United Technologies (UTX) Q2 2016 Earnings

posted in: Earnings Call, Notes | 0

United Technologies (UTX) CFO Akhil Joori said recent data on the US economy is encouraging for their business

“Most recent data on the U.S. economy continues to be encouraging. Consumer spending remains strong and job creation, wage growth and unemployment trends point to a steady growth environment, although more likely in the 2% GDP growth range as opposed to the 3% plus that we would all like to see.”

Yet macroeconomic uncertainty and pension liability has the potential to weigh on their profits  going forward

“Looking beyond 2016, we continue to see macroeconomic uncertainty and pressures. Two watch items that have recently come on the radar screen after Brexit. One, general strengthening of the U.S. dollar, and second, lower yields on both long and short bonds. As you know, lower discount rates could have a significant impact on our pension expense for 2017 and beyond. While it is still too early, as a reminder, every 10 basis points change in the discount rate is around a $30 million profit impact.”

United Technologies (UTX) CEO Greg Hayes said they’ve sunk a ton of capital into developing their new jet engine but they hope to earn patiently earn a good return on their investment in the subsequent decades in the services aftermarket

“it’s an expensive game in the commercial engines business. And I’ve said before we’re going to invest or we have invested about $10 billion in CapEx and R&D over the last dozen years or so to bring the products to market. The good news is, at the end of the year, we should have all of the aircraft engines certified. Even though production rates will increase, costs will come down but that is a significant investment.  The good news of course is the aftermarket will come. As we saw this quarter on the V, when the engines get out there, that six-year, seven-year, eight-year timeframe, the engines do need to be overhauled. We will see the returns. But this is not a – it’s not a short-term gain. These are 30-year programs. The returns remain on track to what we had expected which is well in excess of our cost of capital. But it’s not for the faint of heart either, as you know, Howard. And we’re in for the long-term. We’ve got great engines. The performance has been phenomenal out of the box. Right now, our focus is just on delivering engines and then servicing them for the next 25 years or 30 years.”