United Technologies Corporation (UTC) — Form 10-Q summary
Entity note: The supplied filing is UTC’s 10-Q, not a filing under the name RTX Corp. It covers the quarter and six months ended June 30, 2015; interim financial statements are unaudited.
Business context and reporting period
UTC reported five segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems and Sikorsky. On July 20, 2015, after quarter-end, UTC announced an agreement to sell Sikorsky to Lockheed Martin for $9 billion in cash, subject to adjustments, approvals and other closing conditions. The company expected closing by year-end 2015 or in the first quarter of 2016, and planned to report Sikorsky in discontinued operations beginning in the third quarter.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $16.333 billion | $17.191 billion | $30.874 billion | $31.936 billion |
| Operating profit | $2.552 billion | $2.355 billion | $4.826 billion | $4.453 billion |
| Operating margin | 15.6% | 13.7% | 15.6% | 13.9% |
| Net income attributable to common shareowners | $1.542 billion | $1.680 billion | $2.968 billion | $2.893 billion |
| Diluted EPS | $1.73 | $1.84 | $3.31 | $3.16 |
| Operating cash flow | Not provided separately | Not provided separately | $2.848 billion | $3.077 billion |
Q2 sales fell about 5%, while operating profit rose about 8%; six-month sales fell about 3% and operating profit rose about 8%. Q2 net income attributable to common shareowners declined about 8%, while six-month earnings rose about 3%. The effective tax rate was 29.3% for Q2 and 28.3% for the six months, compared with 16.7% and 23.0% in the prior-year periods. Management attributed much of the increase to the absence of favorable tax adjustments recorded in 2014.
At June 30, cash and equivalents were $5.933 billion; total debt was $22.443 billion and net debt was $16.510 billion. Debt to total capitalization was 41%, versus 38% at year-end 2014. Short-term borrowings were $2.782 billion, including $2.5 billion of commercial paper. No borrowings were outstanding under $4.35 billion of revolving credit agreements. Six-month operating cash flow was $229 million below the prior-year period; management cited higher other net operating assets, investment-related noncash earnings and working-capital use.
Material changes and segment performance
- UTC’s reported sales and margins were affected by the absence of a large prior-year Sikorsky Cyclone program catch-up adjustment. In Q2 2014, UTC recorded $830 million of sales and $1.268 billion of cost of sales, including $438 million of losses, following amended Canadian contract terms. Remaining estimated losses of about $220 million were to be recognized as incurred.
- All five segments recorded organic sales growth in Q2, but currency translation reduced consolidated sales by 4%. Otis Q2 sales declined 8% and operating profit declined 10%; Climate, Controls & Security sales rose 1% and operating profit rose 1%; Pratt & Whitney sales rose 2% and operating profit rose 13%; UTC Aerospace Systems sales were approximately flat and operating profit declined 4%; Sikorsky sales fell 29% and operating profit was $165 million versus a $317 million loss a year earlier.
- UTC cited higher negative engine margins at Pratt & Whitney and adverse mix, warranty and pension costs at UTC Aerospace Systems. Consolidated operating results also benefited from the comparison against prior-year Cyclone losses.
- Q2 2015 earnings included $40 million of after-tax restructuring charges and $27 million of after-tax costs related to the planned Sikorsky sale. Management reported a net $100 million after-tax benefit from nonrecurring items in first-half 2015, offset by $105 million of after-tax restructuring charges.
Outlook, commentary, risks and contingencies
- Management expected 2015 operating cash flow less capital expenditures to equal approximately 90%–100% of net income attributable to common shareowners, and estimated a full-year effective tax rate of about 29%, excluding nonrecurring items and the impact of the Sikorsky sale.
- UTC expected company-funded research and development in 2015 to decline by more than $100 million from 2014. It expected approximately $300 million of 2015 restructuring costs. For 2015 actions, expected recurring annual savings were about $200 million; for 2014 actions, about $310 million, with approximately $112 million realized in the first half of 2015.
- UTC identified economic and political conditions, construction and aerospace demand, airline and customer finances, currency and commodity movements, regulation, program execution, restructuring, pension assumptions and the successful completion of the Sikorsky sale as risks to results.
- UTC had paid approximately $258 million in German tax and interest during the first half while contesting the underlying tax matter; it expected total 2015 payments of about $305 million. The company had fully accrued the matter.
- In the F100 engine litigation, an appeals court reversed and vacated a prior damages award and remanded the case. UTC said it continued to accrue only about $7 million of penalties and related interest. A separate government claim against Pratt & Whitney sought approximately $211 million; UTC said it believed the claim lacked merit.
- The U.S. government alleged False Claims Act and other violations in a Sikorsky contract matter, seeking approximately $148 million including treble damages and penalties. UTC said it did not then believe a material loss was probable. The Justice Department opened a criminal investigation in July 2015; Sikorsky said it would cooperate.
- UTC disclosed certain transactions involving Iranian entities by non-U.S. subsidiaries, reported termination of the identified commercial relationships or access, and stated that relevant disclosures had been filed with OFAC.
Important facts for investors to verify
- Whether the Sikorsky transaction closes on the anticipated terms and schedule, and how the proceeds and discontinued-operations presentation affect subsequent results and capital returns.
- Whether cash generation improves, given lower first-half operating cash flow, increased borrowings used to fund the accelerated share repurchase, and substantial cash held by foreign subsidiaries.
- Whether Pratt & Whitney engine margins, UTC Aerospace Systems profitability and the remaining Cyclone program losses develop as management expects.
- Developments in the German tax dispute, government claims and investigation involving Sikorsky, and other legal or regulatory matters.
- Progress against restructuring costs and savings expectations, the projected tax rate and cash-conversion outlook.