Business context and reporting period
United Technologies Corporation (UTC), now known as RTX Corporation, filed this unaudited Form 10-Q for the quarter ended March 31, 2013. UTC operated through Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems, and Sikorsky. Results include Goodrich, acquired in July 2012, and therefore comparisons with 2012 are materially affected by acquisitions and divestitures.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $14.399 billion | $12.416 billion |
| Operating profit | $2.006 billion | $1.713 billion |
| Operating margin | 13.9% | 13.8% |
| Gross margin | 27.3% | 28.1% |
| Continuing income attributable to common shareowners | $1.270 billion | $1.189 billion |
| Diluted continuing EPS | $1.39 | $1.31 |
| Net income attributable to common shareowners | $1.266 billion | $330 million |
| Operating cash flow, continuing operations | $1.409 billion | $1.323 billion |
- Revenue increased 16%; acquisitions and divestitures contributed a net 18%, while organic volume declined 2%. Product sales were $10.255 billion and service sales were $4.144 billion.
- Gross margin fell 0.8 percentage points, reflecting Goodrich and IAE acquisition effects and a greater mix of commercial aerospace OEM sales versus aftermarket activity. Operating margin edged up 0.1 percentage points.
- Continuing operations benefited from the enlarged business, but net income comparisons are distorted by the 2012 discontinued-operations loss of $857 million, primarily related to disposal charges. Q1 2013 discontinued operations recorded a $4 million loss.
- Segment sales and operating profit: Otis $2.814 billion / $575 million; Climate, Controls & Security $3.837 billion / $520 million; Pratt & Whitney $3.402 billion / $406 million; Aerospace Systems $3.263 billion / $501 million; Sikorsky $1.249 billion / $90 million.
- At March 31, cash was $4.767 billion; total debt was $22.824 billion, versus $9.791 billion a year earlier. Net debt was $18.057 billion; debt-to-total-capitalization was 45%. Current assets were $29.161 billion and current liabilities $22.559 billion.
- Continuing-operations investing cash flow was positive $339 million, including $746 million of business-disposition proceeds; financing cash outflow was $1.019 billion. Total cash decreased $55 million during the quarter, including $766 million of discontinued-operations cash outflows.
Changes, outlook, risks and unusual items
- UTC completed the Goodrich-related sales of its pumps and engine controls and electric power systems businesses for combined proceeds of about $600 million. It also completed the UTC Power disposition, which required $48 million of UTC funding. Rocketdyne and Pratt & Whitney Power Systems remained pending dispositions.
- Management expected 2013 operating cash flow from continuing operations less capital expenditures to exceed continuing net income. It expected a full-year effective tax rate of about 29%, company-funded R&D to rise approximately $300 million versus 2012, and restructuring costs from continuing operations of about $350 million.
- Management expected approximately $2 billion of debt repayments, $1 billion of share repurchases, and $1 billion of acquisition spending in 2013. Global defined-benefit pension contributions were expected to be about $200 million; pension expense was forecast to increase about $225 million versus 2012.
- U.S. Government sequestration could reduce earnings per share by an estimated $0.10. Management cited uncertain defense spending, mixed European conditions, aerospace aftermarket demand, construction markets, foreign exchange, commodities, and the successful integration of Goodrich as key uncertainties. No full-year revenue or EPS guidance is clearly provided in the filing text.
- Q1 included $50 million of net restructuring costs and a $132 million net benefit from non-recurring items in continuing earnings; non-recurring items exceeded restructuring charges by $0.11 per diluted share. The 2013 restructuring actions were expected to produce about $22 million in annual savings; previously initiated 2012 actions were expected to produce about $549 million in annual savings.
- Material contingencies include a government False Claims Act/common-law case concerning Pratt & Whitney, with the government seeking $624 million plus interest and a potentially material outcome if it prevails. A separate DOD claim against Sikorsky of about $95 million received a favorable court ruling, subject to possible appeal. Tax disputes include claimed benefits of approximately $228 million in France and $263 million in Germany; management said a $40–$340 million net reduction in unrecognized tax benefits was reasonably possible within 12 months, excluding those disputes.
- The Goodrich purchase-price allocation remained preliminary; management noted that final fair-value adjustments could be material. The independent accountant performed a review of interim information, not an audit.
Important facts for investors to verify
- How much reported growth and profit reflect Goodrich/IAE consolidation and dispositions, versus underlying organic performance.
- Progress integrating Goodrich, realization of expected savings, and remaining purchase-accounting and customer-contract liabilities.
- Debt reduction, interest costs, cash generation, and the effect of planned divestitures, repurchases, and acquisitions on liquidity.
- Whether aerospace aftermarket demand and Sikorsky/U.S. defense activity recover, and the realized impact of sequestration.
- Progress and final outcomes in the Pratt & Whitney government case, tax disputes, and pending divestitures.