United Technologies Corporation (UTC) — Q1 2015 Form 10-Q
Entity note: The filing is for United Technologies Corporation, not a company identified as RTX Corp in 2015. It covers the unaudited quarter ended March 31, 2015; comparisons are with Q1 2014 unless stated otherwise. The auditor performed a review, not an audit.
Business context
UTC operated five principal segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems, and Sikorsky. The company announced a strategic review of Sikorsky, including a potential tax-free spinoff, with a decision expected around mid-2015.
Key financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $14.541B | $14.745B | -1% |
| Operating profit | $2.274B | $2.098B | +8% |
| Operating margin | 15.6% | 14.2% | +1.4 pts |
| Net income attributable to common shareowners | $1.426B | $1.213B | +18% |
| Diluted EPS | $1.58 | $1.32 | +20% |
| Operating cash flow | $1.310B | $1.335B | -$25M |
Foreign currency translation reduced sales by 4%, while organic sales grew 3%. Other income rose to $421M from $263M, substantially reflecting gains from remeasuring previously held interests in acquired joint ventures. UTC said nonrecurring items provided a net $0.14 per diluted share, partly offset by restructuring charges of $0.07 per share. Foreign currency translation and hedging had an unfavorable $0.07 per-share effect on operational performance.
Cash and cash equivalents were $5.281B at quarter-end. Total debt was $21.993B and net debt was $16.712B, up from $19.794B and $14.559B, respectively, at December 31, 2014. Debt to total capitalization increased to 42% from 38%, primarily due to short-term borrowing used to fund share repurchases. Current assets were $29.958B and current liabilities $25.729B.
Segment trends
- Otis sales declined 7% to $2.745B; operating profit fell 8% to $527M. New equipment orders rose 8% excluding foreign exchange, but China orders declined 12% excluding foreign exchange.
- UTC Climate, Controls & Security sales were roughly flat at $3.852B; operating profit rose 36% to $729M, including acquisition-related fair-value and property-sale gains. Organic sales grew 6%.
- Pratt & Whitney sales were essentially flat at $3.332B; operating profit increased 8% to $419M. Results included higher negative engine margins, partly offset by aftermarket mix and other favorable items.
- UTC Aerospace Systems sales rose 3% to $3.548B; operating profit declined 4% to $569M. Commercial aerospace growth was partly offset by lower military contribution and higher pension costs.
- Sikorsky sales fell 7% to $1.267B; operating profit rose 7% to $92M. Lower aircraft and aftermarket sales were partly offset by improved U.S. government contract performance.
Cash, outlook, and management commentary
- Operating cash flow was slightly lower year over year, as higher earnings were offset by working-capital outflows and other operating assets. Investing cash flow was positive $173M, including $569M of derivative settlement receipts; financing used $1.384B, including $3.0B of common-stock repurchases and $553M of dividends.
- UTC expected 2015 operating cash flow less capital expenditures to equal approximately 90%–100% of net income attributable to common shareowners. It expected the full-year effective tax rate to be about 29%, absent nonrecurring adjustments, and company-funded R&D to decline slightly from 2014.
- Management expected approximately $300M of restructuring costs in 2015. It cited expected annual recurring savings of about $75M from 2015 actions and $215M from 2014 actions as they ramp up. Expected pension expense for 2015 was about $275M higher than in 2014; expected global pension contributions were approximately $350M.
- UTC expected about $1B of cash acquisition investment in 2015. It reported approximately $10.9B of commercial aerospace financing and other contractual commitments, with up to $1.0B potentially payable during the remainder of 2015.
- Management cited improving U.S. and Western European conditions and a stronger airline outlook, while flagging slower Chinese growth, pressure on U.S. defense spending, foreign exchange, interest rates, commodity prices, construction and aerospace demand, and customer and supplier financial conditions.
Unusual items, contingencies, and risks
- UTC paid $2.65B under accelerated share repurchase agreements in March and initially received 18.6M shares; final settlement was expected by Q4 2015. Commercial paper borrowings were approximately $2.2B at quarter-end.
- UTC had fully accrued a German tax dispute involving approximately €215M ($237M) of claimed tax benefits plus estimated interest of €118M ($130M). It paid about $22M in Q1 and expected further payments, including about $194M in April, while continuing litigation.
- The Sixth Circuit reversed and vacated a prior $664M judgment in the F100 engine litigation, finding the government had not proved damages, and remanded the case for further proceedings. UTC maintained a reserve only for approximately $7M of penalties and related interest.
- Pratt & Whitney disputed a U.S. government cost-accounting claim of approximately $211M. DOJ and SEC investigations concerning a sales representative and alleged anti-bribery issues remained ongoing; UTC said it could not predict their outcome.
- UTC said it did not expect the other described contingencies to materially adversely affect its financial position or results, but outcomes remain uncertain. It also disclosed a separate air-emissions proceeding involving proposed penalties at a UTC Aerospace Systems facility.
Important facts for investors to verify
- Confirm the filing entity and period: this is UTC’s Q1 2015 filing, not an RTX Corp filing under that name.
- Assess how much of the earnings and margin improvement came from recurring operations versus the $126M joint-venture fair-value gain and other unusual items.
- Track the completion and final share count or cash settlement of the $2.65B accelerated repurchase, and the resulting debt and leverage.
- Monitor Sikorsky’s strategic review, the German tax litigation and payments, and the government investigations and contract claims.
- Compare subsequent cash generation, restructuring costs and savings, pension expense and contributions, and commercial aerospace commitments with management’s stated expectations.