Filing summary: United Technologies Corporation (UTC), Q2 2012 Form 10-Q
Issuer note: The filing is for United Technologies Corporation, not a company named RTX Corp. It covers the quarter and six months ended June 30, 2012; financial statements are unaudited and reflect continuing and discontinued operations separately.
Business context and reporting period
UTC supplied products and services to building systems and aerospace markets through Otis, UTC Climate, Controls & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Effective January 1, 2012, Carrier and UTC Fire & Security were combined in the new Climate, Controls & Security segment. The comparisons below are with Q2 or the first six months of 2011, as applicable.
Financial performance and liquidity
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Net sales | $13.807 billion, down 5% | $26.223 billion, down 3% |
| Operating profit | $2.179 billion, up from $2.150 billion | $3.892 billion, up from $3.850 billion |
| Operating margin | 15.8%, versus 14.9% | 14.8%, versus 14.2% |
| Net income attributable to common shareowners | $1.328 billion; diluted EPS $1.47 | $1.658 billion; diluted EPS $1.83 |
| Continuing-operations income attributable to common shareowners | $1.466 billion; diluted EPS $1.62 | $2.655 billion; diluted EPS $2.94 |
| Operating cash flow, continuing operations | Not reported separately for the quarter | $3.026 billion, versus $2.643 billion |
Q2 gross margin was 28.1%, up from 27.7%; for the six months it was also 28.1%, versus 27.7%. Company-funded R&D was $525 million in Q2 and $1.069 billion for the six months, compared with $494 million and $962 million, respectively. Continuing-operations income tax rates were 22.5% for Q2 and 21.5% for the first half, reduced by favorable tax items.
At June 30, cash and cash equivalents were $5.966 billion and restricted cash was $10.715 billion, largely proceeds reserved for the Goodrich acquisition. Total debt was $20.721 billion, versus $10.260 billion at year-end 2011; net debt was $14.755 billion, versus $4.300 billion. Debt to total capitalization rose to 47% from 31%. The company had $4 billion of revolving credit capacity, with no borrowings under those facilities at quarter-end. Six-month capital expenditures were $431 million; operating cash flow less capital expenditures was $2.595 billion (calculated from reported figures).
Changes versus the prior comparable period
- Sales fell despite 1% organic growth: Q2 declines reflected net dispositions and foreign-currency translation, each reported as a 3% adverse factor. For the first half, 1% organic growth was more than offset by dispositions and currency, each down 2%.
- Continuing-operations earnings and diluted EPS improved year over year, while total common-shareowner earnings and EPS fell for the first half because discontinued operations recorded a $993 million net loss, including a $1.171 billion disposal loss. Q2 discontinued operations recorded a $136 million net loss.
- Reported other income rose to $340 million in Q2 and $640 million for the first half, aided by portfolio-sale gains. The first-half figure included gains from UTC Climate, Controls & Security portfolio transactions, partly offset by impairment charges and a loss on a branch-operations disposition.
- Segment performance was mixed. In Q2, Climate, Controls & Security operating profit increased 19% to $789 million and Hamilton Sundstrand increased 14% to $211 million. Otis profit fell 12% to $651 million; Sikorsky fell 23% to $213 million. Pratt & Whitney profit was nearly flat at $427 million. For the first half, Hamilton Sundstrand rose 15%, while Pratt & Whitney and Sikorsky declined 4% and 17%, respectively.
- Cash from continuing operations increased by $383 million year over year, primarily due to lower working-capital cash use. Investing cash outflow was $12.272 billion, mainly reflecting $10.7 billion of restricted acquisition cash and the IAE transaction. Financing provided $9.377 billion, primarily through debt issuance.
Outlook, commentary, risks and unusual items
- UTC completed its $18.2 billion Goodrich acquisition on July 26, 2012, after the reporting date. It financed the transaction using June debt and Equity Unit proceeds, July commercial paper and a term loan, and operating cash. Accordingly, the acquisition and related post-quarter financing are not reflected in the June 30 financial statements. UTC planned to combine Goodrich with Hamilton Sundstrand as UTC Aerospace Systems.
- UTC expected divestitures to generate approximately $3 billion in after-tax cash for debt repayment. After quarter-end it agreed to sell Rocketdyne for $550 million and Hamilton Sundstrand’s industrial businesses for $3.46 billion; those transactions remained subject to closing conditions.
- Management raised its estimate for 2012 continuing-operations restructuring costs to approximately $500 million. It expected about $200 million in annual recurring savings from 2012 actions and about $300 million from 2011 actions once implemented. UTC also expected 2012 company-funded R&D to rise about $150 million from 2011, and estimated a 29.5% full-year effective tax rate excluding Goodrich and nonrecurring adjustments.
- Management expected pension expense to increase by approximately $250 million in 2012 compared with 2011. It suspended share repurchases until at least January 1, 2013 and expected materially lower repurchases for the following two years.
- Key operating exposures included European weakness and currency headwinds, slower Chinese growth, possible U.S. government budget reductions, airline cash conservation and lower commercial-engine spares orders. Sikorsky’s Canadian CH-148 fixed-price program had unresolved delivery and contract disputes; UTC said a contractual solution might not be reached to support 2012 delivery or revenue recognition.
- UTC recorded discontinued-operation impairments for Rocketdyne and Clipper and a second-quarter UTC Power impairment. It also recorded a $91 million reserve for potential Clipper wind-turbine warranty costs and said further reasonably possible costs could not yet be estimated.
- Legal and regulatory matters included a DOJ claim against Pratt & Whitney seeking $624 million plus interest, and export-control consent and deferred-prosecution agreements involving a $55 million civil penalty (up to $20 million potentially suspended) and an additional $13.8 million penalty. P&WC pleaded guilty and faced partial debarment from certain new or renewed export licenses; UTC stated it did not expect the matters to materially harm its financial condition or results. UTC also disclosed a German tax-benefit dispute and other tax examinations.
- The independent accountant performed a review of the interim financial information, not an audit. Management reported effective disclosure controls as of June 30, 2012.
Important facts for investors to verify
- Post-quarter Goodrich financing, including the commercial paper and term loan, and the resulting debt, interest expense and leverage after closing.
- Timing, proceeds and closing conditions for the Rocketdyne and Hamilton Sundstrand industrial-business sales, and whether proceeds are applied to repay acquisition debt as planned.
- Realization and timing of restructuring savings, the revised $500 million cost estimate, and the expected increase in pension expense.
- Progress and financial exposure on the CH-148 contract, Clipper warranty claims, and the Pratt & Whitney government litigation.
- Actual discontinued-business sale outcomes and any additional impairment, tax or disposal charges; the filing cautions that final sale terms could produce further gains or losses.
- Reported results include material portfolio gains and tax benefits; compare underlying operations with reported earnings, particularly the distinction between continuing operations and total results.