United Technologies Corporation (UTC) — 2019 Form 10-K
Entity and period: The supplied filing is UTC’s annual report for the fiscal year ended December 31, 2019, filed February 6, 2020. It is not an RTX-branded filing, and the text does not provide standalone fourth-quarter results. UTC expected to rename itself Raytheon Technologies Corporation after the proposed Raytheon merger closed.
Business context
UTC reported four segments: Otis, Carrier, Pratt & Whitney, and Collins Aerospace Systems. The planned spin-offs of Otis and Carrier were expected early in the second quarter of 2020, alongside the anticipated closing of the all-stock Raytheon merger. Both transactions remained subject to conditions and approvals.
In 2019, commercial and industrial sales were approximately 41% of consolidated sales; commercial aerospace sales were approximately 42%, and military aerospace sales approximately 17%. International sales, including U.S. exports, were 60% of net sales. The company had approximately 243,200 employees at year-end.
Financial metrics available in the supplied text
The filing incorporates the audited financial statements and management’s discussion from UTC’s 2019 Annual Report, but those figures are not included in the supplied text. Consolidated revenue, earnings, margins, operating cash flow, capital spending, cash and debt balances, and liquidity measures therefore cannot be reported clearly from this source.
| Segment remaining performance obligations (RPO) | At Dec. 31, 2019 | At Dec. 31, 2018 | Expected 2020 sales realization from 2019 RPO |
|---|---|---|---|
| Otis | $16.3 billion | $16.4 billion | Approximately $8.7 billion |
| Carrier | $4.7 billion | $5.3 billion | Approximately $3 billion |
| Pratt & Whitney | $85.2 billion | $71.1 billion | Approximately $14 billion |
| Collins Aerospace Systems | $29.5 billion | $26.6 billion | Approximately $12 billion |
RPO includes intercompany obligations; the filing cautions that aerospace aftermarket demand may not be reflected in RPO and that some Pratt & Whitney contracts may ultimately have costs exceeding sales. Government contracts and subcontracts represented $13.1 billion of Pratt & Whitney’s 2019 RPO and $6.8 billion of Collins Aerospace Systems’ 2019 RPO.
UTC reported issuing $11 billion of notes in connection with the Rockwell Collins acquisition; $7.8 billion of Rockwell Collins debt remained outstanding at the acquisition close. The filing says acquisition-related leverage contributed to a one-notch downgrade of UTC’s long-term issuer credit ratings, and one agency placed the rating on negative outlook after the planned separations were announced. These disclosures do not establish year-end total debt or liquidity.
During the fourth quarter, UTC repurchased 276,000 shares at an average $144.99 per share; $1.812 billion remained available under its repurchase authorization at December 31, 2019. Approximately $2.6 billion, or 3% of 2019 sales, came from cost-reimbursement U.S. Government contracts.
Material changes and developments
- Pratt & Whitney RPO rose to $85.2 billion from $71.1 billion. Collins Aerospace Systems RPO rose to $29.5 billion from $26.6 billion; the filing notes that the 2018 figure included $10.7 billion related to the Rockwell Collins acquisition.
- Otis RPO declined slightly, from $16.4 billion to $16.3 billion, and Carrier RPO declined from $5.3 billion to $4.7 billion.
- UTC and Raytheon shareowners approved the proposed merger in October 2019. The agreement provided for each Raytheon share to convert into 2.3348 UTC shares upon closing.
- UTC continued to plan tax-intended spin-offs of Otis and Carrier, leaving the remaining UTC business focused on aerospace. Completion was not assured.
Outlook, risks and contingencies
- Outlook: The text gives expected 2020 RPO conversion by segment, but no clear consolidated 2020 revenue, earnings, margin, or cash-flow guidance. It anticipated the merger and separations early in the second quarter of 2020, subject to conditions.
- Execution and transaction risks: Merger integration, regulatory approvals, separation financing, tax treatment, transaction costs, dis-synergies, and potential delays or failure to complete could affect results and expected benefits.
- Operating risks: The filing highlights cyclical construction and aerospace demand, airline and defense spending conditions, foreign exchange and trade-policy exposure, supplier concentration and capacity constraints, and fixed-price contract cost overruns.
- Technology and production: Pratt & Whitney’s geared turbofan production ramp and supply-chain capacity require significant execution; delays or in-service issues could result in added costs, delivery delays, or contractual liabilities.
- Leverage and capital allocation: Debt service, credit-market access, ratings changes, planned transactions, and limits on repurchases could constrain flexibility. Dividends and repurchases could be changed or suspended.
- Legal and regulatory matters: UTC said it did not expect the 737 MAX-related lawsuits and inquiries involving Collins Aerospace parts to materially affect its financial position, results, or cash flows. A securities lawsuit was closed after the appellate court affirmed dismissal. DOJ and SEC investigations into a Rockwell Collins voluntary disclosure were closed in December 2019 and January 2020. Other claims and government-contract matters remained, with additional detail incorporated by reference.
Most important facts for investors to verify
- Review the incorporated 2019 Annual Report for actual consolidated and segment results, cash flows, balance-sheet liquidity, debt maturities, margins, and full-year comparisons.
- Confirm the timing, regulatory status, financing, tax conditions, and final terms of the Otis and Carrier separations and Raytheon merger.
- Assess the quality and expected conversion of segment RPO, particularly Pratt & Whitney’s long-term contracts and Collins’ acquisition-related comparability.
- Track leverage, credit ratings, transaction costs, and any effects on dividends or share repurchases.
- Monitor geared turbofan production and supply-chain execution, government-contract audits and contingencies, and developments in 737 MAX-related claims.