United Technologies Corporation (UTC) — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. This filing is by United Technologies Corporation, not a company identified as RTX Corp. UTC reported four continuing segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems. Sikorsky was sold in November 2015 and is presented as discontinued operations. Interim financial statements were reviewed, not audited.
Financial performance
Unless otherwise noted, amounts are in millions of dollars; comparisons are with the corresponding 2015 period.
| Metric | Q3 2016 | Nine months 2016 | Comparison / context |
|---|---|---|---|
| Net sales | $14,354 | $42,585 | Up 4% and 2%, respectively |
| Operating profit | $2,251 | $6,533 | Down 2% and 5% |
| Operating margin | 15.7% | 15.3% | Down from 16.7% and 16.5% |
| Continuing income attributable to common shareholders | $1,443 | $4,041 | Up 1% in Q3; down 5% year to date |
| Diluted EPS from continuing operations | $1.74 | $4.86 | Versus $1.61 and $4.76 |
| Net cash from continuing operating activities | Not stated for quarter | $4,536 | Versus $4,044 |
| Capital expenditures | Not stated for quarter | $1,043 | Versus $1,044 |
| Cash and cash equivalents | $7,107 at Sept. 30 | — | $7,075 at Dec. 31, 2015 |
| Total debt / net debt | $22,665 / $15,558 | — | Net debt was $13,350 at Dec. 31, 2015 |
Q3 net income attributable to common shareholders was $1,480, including $37 from discontinued operations; the latter included an approximately $40 tax benefit related to Sikorsky. Nine-month net income was $4,042, including $1 from discontinued operations. Nine-month discontinued-operations cash outflow was $2,480, primarily Sikorsky-related sale taxes.
Continuing-operations operating cash flow improved by $492 year over year, with working-capital outflows approximately $935 lower, partly offset by lower net income excluding noncash charges and a $237 payment under a Canadian government settlement. Cash from continuing operations was partly offset by $1,849 of investing outflows and $203 of financing outflows.
Current assets were $28,548 and current liabilities $22,541 at quarter-end. Revolving credit facilities totaling $4.35 billion were undrawn; commercial paper outstanding was $780 million. Approximately 89% of cash was held by foreign subsidiaries.
Material changes and operating drivers
- Organic sales grew 5% in Q3 and 3% year to date. Aerospace aftermarket and OEM activity drove much of the growth; foreign currency reduced reported sales growth.
- Pratt & Whitney sales rose 8% in Q3 and 6% year to date, but operating profit fell 19% and 14%, respectively. Drivers included unfavorable contract performance and settlements, adverse commercial engine mix, customer negotiations, and higher development spending.
- UTC Aerospace Systems sales rose 5% in Q3 and 2% year to date; operating profit was up 5% in Q3 and approximately flat year to date.
- Otis Q3 sales declined 1% and operating profit declined 9%; management cited pricing and mix pressure, particularly in China and Europe, and absence of prior-year foreign-exchange gains. UTC Climate, Controls & Security Q3 sales rose 3% and operating profit rose 4%.
- Consolidated gross margin fell to 28.0% in Q3 from 28.9%, and to 27.8% year to date from 28.8%. Service costs rose faster than service sales; Pratt & Whitney was the largest stated source of margin pressure.
- Interest expense, net, increased to $225 in Q3 and $673 year to date, primarily reflecting new non-U.S. debt issued in February 2016.
- Total debt increased from $20.4 billion at year-end 2015 to $22.7 billion; debt-to-total-capitalization was 42%, versus 41% at year-end.
Outlook, risks, and unusual items
- Management estimated a full-year 2016 continuing-operations effective tax rate of approximately 28%, excluding restructuring and non-operational or nonrecurring items. It expected continuing-operations operating cash flow after capital expenditures to equal approximately 90%–100% of continuing income attributable to common shareholders.
- Expected 2016 restructuring costs were $350–$400. Management expected annual recurring pretax savings of approximately $100 from 2016 actions and approximately $430 from 2015 actions; additional charges to complete those actions were estimated at $99 and $103, respectively.
- Management expected approximately $1 billion of 2016 acquisition cash investment and $2–$3 billion of 2016 share repurchases, largely funded with additional borrowing. It had $5.3 billion remaining under its repurchase authorization at September 30.
- Expected 2016 company-funded R&D was slightly above 2015. A one-time pretax pension settlement charge of $400–$530 was expected in Q4 following pension risk-transfer transactions; management also expected pension expense, excluding that charge, to be about $500 lower in 2016 than in 2015.
- Pratt & Whitney recorded unfavorable aerospace contract-estimate changes and a charge for ongoing customer contract negotiations; the amount could change as negotiations progress. Recovery of investments supporting the delayed Bombardier CSeries program depends on future engine deliveries.
- Key stated business uncertainties included global growth, construction and air-travel demand, airline customer health, defense spending, commodity and currency movements, regulation, supplier performance, and the U.K.’s exit from the EU. Management said the U.K. vote was not expected to have a significant near-term business impact.
- Contingencies include a pending U.S. government cost-accounting claim of approximately $211, an appealed German tax dispute involving approximately €215 of claimed tax benefits plus estimated interest, and asbestos liabilities estimated at $378 with approximately $106 of insurance recoveries. The F100 litigation concluded after UTC paid an $11 judgment in Q3. Management generally did not expect resolution of disclosed matters to materially adversely affect the company, while noting outcomes remain uncertain.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting. It stated there were no material changes to risk factors from the 2015 Form 10-K.
Important facts for investors to verify
- Whether Pratt & Whitney contract performance, engine mix, customer negotiations, and CSeries investment recovery improve or require further charges.
- Whether Q4 pension settlement costs and restructuring spending align with management’s stated estimates and savings targets.
- Cash conversion and working-capital trends, including the effect of factoring, aerospace inventory growth, and Sikorsky-related tax payments.
- Debt growth, planned share repurchases, and reliance on borrowing while most cash is held overseas.
- Developments in the German tax appeal, U.S. government cost-accounting claim, and pending reinstatement of Pratt & Whitney Canada’s full export-license privileges.