United Technologies Corporation (UTC) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. This filing is for United Technologies Corporation, the predecessor company to today’s RTX Corporation; it is not a 2017 filing under the RTX name. Results are unaudited and cover continuing operations unless otherwise stated. The interim financial statements received a limited review, not an audit.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $13.815 billion | $13.357 billion | +3% |
| Operating profit | $2.267 billion | $1.945 billion | +17% |
| Operating margin | 16.4% | 14.6% | +1.8 pts |
| Net income attributable to common shareowners | $1.386 billion | $1.183 billion | +17% |
| Diluted EPS from continuing operations | $1.73 | $1.41 | +23% |
| Operating cash flow, continuing operations | $993 million | $798 million | +$195 million |
| Capital expenditures | $325 million | $286 million | +$39 million |
Gross margin declined to 27.1% from 27.7%. Company-funded R&D was $577 million (4.2% of sales), versus $541 million (4.1%). The effective tax rate was 28.5%, compared with 27.2%.
At March 31, 2017, cash and cash equivalents were $7.156 billion; total debt was $24.582 billion and net debt was $17.426 billion. Debt to total capitalization was 46%, versus 45% at year-end 2016. Current assets were $29.305 billion and current liabilities $23.726 billion. The company had $4.35 billion of committed revolving credit capacity with no borrowings drawn.
Material changes and drivers
- Sales grew organically 3%; all four segments reported organic growth. Aerospace aftermarket demand was a key contributor.
- Operating profit included $379 million of gains from selling UTC Climate, Controls & Security’s Watsco investments. The sale generated $596 million in cash proceeds; net of tax, the gains added $238 million to income. This was a material nonrecurring earnings contributor.
- UTC Climate, Controls & Security segment operating profit rose 59% to $963 million, primarily reflecting the Watsco gain; operating margin was 24.7%, versus 16.3%.
- Otis operating profit declined 3% to $452 million, with margin falling to 16.1% from 17.2%, mainly due to pricing pressure, particularly in China.
- Pratt & Whitney operating profit declined 4% to $393 million; margin decreased to 10.5% from 11.4%. Drivers included unfavorable contract settlements, higher negative engine margins and lower commercial engine contribution, partly offset by aftermarket growth.
- UTC Aerospace Systems operating profit increased 7% to $576 million, with margin improving to 16.0% from 15.3%, supported by commercial aerospace aftermarket volume.
- Share repurchases were $933 million for approximately 8.4 million shares; common dividends paid were $505 million. Cash declined only $1 million from year-end, while total debt increased about $681 million.
Outlook, commentary and risks
- Management estimated 2017 cash flow from continuing operations, after capital expenditures, at 90%–100% of net income from continuing operations attributable to common shareowners.
- Management estimated a 2017 full-year effective tax rate of approximately 27%, excluding restructuring and non-operational nonrecurring items.
- Expected 2017 acquisition cash investment was approximately $1–$2 billion. Expected full-year share repurchases were approximately $3.5 billion, potentially funded by operating cash and additional borrowings.
- Expected 2017 restructuring costs were approximately $300 million. Management cited expected annual recurring pretax savings of about $32 million from 2017 actions and $180 million from 2016 actions once fully realized.
- Global defined-benefit pension contributions were expected to total approximately $300 million in 2017, including about $150 million of discretionary domestic contributions. Customer financing activity was expected to use cash in 2017.
- Commercial aerospace financing and related contractual commitments totaled approximately $14.2 billion; up to $0.9 billion could be disbursed during the remainder of 2017. New-engine program investment recovery depends partly on future deliveries, including the delayed Bombardier CSeries program.
- Risks include economic and construction conditions, airline and defense demand, customer and supplier financial health, foreign exchange and commodity movements, regulation, program execution, restructuring and acquisition integration, and legal or tax proceedings. About 96% of cash was held by foreign subsidiaries; repatriation can have tax or capital-control consequences.
- Contingencies include a pending appeal of a German tax dispute involving approximately €215 million of claimed tax benefits plus estimated interest of approximately €118 million; an asserted Pratt & Whitney government claim of approximately $177 million plus interest, which the company contests; and asbestos liabilities estimated at $379 million, partially offset by a $133 million insurance recovery receivable. Management stated it did not expect the disclosed matters to materially harm the company, but outcomes remain uncertain.
- The company planned to adopt the new revenue standard on January 1, 2018 using the modified retrospective approach. It expected changes, particularly in aerospace revenue and cost recognition; it reported $275 million in capitalized deferred engine unit costs that would be eliminated through retained earnings upon adoption, with the balance expected to increase before adoption.
Important facts for investors to verify
- Assess underlying earnings excluding the Watsco investment-sale gain and restructuring charges; reported profit growth was materially affected by these items.
- Track segment margins and contract estimates, especially Pratt & Whitney’s engine economics and the unfavorable commercial-project adjustment at UTC Climate, Controls & Security.
- Evaluate operating cash flow quality: factoring activity increased cash generation by approximately $500 million year over year, largely due to temporarily extended customer payment terms.
- Monitor debt, repurchases and foreign cash access against management’s cash conversion, acquisition, pension funding and repurchase expectations.
- Follow the German tax litigation, government-contract claim, asbestos assumptions and CSeries program investment recovery, as well as the effects of adopting the new revenue standard.