United Technologies Corporation (UTC) — Q1 2011 Form 10-Q
Entity note: The filing names United Technologies Corporation, not RTX Corporation. It covers the quarter ended March 31, 2011. The interim financial statements are unaudited and received a limited review, not an audit.
Business context and reporting period
UTC operated six principal segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Its businesses span building systems and aerospace, across commercial and government markets. Comparisons below are against Q1 2010 unless noted.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net sales | $13.344 billion | $12.040 billion; up 10.8% (9% organic) |
| Operating profit and margin | $1.779 billion; 13.3% | $1.523 billion; 12.6% |
| Gross margin | $3.703 billion; 27.8% of sales | $3.308 billion; 27.5% |
| Net income attributable to common shareowners | $1.012 billion; diluted EPS $1.11 | $866 million; diluted EPS $0.93 |
| Operating cash flow | $1.361 billion | $1.154 billion |
| Capital expenditures | $180 million | $147 million |
| Cash and debt at quarter-end | Cash $4.440 billion; total debt $10.487 billion; net debt $6.047 billion | Net debt was $6.206 billion at December 31, 2010 |
Operating cash flow less capital expenditures was approximately $1.181 billion, a derived measure. Working capital used $301 million of cash, versus $194 million in Q1 2010. Cash increased $357 million during the quarter. Debt was 31% of total capitalization and net debt was 21% of net capitalization. The effective tax rate was 32.5%, compared with 30.0%.
Segment results were mixed. Carrier sales rose 12% and operating profit rose 123%, with margin increasing to 11.2% from 5.6%, aided by volume, conversion and the absence of prior-year portfolio-transformation charges. UTC Fire & Security sales rose 15%, partly from the GE Security acquisition. Pratt & Whitney and Hamilton Sundstrand sales each rose 9%; Sikorsky sales rose 16%, but profit fell 3% and margin declined to 8.9%. Otis sales rose 2%; new-equipment sales remained weak, partly offset by service growth.
Changes versus prior period
- Sales and operating profit increased, with consolidated operating margin expanding 0.7 percentage points. Management attributed profit growth to higher volume, lower restructuring costs and divestiture-related gains; higher R&D and commodity costs partly offset improvement.
- Company-funded R&D increased to $485 million from $397 million, while customer-funded R&D declined to $422 million from $492 million.
- Operating cash flow increased, but working-capital outflow grew, chiefly from higher inventory needs associated with sales growth.
- Investing cash outflow fell to $201 million from $2.124 billion, largely because Q1 2010 included major acquisitions. Financing shifted to a $879 million outflow from a $1.318 billion inflow, including stock repurchases and the prior-year debt issuance comparison.
Outlook, commentary, risks and unusual items
- Management described end markets as generally improving, with short-cycle recovery and stronger commercial aerospace aftermarket demand. Otis new-equipment sales were lagging, but order trends led management to expect a second-half 2011 recovery. Commercial aerospace spares orders increased at Pratt & Whitney and Hamilton Sundstrand.
- For 2011, UTC expected an approximately $250 million adverse operating-profit impact from gross commodity cost increases and $200–$225 million of additional company-funded R&D versus 2010. It expected a full-year effective tax rate of about 30.5% and a roughly $150 million increase in pension expense versus 2010.
- Expected full-year restructuring costs were $150–$200 million. Management anticipated approximately $350 million in annual recurring pre-tax savings from 2010 actions and approximately $18 million from 2011 actions, as they are implemented. UTC expected about $1.5 billion of acquisition investment and approximately $2.5 billion of share repurchases in 2011.
- UTC reported $1.9 billion of commercial aerospace financing and other contractual commitments; up to $157 million could be disbursed in 2011. Customer financing was expected to be a net use of funds for the year. Credit agreements provided $3.0 billion of committed capacity, with none drawn at quarter-end.
- Management anticipated possible short-term supply-chain disruption following the Japan earthquake, especially for electronics, with any impact expected in the second half; it did not then expect a significant effect on financial results or liquidity. Other risks include high oil prices and airline profitability, potential U.S. defense-budget pressure, commodities, currencies, economic conditions and supplier disruption.
- Legal and tax exposures include a DOJ False Claims Act case involving Pratt & Whitney (remanded for further proceedings on damages), a DOD claim against Sikorsky of approximately $89 million, and patent litigation with Rolls-Royce. The court dismissed Rolls-Royce’s willful-infringement claim on April 1, 2011, but the case remained pending. A German tax matter involved approximately $278 million of claimed benefits; UTC had not accrued tax expense and said developments could require an accrual.
- Q1 included $31 million of restructuring charges and favorable divestiture-related gains within other income. The filing also notes that the Clipper acquisition purchase accounting increased goodwill and warranty/performance-guarantee balances.
Important facts for investors to verify
- Whether organic growth and margin gains persist, particularly Carrier’s sharp profit rebound and the aerospace aftermarket recovery.
- Execution, cash costs and timing of restructuring savings, alongside planned R&D investment and commodity-cost headwinds.
- Actual progress on repurchases, acquisitions, pension expense and customer-financing commitments versus management’s expectations.
- Developments in Japan-related supply availability, airline conditions and U.S. defense spending.
- Potential outcomes and financial effects of the disclosed government-contract, patent and German tax matters.