Does anyone even remember the last time that defense contractor United Technologies (NYSE:UTX) missed an earnings target? (Hint: Try two years back.) On Wednesday morning, the company will try to drive that bad memory even further into the cobwebs of history, as it reports its first-quarter 2007 numbers.

What analysts say:

  • Buy, sell, or waffle? Twenty-one analysts follow United Technologies. Nineteen say "buy it," and two say "hold it."
  • Revenues. On average, Wall Street is looking for 8% revenue growth to $11.48 billion.
  • Earnings. Profits are predicted to rise 5% to $0.80 per share.

What management says:
CEO George David characterized UT's 2006 performance as "strong," and promised "more of the same in 2007" thanks largely to "good conditions in most of our markets worldwide." Sales for the year were up 12%, with 9% of that growth organic. Earnings per share grew 19%, while free cash flow climbed in line with sales at 13%.

The sole exception to all this good news, it seems, was the firm's Carrier unit. Hobbled by a "substantially weaker U.S. housing market" in the second half of the year, David lamented that business's performance in North America.

What management does:
But in reviewing the numbers, honestly, I don't think Carrier did too badly. Sales for the year still came in 8% higher than 2005's numbers, and profits grew even faster at 12%. It seems the weakest performance, in fact, came from the Otis business (which does elevators, escalators, and the like). That unit produced a relatively weak 7% sales increase -- and even it did better on profits, growing them 10%.

The firm's success in growing profits is all the more remarkable when you notice that gross margins reversed their rise toward the end of last year. Yet despite a rolling gross 30 basis points below where UT was a year previously, rolling operating and net margins still came in higher.

Margins

9/05

12/05

3/06

6/06

9/06

12/06

Gross

28.9%

28%

28.2%

28.3%

28.5%

27.7%

Operating

13.5%

12.7%

12.9%

13.3%

13.7%

13.2%

Net

7.4%

7.2%

7.3%

7.4%

7.5%

7.8%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Exhale. Now, after all this good news, you just know there's got to be some bad news hidden deep down within the balance sheet somewhere, right? Well, it took some doing, but already knowing where to look -- because we've looked there before -- I did find one criticism to raise at UT.

Compared to the 12% sales growth that UT averaged in the second half of the year, inventories are up 19% year over year. Presumably, this represents the remains of the buildup in aerospace inventories that David spoke about a couple of quarters back. For the record, this is a slight improvement relative to two quarters back, but still worse than nine months ago (when I first keyed in on the inventories issue). As it turns out, even this bad news has a "good" angle to it: UT is working the inventories back down. Hopefully, we'll see more of the same on Wednesday.

Check in on the competition, including American Standard, Honeywell, and Textron in:

Fool contributor Rich Smith does not own shares of any company named above.