Business context and reporting period
This is United Technologies Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company operated through Otis, Carrier, Pratt & Whitney, and Collins Aerospace Systems. Although the request identifies RTX, this filing is for UTC, before its proposed merger with Raytheon and subsequent name change.
Financial performance and position
Dollar figures are in millions unless otherwise noted.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $19,634 | $16,705 | $37,999 | $31,947 |
| Operating profit | $2,584 | $2,876 | $4,629 | $4,804 |
| Operating margin | 13.2% | 17.2% | 12.2% | 15.0% |
| Net income attributable to common shareowners | $1,900 | $2,048 | $3,246 | $3,345 |
| Diluted EPS | $2.20 | $2.56 | $3.76 | $4.18 |
| Gross margin | 26.6% | 25.6% | 26.0% | 25.8% |
| Operating cash flow | Not provided quarterly in the filing excerpt | $3,611 | $2,555 |
Cash and cash equivalents were $6,819 at June 30, 2019, versus $6,152 at December 31, 2018. Total debt was $45,251 and net debt was $38,432; debt to total capitalization was 51%. Current assets were $37,058 and current liabilities $35,422. The company reported $10,350 of committed bank borrowing capacity with no borrowings under those facilities; commercial paper outstanding was $855.
Six-month investing cash outflow was $1,217 and financing cash outflow was $1,766. Capital expenditures were $830, dividends paid were $1,219, and cash repurchases of common stock were $69. Remaining performance obligations were approximately $125.1 billion, with about 45% expected to be recognized as sales over the following 24 months.
Material changes versus prior comparable periods
- Q2 sales rose 18% year over year; management attributed 6 percentage points to organic growth, 13 points to acquisitions and divestitures (primarily Rockwell Collins), and a 1-point reduction to foreign currency. Six-month sales increased 19%.
- Despite higher sales, Q2 operating profit and diluted EPS declined. Other income fell to $212 from $941, chiefly because Q2 2018 included the gain on the Taylor Company sale. Interest expense also rose, reflecting debt issued in 2018 to help finance Rockwell Collins.
- For the first half, operating cash flow increased $1,056 year over year. Investing cash outflow increased by $979, mainly because the prior-year period included about $1 billion of Taylor sale proceeds.
- Collins Aerospace Systems benefited from the Rockwell Collins acquisition: Q2 sales were $6,576 versus $3,962 and operating profit was $1,172 versus $569. Carrier operating profit fell to $836 from $1,645, primarily reflecting the absence of the prior-year Taylor sale gain; its operating margin was 16.8% versus 32.7%.
- UTC reported $44,112 of long-term debt, including current maturities, versus $44,068 at year-end; total debt was lower than year-end as short-term borrowings declined. Compared with June 2018, total debt was higher, largely due to Rockwell Collins acquisition financing and assumed debt.
Outlook, management commentary, risks and unusual items
- Management expected 2019 operating cash flow, net of capital expenditures, of approximately $4.5–$5.0 billion, including $1.5 billion of one-time cash payments related to the portfolio separation.
- UTC expected Otis and Carrier spin-offs and the Raytheon all-stock merger to close in the first half of 2020, subject to customary approvals and conditions. The Raytheon transaction depended on completion of the Otis and Carrier separations.
- The company recorded a net Q2 gain of approximately $307 million, including pre-tax interest of about $56 million, following the conclusion of IRS audits for 2014–2016 and an Italian tax amnesty filing. Management said further non-cash gains of $25–$70 million could be recognized in the remainder of 2019.
- Restructuring charges were $178 million in the first half. For 2019 actions, UTC expected $73 million of remaining charges and approximately $160 million of annual recurring pre-tax savings over two years. For 2018 actions, it expected $20 million of further charges and approximately $260 million of annual savings at maturity.
- Pratt & Whitney disputed a new U.S. government cost-accounting claim seeking approximately $1.73 billion plus interest (about $506 million through June 30, 2019). Two other related claims sought $177 million plus interest and $269 million plus interest. UTC said it believed the claims were without merit.
- UTC identified possible exposure to U.S. sanctions involving Turkey, which could affect aerospace suppliers, including sole-sourced components. Collins Aerospace businesses were also named in lawsuits related to the two 737 MAX accidents; UTC said it did not expect those matters to materially affect its financial position, results, or cash flows.
- Other risks include merger and spin-off execution, integration and synergy realization, customer and supplier disruption, government contracting investigations, tax disputes, aerospace contract estimates, and fluctuations in demand, currencies, commodities, and airline conditions. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Raytheon merger and Otis/Carrier separations received approvals and closed on the expected terms and schedule, and their ultimate financing, costs, and synergies.
- How much of the reported sales growth and Collins Aerospace profit growth is organic versus acquisition-related, and whether margins are sustained.
- The durability of cash flow and the expected effect of separation payments, working-capital needs, customer financing commitments, and debt maturities.
- Developments in the disputed Pratt & Whitney government claims, German tax litigation, and other legal or regulatory matters.
- Whether restructuring savings are achieved as planned and whether exposure to Turkey-related supply restrictions or 737 MAX litigation changes.