Business context and reporting period
United Technologies Corporation (UTC) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2009. The filing names UTC as the registrant; it does not use the RTX name. UTC operated six segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Management described a broad global downturn affecting construction, housing, transport refrigeration, business aviation and airline activity.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $13.196 billion | $15.944 billion | $25.445 billion | $29.902 billion |
| Operating profit | $1.637 billion | $2.099 billion | $2.887 billion | $3.773 billion |
| Net income attributable to common shareowners | $976 million | $1.275 billion | $1.698 billion | $2.275 billion |
| Diluted EPS | $1.05 | $1.32 | $1.83 | $2.34 |
| Operating margin | 12.4% | 13.2% | 11.3% | 12.6% |
Q2 gross margin was 26.5% of sales versus 26.4%; first-half gross margin was 25.9% versus 26.2%. Excluding restructuring charges, management said gross margin improved by 80 basis points in Q2 and 40 basis points for the first half. The Q2 dividend was $0.39 per share.
For the first half, operating cash flow was $2.025 billion versus $2.306 billion; investing cash flow used $527 million versus $1.231 billion; and financing cash flow used $1.785 billion versus $612 million. Cash at June 30 was $4.016 billion. Total debt was $10.816 billion and net debt was $6.800 billion. Total equity was $18.406 billion; debt to total capitalization was 37%.
Material changes versus the prior comparable period
- Q2 revenue fell 17.2%, including an 11% organic decline, a 5% adverse foreign-currency effect and a 1% net effect from acquisitions and divestitures. First-half revenue fell 14.9%.
- Q2 operating profit declined 22%; first-half operating profit declined 23%. Higher restructuring charges and currency effects compounded lower volumes.
- Carrier was particularly weak: Q2 revenue fell 29% and operating profit 47%. Sikorsky was an exception, with Q2 revenue up 6% and operating profit up 20%, driven largely by military helicopter demand.
- First-half operating cash flow declined, reflecting lower earnings and $401 million of domestic pension contributions. Management said working-capital cash use was lower than in the prior-year period.
- Comparatives reflect retrospective accounting presentation changes for noncontrolling interests and collaborative arrangements; the latter increased reported revenue and cost of sales without changing operating profit.
Outlook, risks and unusual items
- Management expected full-year 2009 restructuring costs of approximately $750 million, including $464 million recorded in the first half. The 2009 actions target about 10,600 net workforce reductions and roughly 2 million net square feet of facility exits; approximately 7,000 reductions were completed by June 30. Expected recurring annual pretax savings were approximately $500 million as actions mature.
- Management expected company-funded R&D to decline at least $100 million from 2008, capital expenditures to decline approximately 30%, and 2009 acquisition investment to be about $2 billion, subject to opportunities. It expected approximately $1 billion of 2009 share repurchases, subject to other investment needs, and a full-year effective tax rate of about 28% before discrete items.
- Management cited continued economic weakness, reduced airline traffic and aircraft utilization, lower construction activity, currency strength and tight credit as ongoing pressures. P&WC hedging was expected to weigh on 2009 operating results by approximately $100 million, net of currency translation.
- Q2 included a $52 million noncash, nontaxable Otis gain from remeasuring a previously held joint-venture interest. The filing also reports increased pension expense and significant restructuring activity.
- Liquidity sources included $4.016 billion cash, access to commercial paper and $2.5 billion in undrawn revolving credit facilities. About $856 million of commercial paper was outstanding and scheduled to mature in under one month. Management said it believed liquidity was adequate.
- Contingencies include ongoing government investigations and contract audits, the appealed Pratt & Whitney False Claims Act case, an approximately $80 million DOD claim against Sikorsky that UTC disputed, and a German tax matter involving approximately $255 million of claimed benefits. Management generally did not expect other matters to materially harm the company, but outcomes remain uncertain.
- The financial statements received an interim review, not an audit. Management reported effective disclosure controls as of June 30, 2009.
Important facts for investors to verify
- Whether revenue and margin trends stabilized after the sharp declines, especially at Carrier and in commercial aerospace aftermarket businesses.
- Whether restructuring costs, workforce and facility actions, and anticipated recurring savings meet management’s stated targets.
- Cash generation and working capital, including pension contributions, inventory levels and customer advances.
- Near-term commercial-paper maturities, planned buybacks and acquisitions, and the resulting path of cash and debt.
- Currency and hedge impacts, pension cost assumptions, and resolution or accounting treatment of the identified tax and legal contingencies.