United Technologies Corporation (now RTX): Q1 2019 10-Q Summary
Entity and period: This filing is by United Technologies Corporation (UTC), for the quarter ended March 31, 2019. UTC is the predecessor of today’s RTX; RTX was not the registrant name in this filing. Financial amounts are in U.S. dollars.
Business context and results
UTC reported four segments: Otis, Carrier, Pratt & Whitney, and Collins Aerospace Systems. The quarter’s results include Rockwell Collins, acquired in November 2018; its contribution materially affects year-over-year comparisons.
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Net sales | $18.365 billion | $15.242 billion | Up 20%; organic growth 8%, acquisitions and divestitures net added 15%, and FX reduced growth 3% |
| Operating profit | $2.045 billion | $1.928 billion | Up 6%; operating margin declined to 11.1% from 12.6% |
| Net income attributable to common shareowners | $1.346 billion | $1.297 billion | Up 4% |
| Diluted EPS | $1.56 | $1.62 | Down 4%; weighted-average diluted shares rose to 860.7 million from 800.4 million |
| Gross margin | 25.4% | 26.0% | Down 60 basis points |
| Cash from operating activities | $1.500 billion | $453 million | Improved by $1.047 billion, mainly from working capital and lower Canadian settlement payments |
| Capital expenditures | $363 million | $337 million | Operating cash less capex was approximately $1.137 billion, versus $116 million |
Revenue growth was broad-based: all four segments had organic sales growth. Collins Aerospace’s reported sales rose 71%, largely reflecting Rockwell Collins; Pratt & Whitney sales rose 11%; Otis rose 2%; Carrier declined 1%. Segment operating margins were lower year over year: Otis 13.8% (14.8% prior year), Carrier 12.2% (13.5%), Pratt & Whitney 9.0% (9.5%), and Collins Aerospace 13.1% (15.4%).
Financial position and liquidity
- Cash and cash equivalents were $6.240 billion at March 31, 2019, compared with $6.152 billion at year-end 2018; about 66% was held by foreign subsidiaries.
- Total debt was $45.186 billion and net debt was $38.946 billion. Debt to total capitalization was 52%, versus 53% at year-end and 46% a year earlier. The increase from the prior year primarily reflected Rockwell Collins acquisition financing and assumed debt.
- Current assets were $35.402 billion and current liabilities were $31.403 billion. UTC had $1.111 billion of short-term borrowings, including $849 million of commercial paper; no borrowings were outstanding under its bank credit agreements.
- Operating, investing, and financing cash flows were respectively $1.500 billion, negative $394 million, and negative $1.077 billion. Dividends paid were $609 million; share repurchases were $29 million.
- Remaining performance obligations were approximately $117.5 billion, with about 46% expected to be recognized as sales over the next 24 months.
Material changes and notable items
- Rockwell Collins contributed approximately $2.3 billion of sales and $264 million of operating profit in the quarter. Its preliminary purchase accounting included $20.553 billion of goodwill; valuation work remained incomplete and potential adjustments could be material.
- Net interest expense increased to $431 million from $229 million, reflecting debt issued in 2018, including financing associated with the acquisition. The average interest expense rate was 3.6%, versus 3.4%.
- Company-funded research and development rose to $728 million from $554 million; customer-funded R&D rose to $551 million from $323 million. The acquisition was the principal driver of the increases.
- Q1 restructuring costs were $112 million, compared with $69 million. UTC expected approximately $110 million of annual recurring savings from 2019 actions and approximately $260 million from 2018 actions when fully realized; further charges were expected to complete those programs.
- Adoption of the new lease standard added $2.533 billion of operating lease right-of-use assets and $2.602 billion of operating lease liabilities at quarter-end; adoption did not materially affect the income statement or cash flows.
Outlook, risks, and contingencies
- UTC expected 2019 operating cash flow less capital expenditures of approximately $4.5–$5.0 billion, including $1.5 billion of one-time cash payments related to the planned portfolio separations. Management said operating cash flows should be sufficient for future operating needs.
- UTC planned to separate into three companies: an aerospace business (Collins Aerospace and Pratt & Whitney), Otis, and Carrier. Otis and Carrier spin-offs were expected in the first half of 2020, subject to customary approvals, tax matters, filings, financing, and other conditions. Separation-related tax costs were expected to begin in Q2 2019.
- In April 2019, a U.S. Defense Contract Management Agency official asserted a $1.73 billion claim plus approximately $473 million of interest against Pratt & Whitney over alleged cost-accounting noncompliance. UTC said it believed the claim was without merit and intended to appeal. Separate claims of $177 million plus interest and $269 million plus interest were also disputed.
- UTC reported German tax litigation concerning approximately €215 million of claimed tax benefits plus estimated interest of approximately €118 million; it had previously paid €275 million to German authorities pending resolution. The company also disclosed an estimated $333 million of asbestos liabilities through 2059 and approximately $147 million of probable insurance recoveries.
- Other risks identified include economic and market conditions, aircraft and construction demand, commodity and currency movements, customer and supplier conditions, government contracting investigations, acquisition integration, separation execution and costs, indebtedness, and evolving tax and regulatory requirements. UTC said it did not believe the disclosed contingencies, apart from matters specifically described, would materially harm its financial condition or results.
Important facts for investors to verify
- Track the status, potential financial exposure, and appeal of the new $1.73 billion Pratt & Whitney government claim and the related existing claims.
- Monitor separation approvals, timing, tax treatment, financing, transaction costs, and the stated $1.5 billion cash-cost estimate.
- Assess whether Rockwell Collins integration, purchase-accounting adjustments, and anticipated benefits affect reported margins and cash generation.
- Compare subsequent cash flow and working-capital performance with the $4.5–$5.0 billion 2019 cash-flow-less-capex outlook.
- Review debt levels, interest expense, and the allocation of debt and liquidity among the planned successor companies.
The interim financial statements were reviewed, not audited, by the independent registered public accounting firm. Management cautioned that quarterly results are not necessarily indicative of full-year results.