United Technologies Corporation (UTC) — Form 10-Q Summary
Filing identity and period: The supplied filing is UTC’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013, not a filing under the RTX Corp. name. UTC is the historical registrant relevant to this filing. Dollar amounts are in millions except per-share data. The interim financial statements received a limited review, not an audit.
Business context and reporting period
UTC operated through Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems, and Sikorsky. Results are significantly affected by the July 2012 Goodrich acquisition: Goodrich is included in 2013 results but not in the comparable 2012 reported period, so reported growth is not wholly organic. UTC continued to sell non-core businesses and use divestiture proceeds to reduce acquisition-related debt.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $16,006 | $13,807 | $30,405 | $26,223 |
| Operating profit | $2,507 | $2,179 | $4,513 | $3,892 |
| Operating margin | 15.7% | 15.8% | 14.8% | 14.8% |
| Continuing income attributable to common shareowners | $1,552 | $1,466 | $2,822 | $2,655 |
| Diluted continuing EPS | $1.70 | $1.62 | $3.09 | $2.94 |
| Net income attributable to common shareowners, including discontinued operations | $1,560 | $1,328 | $2,826 | $1,658 |
| Continuing operating cash flow | Not presented by quarter | Not presented by quarter | $3,348 | $3,026 |
- Q2 sales rose 16%; management attributed the increase principally to acquisitions, especially Goodrich and IAE. Organic sales were flat in the quarter and down 1% for the first half.
- Gross margin was 27.8% in Q2 versus 28.1%; first-half gross margin was 27.6% versus 28.1%. Management cited aerospace OEM mix, Sikorsky contract pricing/reset provisions, and pricing pressure at Otis.
- Q2 operating profit increased, but consolidated operating margin edged down. Segment results varied: Pratt & Whitney operating profit rose to $567 from $427; Sikorsky fell to $156 from $213; Otis was nearly unchanged at $650; Climate, Controls & Security declined to $752 from $789. UTC Aerospace Systems’ sales and profit comparisons were heavily affected by Goodrich.
- Discontinued operations generated income of $8 in Q2 and $4 for the first half, versus losses of $136 and $993 in the comparable 2012 periods. The prior-year comparison included substantial impairment charges.
Cash, debt, and liquidity
- At June 30, cash and equivalents were $4,909; total debt was approximately $21,656; net debt was $16,747. Debt to total capitalization was 43%, compared with 46% at year-end 2012.
- Current assets were $28,790 and current liabilities $23,164. UTC reported $4 billion of revolving credit facilities, with no borrowings outstanding under them; commercial paper outstanding was $50.
- First-half continuing operating cash flow was $3,348. Continuing investing activities provided $108, primarily reflecting approximately $1.3 billion of divestiture proceeds, offset by capital spending and other investments. Continuing financing activities used $2,987, including debt repayment, $930 of common dividends, and $670 of share repurchases.
- Working capital movements used $264 of cash in the first half, principally as inventories and receivables increased. Capital expenditures were $664.
Material changes, outlook, risks, and unusual items
- Portfolio changes: UTC sold Goodrich pumps and engine controls and electric power systems businesses for combined proceeds of about $600; sold Pratt & Whitney Power Systems for $432 cash plus contingent consideration valued at about $200, recording a $193 pretax gain; and sold substantially all Rocketdyne operations. The UTC Power disposition required $48 of payments by UTC.
- Restructuring: First-half pretax restructuring costs were $240. UTC expected about $450 of full-year 2013 restructuring costs, with most remaining actions targeted for 2013–2014. Management estimated recurring annual pretax savings of approximately $237 from 2013 actions and $555 from 2012 actions.
- Management outlook: UTC expected 2013 operating cash flow less capital expenditures to exceed continuing net income attributable to common shareowners; a full-year effective tax rate of approximately 29%, absent one-time adjustments; approximately $1 billion of acquisition investment; about $2.5 billion of 2013 debt repayments; and approximately $1.2 billion of share repurchases. Management also expected 2013 pension expense to rise about $225 versus 2012. These are forward-looking estimates, not guarantees.
- One-time items and taxes: Q2 continuing results included restructuring charges after tax of $127 and benefits from non-recurring items after tax of $177. The first-half figures were $162 of restructuring charges and $309 of non-recurring benefits. The effective tax rate was 28.2% in Q2 versus 22.5%, mainly reflecting the absence of favorable 2012 tax adjustments; UTC’s first-half rate was 26.2% versus 21.5%.
- Major contingency: After quarter-end, a trial court entered a $664 judgment against Pratt & Whitney in the long-running F100 engine litigation. UTC said it would appeal and estimated a possible additional loss of $24–$657 beyond amounts previously accrued, plus postjudgment interest, if the judgment is ultimately upheld. UTC warned the outcome could materially affect results and cash flows.
- Other exposures: UTC disclosed a French tax dispute involving approximately $310 of claimed tax benefits, for which it had accrued no expense, and a German tax dispute involving approximately $266 of claimed benefits. U.S. government investigations, export-control compliance, environmental matters, guarantees, and ordinary-course litigation also remain risks. Rocketdyne-related performance guarantees increased by about $123, with no significant liability recorded.
- Market conditions: Management cited weak European conditions, expected pressure on U.S. defense spending and possible future sequestration effects, as well as exposure to construction demand, airline conditions, foreign exchange, interest rates, commodities, suppliers, and successful integration of Goodrich.
Important facts for investors to verify
- How much of sales and profit growth reflects Goodrich/IAE acquisitions versus organic performance, and whether integration benefits and savings are being realized.
- The status and financial exposure of the F100 litigation appeal, including accrued amounts, interest, and any subsequent court decisions.
- Progress against debt-reduction, cash-flow, restructuring-savings, acquisition-spending, and share-repurchase expectations.
- Segment trends—particularly Sikorsky contract economics and military demand, Pratt & Whitney aftermarket and engine volumes, and Otis pricing and European conditions.
- Developments in the French and German tax disputes and other government, export-compliance, guarantee, and litigation matters.