Business context and reporting period
This is United Technologies Corporation’s (UTC) unaudited Form 10-Q for the quarter and nine months ended September 30, 2015—not a filing under the name RTX Corp. Comparisons are with the corresponding 2014 periods. UTC reported four continuing segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems. Sikorsky was classified as discontinued operations after UTC agreed to sell it.
Financial performance
Dollars in millions, except per-share amounts and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales from continuing operations | $13,788 | $14,613 | $41,798 | $42,920 |
| Operating profit | $2,302 | $2,612 | $6,899 | $7,313 |
| Operating margin | 16.7% | 17.9% | 16.5% | 17.0% |
| Continuing income attributable to common shareholders | $1,426 | $1,755 | $4,252 | $4,788 |
| Diluted continuing EPS | $1.61 | $1.93 | $4.76 | $5.24 |
| Net income attributable to common shareholders, including discontinued operations | $1,362 | $1,854 | $4,330 | $4,747 |
- Q3 sales fell 6% year over year: organic sales declined 1% and currency translation reduced sales 5%. Nine-month sales fell 3%, including a 5% currency headwind, partly offset by 2% organic growth.
- Q3 gross margin declined to 28.9% from 30.4%; nine-month gross margin was 28.8% versus 29.7%. Management attributed the declines chiefly to Pratt & Whitney’s lower favorable contract adjustments and greater negative engine margins, and to higher pension costs.
- Pratt & Whitney was the main Q3 operating pressure: sales fell 9%, operating profit fell 34%, and margin declined to 13.0% from 17.8%. Engine shipment delays during a transition to a third-party logistics center contributed; management said the transition was largely complete by period-end.
- Nine-month continuing operating cash flow was $4,044, down from $5,022. Continuing investing cash use was $1,416, including $1,044 of capital expenditures. Cash-flow pressure reflected lower income and increased working-capital investment, including inventories and receivables.
Balance sheet, liquidity and capital allocation
- At September 30, cash and cash equivalents were $5,477; total debt was $22,667 and net debt was $17,190. Debt to total capitalization was 41%, versus 38% at December 31, 2014. Short-term borrowings rose to $3,024, mainly commercial paper.
- UTC had $4,350 of revolving credit facilities undrawn, available as backup for commercial paper. About 99% of cash was held by foreign subsidiaries; repatriation of some balances could have adverse tax consequences or be subject to capital controls.
- UTC repurchased $4,000 of stock during the first nine months and paid $1,643 in common dividends. After quarter-end, the board authorized a new $12 billion repurchase program; management expected approximately $10 billion of total 2015 repurchases.
- Credit-rating agencies downgraded UTC in September from A/A2 to A-/A3, with stable outlooks; UTC said the actions primarily reflected completed and expected share repurchases.
Outlook, management commentary and notable items
- UTC agreed to sell Sikorsky to Lockheed Martin for $9 billion cash, subject to adjustments and customary closing conditions, including regulatory approval. Closing was expected in Q4 2015; expected after-tax net proceeds were approximately $6 billion. Management expected to use proceeds toward additional share repurchases.
- Management expected 2015 continuing-operations cash flow after capital expenditures to be approximately 90%–100% of continuing income attributable to common shareholders; the filing does not provide a clear full-year sales or EPS forecast.
- Management estimated a full-year continuing-operations effective tax rate of about 28.5%, excluding nonrecurring items; company-funded R&D was expected to decline approximately $200 million from 2014. Global defined-benefit pension contributions were expected to be about $150 million in 2015, while pension expense was expected to increase about $300 million versus 2014.
- UTC expected approximately $1 billion of 2015 cash investment in acquisitions. For ongoing 2015 restructuring actions, it expected another $60 million of charges and approximately $145 million in annual recurring pre-tax savings as actions mature. It also expected more than $300 million of 2015 restructuring costs in continuing operations overall.
- Other risks and uncertainties include economic and currency conditions, construction and aerospace demand, customer and supplier conditions, execution and regulatory approval of the Sikorsky sale, new-program development and delivery, restructuring outcomes, pensions, and legal and tax matters. UTC disclosed a government claim seeking approximately $85 million in the F100 engine litigation, while UTC continued to accrue only the approximately $7 million civil penalty; it also disputed a $211 million cost-accounting claim. The German tax dispute remained in litigation; UTC had paid approximately $300 million in tax and interest through September to limit further interest accruals.
- The interim statements received an accountant’s review, not an audit opinion. Management reported disclosure controls effective as of September 30, 2015, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the Sikorsky transaction closed on the expected terms and timing, and whether proceeds and resulting discontinued-operations effects matched expectations.
- Whether Pratt & Whitney recovered from the logistics transition and improved engine margins, deliveries, and operating performance.
- Whether working-capital demands and operating cash generation improved, particularly given the lower nine-month cash flow and inventory build.
- How planned share repurchases were financed and whether elevated debt, credit-rating changes, and overseas cash accessibility affected liquidity.
- Developments in the German tax litigation, F100 engine case, government cost-accounting claim, pension expense, and restructuring costs and savings.