United Technologies Corporation (UTC) — Form 10-Q Summary
Entity note: The supplied filing is UTC’s 10-Q, not a filing under the name RTX Corp. It covers the quarter and nine months ended September 30, 2011; amounts are USD unless stated otherwise.
Business context and reporting period
UTC operated six principal segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Its businesses span building systems and aerospace. Management described a slower, uneven global recovery, with persistent strength in emerging-market demand. The interim financial statements were reviewed by the independent auditor, not audited.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $14.804bn | $13.620bn | $43.224bn | $39.462bn |
| Operating profit | $2.202bn | $1.928bn | $6.201bn | $5.333bn |
| Net income attributable to common shareowners | $1.324bn | $1.198bn | $3.654bn | $3.174bn |
| Diluted EPS | $1.47 | $1.30 | $4.02 | $3.43 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $4.578bn | $4.230bn |
- Q3 sales grew 8.7%; nine-month sales grew 9.5%. Operating profit increased 14% and 16%, respectively; diluted EPS rose 13% and 17%.
- Consolidated operating margin was 14.9% versus 14.2% in Q3 and 14.3% versus 13.5% for nine months. Gross margin declined to 27.3% from 29.0% in Q3 and to 27.6% from 28.0% for nine months.
- Other income (expense), net was $227m versus $(114)m for Q3 and $550m versus $(33)m for nine months. Gains and other non-recurring items materially affected these comparisons.
- Nine-month capital expenditures were $605m; operating cash flow less capital expenditures was approximately $3.973bn, an analyst-calculated measure. Working capital used $693m of cash, versus a $31m source in the comparable 2010 period.
- At September 30, cash was $5.966bn; total debt was $11.364bn and net debt $5.398bn. Current assets were $26.424bn and current liabilities $20.064bn. Net debt to net capitalization was 19%, versus 22% at December 2010.
- Nine-month common-stock repurchases were $2.175bn and common dividends paid were $1.192bn. UTC had suspended further repurchases until September 30, 2012 in light of the pending Goodrich acquisition.
Material changes and segment performance
- All six segments reported organic sales growth in Q3. Sikorsky led with 21% organic growth, followed by Carrier at 9%; Otis grew 4%, Hamilton Sundstrand 7%, UTC Fire & Security 2%, and Pratt & Whitney 3%.
- For the first nine months, Carrier operating profit rose 40% and Sikorsky’s rose 33%. Pratt & Whitney operating profit declined 3%, reflecting higher R&D, unfavorable mix and fewer military engine deliveries. Otis’ Q3 margin fell to 22.4% from 23.3%; Pratt & Whitney’s fell to 16.5% from 16.9%.
- Higher volume supported results, but lower-margin sales mix, commodity costs and warranty costs pressured gross margin. Company-funded R&D increased to $1.506bn for nine months from $1.289bn.
- Management announced that Carrier and UTC Fire & Security would combine as UTC Climate, Controls & Security Systems in 2012; Pratt & Whitney and Hamilton Sundstrand would join a new aerospace organization while continuing separate segment reporting.
Outlook, commentary, risks and unusual items
- Management expected 2011 operating cash flow less capital expenditures to exceed net income attributable to common shareowners. It forecast 2011 company-funded R&D to increase at least $275m from 2010 and the effective tax rate to be about 30.5% for the year; Q4 tax rate was expected near 28%, before specified refund claims and other non-recurring items.
- UTC raised its 2011 restructuring-cost expectation to more than $300m. It expected approximately $175m of annual recurring pre-tax savings from the 2011 actions and approximately $350m from the 2010 actions, subject to execution. Pension expense was expected to rise about $150m versus 2010.
- The announced Goodrich acquisition was valued at $18.4bn enterprise value, including $1.9bn net debt assumed; UTC expected to fund the $16.5bn remainder with debt and equity, with equity about 25% of that financing, and anticipated a mid-2012 closing subject to approvals. A $15bn bridge facility had been committed. UTC also announced an IAE/Rolls-Royce transaction for $1.5bn plus payments tied to V2500 fleet flight hours, and a new equal-share engine-development venture; both were subject to conditions and expected to close in mid-2012.
- Q3 and nine-month comparisons benefited from the absence of a $159m 2010 impairment charge on the Clipper investment. 2011 items included Goodrich transaction costs, investment-sale gains, litigation resolutions, the $73m Sikorsky UAE venture gain, and an approximately $20m equity-investment impairment at UTC Fire & Security. Restructuring charges were $188m for nine months.
- Risks highlighted included slower global growth, European sovereign-debt concerns, weak U.S. housing, possible pressure on U.S. defense spending, foreign-exchange and commodity exposure, supplier disruptions, acquisition integration and approval risk, and restructuring execution. P&W Canada’s 2011 foreign-exchange and hedging impact was expected to be adverse by about $75m.
- Tax uncertainties included a possible $145m–$310m net reduction in unrecognized tax benefits within 12 months. A separate €197m (approximately $267m) German tax-benefit matter was under review. Contingencies included a disputed Sikorsky government claim of about $90m and ongoing government-contract matters; the filing stated that outcomes could affect results or cash flows. UTC appealed the 2011 rejection of its appeal in the Otis European competition case, involving a fine already paid in 2007.
Most important facts for investors to verify
- Whether Goodrich and the announced IAE/Rolls-Royce transactions received required approvals, closed on expected terms, and changed UTC’s debt, equity and share-repurchase plans.
- How much reported profit growth depended on non-recurring items, foreign exchange and restructuring, and whether gross-margin pressure persisted.
- Whether operating cash flow converted to cash as expected given working-capital needs, pension funding and acquisition financing.
- Progress and realized savings from restructuring, along with the announced R&D, tax-rate, pension-expense and cash-flow outlook.
- Developments in the German tax matter, government-contract disputes, and other legal and regulatory contingencies.