United Technologies Corporation (UTC) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing is by United Technologies Corporation, not an issuer identified in the filing as RTX Corp. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $16.510B | $15.062B | $48.457B | $44.157B |
| Operating profit | $1.838B | $2.032B | $6.642B | $6.340B |
| Operating margin | 11.1% | 13.5% | 13.7% | 14.4% |
| Net income attributable to common shareowners | $1.238B | $1.330B | $4.583B | $4.155B |
| Diluted EPS | $1.54 | $1.67 | $5.72 | $5.20 |
- Q3 sales rose 10%, while operating profit fell about 10% and diluted EPS fell about 8%. For the first nine months, sales rose 10%, operating profit about 5%, and diluted EPS about 10%.
- Q3 gross margin declined to 24.1% from 26.3%; nine-month gross margin declined to 25.2% from 26.6%. Management cited Pratt & Whitney’s lower engine margins and contract matters, and unfavorable Otis price and mix.
- Nine-month operating cash flow was $4.317B, versus $3.110B. Investing cash outflow was $1.019B, versus $1.658B; financing provided $10.839B, versus a $293M outflow. Capital expenditures were $1.122B.
- At September 30, cash and cash equivalents were $13.799B, with another $9.205B classified as restricted cash, principally for the Rockwell Collins transaction. Total debt was $39.943B, up from $27.485B at year-end 2017. Reported net debt, including restricted cash as a deduction, was $16.943B, versus $18.500B.
- Current assets were $40.204B and current liabilities $26.504B. The company reported $4.35B of revolving credit capacity, with no borrowings under those facilities.
Material changes and unusual items
- UTC adopted the new revenue-recognition standard in 2018 using the modified retrospective method. It increased reported nine-month sales by $455M, operating profit by $96M, and net income by $68M. Adoption reduced opening retained earnings by $480M. Management expected an immaterial effect on 2018 net income.
- The sale of Taylor Company generated $1.0B in proceeds and a $799M pretax gain ($591M after tax). This contributed to nine-month other income, net of $1.303B, compared with $1.095B a year earlier.
- UTC issued $11B of notes in August to help fund the pending Rockwell Collins acquisition; $9.2B of net proceeds was restricted for the transaction. Total debt increased, and share repurchases were suspended apart from employee-plan activity.
- Q3 results included $281M of after-tax net charges for significant non-operational or nonrecurring items and $28M of after-tax restructuring charges. Nine-month results included a $179M net gain from significant non-operational or nonrecurring items and $139M of after-tax restructuring charges.
- The company recorded $186M of pretax restructuring costs for the first nine months. It expected another $83M to complete 2018 actions and estimated those actions could yield about $110M in annual recurring pretax savings over two years.
Outlook, commentary and risks
- Management expected 2018 cash flow from continuing operations, less capital expenditures, of approximately $4.5B–$5.0B. It expected total 2018 global defined-benefit pension contributions of about $100M.
- UTC expected the Rockwell Collins acquisition to close in Q4 2018, subject to customary conditions and regulatory approvals. It anticipated approximately $15B of cash consideration and expected to assume about $7B of Rockwell Collins debt. Completion, timing, financing and anticipated benefits remained uncertain.
- Management described demand growth across all four segments and strong commercial aerospace activity. However, Pratt & Whitney’s commercial OEM profitability was pressured by negative engine margins and ramp-related costs; UTC also cited input-cost, logistics, warranty, foreign-exchange and customer-demand risks.
- Other disclosed uncertainties include the ongoing strategic portfolio review, final accounting for the 2017 tax law, contract-cost estimates, customer financing commitments, and legal and government matters. UTC stated it could not predict outcomes for certain contingencies.
- Notable matters include a pending government claim against Pratt & Whitney of approximately $177M plus interest (about $80M through September 30, 2018), German tax litigation involving approximately $253M of disputed tax benefits plus estimated interest, and asbestos liabilities estimated at $341M before tax, partly offset by a $156M insurance-recovery receivable. UTC also reported a $13.9M SEC settlement payment in 2018.
- The independent accountant performed a review of the interim financial information, not an audit.
Key facts for investors to verify
- Whether and when the Rockwell Collins acquisition closed, its final funding and assumed debt, and subsequent leverage and cash-flow effects.
- Whether the stated 2018 cash-flow outlook was achieved and how much cash was available for general use after restricted balances.
- Whether Pratt & Whitney’s engine margins and Otis pricing and mix improved, and whether segment growth translated into operating-profit growth.
- How final tax-law accounting, contract estimates, legal contingencies and restructuring costs and savings affected later reported results.