United Technologies Corporation (UTC) — Q1 2016 Form 10-Q
Filing identity: The filing is for United Technologies Corporation, the predecessor name associated with today’s RTX; it is not filed under the RTX name. It covers the unaudited quarter ended March 31, 2016, with comparisons to Q1 2015 unless otherwise stated. Sikorsky, sold in November 2015, is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparator |
|---|---|---|
| Net sales | $13.357 billion | $13.320 billion |
| Operating profit / margin | $1.945 billion / 14.6% | $2.182 billion / 16.4% |
| Gross margin | 27.7% | 28.6% |
| Continuing-operations net income attributable to common shareholders | $1.180 billion | $1.364 billion |
| Net income attributable to common shareholders | $1.191 billion; diluted EPS $1.43 | $1.426 billion; diluted EPS $1.58 |
| Operating cash flow, continuing operations | $795 million | $1.646 billion |
| Cash and cash equivalents | $7.215 billion | $7.075 billion at Dec. 31, 2015 |
| Total debt / net debt | $23.051 billion / $15.836 billion | $20.425 billion / $13.350 billion at Dec. 31, 2015 |
Total assets were $88.571 billion and total liabilities $58.541 billion at quarter-end. UTC had $4.35 billion of undrawn revolving credit facilities, also available as backup for commercial paper. Approximately 88% of cash was held by foreign subsidiaries. Debt-to-total-capitalization was 44%, versus 41% at year-end 2015.
Operating cash flow fell $851 million year over year, reflecting lower earnings, greater working-capital outflows and a $237 million Canadian government settlement payment. Continuing-operations investing cash flow was negative $483 million, while financing cash flow was positive $2.038 billion, including net long-term debt issuance of $2.324 billion. Discontinued-operations cash outflow was $2.227 billion, primarily Sikorsky-sale-related taxes. Cash increased $140 million during the quarter.
Material changes and segment results
- Reported sales were essentially flat; organic sales increased 2%, offset by a 2% foreign-currency translation impact.
- Operating profit declined 11% and gross margin fell 90 basis points. Management cited higher negative engine margins and OEM mix at Pratt & Whitney, unfavorable commercial OEM mix at UTC Aerospace Systems, and pricing pressure at Otis.
- Otis sales declined 1% and operating profit 12%; UTC Climate, Controls & Security sales declined 3% and operating profit 17%. Pratt & Whitney sales rose 8% but operating profit declined 2%. UTC Aerospace Systems sales declined 1% and operating profit 5%.
- Q1 2015 included $408 million of other income versus $146 million in Q1 2016, including prior-year joint-venture remeasurement, property-sale and contract-termination gains. Q1 2015 also included $61 million of favorable aerospace contract-estimate changes; Q1 2016 had no significant net impact from such changes.
- Q1 2016 net income included $11 million from discontinued operations, including an $18 million additional Sikorsky disposal gain. Q1 2015 discontinued operations included $91 million of Sikorsky operating income.
Outlook, management commentary and risks
- UTC expected 2016 operating cash flow from continuing operations, after capital expenditures, to approximate 90%–100% of continuing-operations net income attributable to common shareholders.
- Management estimated full-year continuing-operations effective tax rate of approximately 28%, excluding restructuring and nonrecurring items; company-funded R&D was expected to decline by up to $25 million from 2015.
- Expected 2016 restructuring costs were approximately $500 million. The company anticipated annual recurring savings of about $60 million from 2016 actions and about $440 million from 2015 actions once realized; completion timing was generally 2016–2017.
- Management expected 2016 acquisition cash investment of $1–$2 billion and approximately $175 million of global defined-benefit pension contributions. It anticipated approximately $2.5 billion of Sikorsky-sale-related tax payments in 2016, of which about $2.2 billion had been paid by March 31.
- The company cited modest global growth, slower China growth and contraction in Russia and Brazil. Business sensitivities include construction and air-travel demand, airline finances, defense spending, foreign exchange, commodities, regulation and supplier delivery. These are risks to results, not formal consolidated sales or EPS guidance.
- Contingencies include a disputed government cost-accounting claim of approximately $211 million; an F100 engine matter in which the government sought approximately $85 million and UTC disputed the basis beyond the previously affirmed civil penalty; and an appeal of an adverse German tax-court ruling. UTC recorded $376 million of estimated asbestos liabilities and a $106 million insurance recovery receivable.
- The filing reports no material changes to risk factors or market-risk exposure and states disclosure controls were effective. The interim financial statements received an accountant’s review, not an audit opinion.
Important facts for investors to verify
- Whether lower segment margins—especially Pratt & Whitney’s negative engine-margin pressure—persist, and how OEM mix and aftermarket growth evolve.
- Whether operating cash flow recovers after the working-capital outflow and Canadian settlement payment, and whether cash remains available given its foreign concentration.
- Debt growth, remaining Sikorsky-related share-repurchase settlements, and the effect of planned repurchases and dividends on leverage and liquidity.
- Actual restructuring charges, timing and realization of projected savings, and the ultimate Sikorsky-related tax payments.
- Developments in the government claims, German tax appeal, asbestos assumptions and recoveries, and the PW1500G/CSeries program’s investment recovery.