United Technologies Corporation (UTC) — Q2 2010 Form 10-Q
Period: Quarter and six months ended June 30, 2010; financial statements are unaudited. The supplied filing is for United Technologies Corporation, not a filing under the name RTX Corp.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $13.890bn | $13.196bn | $25.981bn | $25.445bn |
| Operating profit | $1.925bn | $1.637bn | $3.463bn | $2.887bn |
| Operating margin | 13.9% | 12.4% | 13.3% | 11.3% |
| Net income attributable to common shareowners | $1.110bn | $976m | $1.976bn | $1.698bn |
| Diluted EPS | $1.20 | $1.05 | $2.13 | $1.83 |
| Dividends per share | $0.43 | $0.39 | $0.85 | $0.77 |
- Q2 sales (product and service) rose 5.7% to $13.802bn; total revenue rose 5.3%. Management attributed Q2 growth to 4% organic growth and 1% net acquisition benefit. First-half sales rose 2.3%; organic revenue was flat.
- Gross margin was 27.4% in Q2 versus 26.5% a year earlier, and 27.5% for the first half versus 25.9%. Management cited volume, cost reductions, restructuring savings and acquisitions, partly offset by asset impairment charges.
- Operating cash flow was $2.554bn for the first half, up from $2.025bn. Investing used $2.359bn, including $2.368bn of business investments; financing provided $405m. Cash increased $548m to $4.997bn.
- At June 30, cash was $4.997bn; total debt was $12.065bn and net debt $7.068bn. Current assets were $24.401bn and current liabilities $18.762bn. Debt to total capitalization was 37%; net debt to net capitalization was 25%.
- Working capital changes used $397m of cash in the first half, compared with $196m a year earlier. The company reported $1.225bn of commercial paper outstanding and $2.5bn of undrawn committed revolving credit capacity.
Material changes and business drivers
- All six segments reported higher operating profit in Q2. Carrier profit rose 28% and Sikorsky revenue rose 22%, supported by U.S. residential/transport refrigeration demand and military aircraft deliveries, respectively.
- UTC Fire & Security revenue rose 22%, primarily due to GE Security, acquired March 1 for approximately $1.8bn; organic revenue contracted. Otis revenue fell 4% in Q2 amid weaker new-equipment markets, while maintenance remained supportive.
- Pratt & Whitney revenue increased 6% in Q2 but first-half revenue fell 2%; Hamilton Sundstrand revenue declined 1% in Q2. Aerospace aftermarket orders improved sequentially, but commercial aviation and business-jet conditions remained challenging.
- First-half 2010 acquisitions totaled approximately $2.4bn, including a 49.9% equity stake in Clipper Windpower. Goodwill increased to $16.914bn from $16.298bn at year-end 2009.
- Total debt increased from $9.744bn at year-end 2009, reflecting acquisitions and financing activity. UTC issued $2.25bn of long-term notes in February and repaid or redeemed $1.1bn of notes in May and June.
Outlook, risks and unusual items
- Management raised its full-year organic revenue growth expectation to approximately 2%, citing improved operating outlook and order trends. It nevertheless expected second-half earnings pressure, particularly from foreign-currency translation and higher R&D.
- Management expected 2010 company-funded R&D to exceed 2009 by more than $150m, the full-year effective tax rate to be approximately 29% before discrete items, acquisitions to total about $3bn, and share repurchases about $2bn. It expected approximately $600m of 2010 cash pension contributions.
- Restructuring actions initiated in 2010 target approximately 2,400 job reductions and 2.8m net square feet of facility exits; expected annual recurring pre-tax savings are approximately $160m. For 2009 actions, management cited expected annual savings of approximately $700m. The company expected a net $0.20 per-share charge for full-year restructuring and non-recurring items.
- Q2 included approximately $86m of asset impairment charges related mainly to anticipated Carrier and Hamilton Sundstrand dispositions. Q2 diluted EPS included a net $0.12 charge from restructuring and non-recurring items. The prior-year comparison included a $52m Otis gain that did not recur.
- Risks include a modest and uncertain global recovery, tight credit, construction and aerospace cyclicality, foreign-exchange exposure, supplier constraints, acquisition integration, government-contract investigations/audits, and tax and environmental contingencies. The German tax matter involves approximately €198m ($243m) of claimed benefits for which management had not accrued tax expense; outcomes of tax and legal matters remain uncertain.
- Pratt & Whitney’s planned Connecticut facility closures were enjoined through the current labor agreement, expiring December 5, 2010; the Second Circuit upheld the decision on July 8, 2010. UTC said it was evaluating operational effects and did not expect a material adverse financial effect.
- Management stated disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter. The interim statements received a review, not an audit, from PwC.
Important facts for investors to verify
- Confirm the issuer identity: the source filing is United Technologies Corporation, despite the request metadata naming RTX Corp.
- Track whether the approximately 2% full-year organic growth expectation and anticipated second-half currency and R&D headwinds materialized.
- Assess acquisition integration and returns from GE Security and Clipper, including the effect on debt and goodwill.
- Monitor cash conversion, working-capital needs, planned repurchases and dividends against rising debt and pension contributions.
- Review progress and realized savings from restructuring, asset dispositions, the Canadian CH-148 helicopter amendments, and outstanding tax and government-contract matters.