United Technologies Corporation (UTC) — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The supplied filing is UTC’s annual report, not a quarterly report, and it is not an RTX filing; the financial statements are incorporated by reference from the 2011 Annual Report to Shareowners.
Business context and financial overview
UTC operated across building systems and aerospace through Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Commercial and industrial businesses represented approximately 58% of 2011 consolidated net sales; commercial aerospace and military aerospace represented approximately 22% and 20%, respectively. International operations, including U.S. export sales, generated 61% of total segment sales.
- The supplied filing text does not provide clear consolidated values for revenue, net income, earnings per share, operating margins, cash flow, or cash and current assets. These financial statements and the related management discussion are incorporated by reference.
- Consolidated debt was approximately $10.3 billion at December 31, 2011. No consolidated liquidity ratio or cash balance is stated in the supplied text. UTC reported no outstanding amounts under its revolving credit facilities.
- Company-funded research and development was $2.1 billion, or 3.5% of sales, versus $1.7 billion (3.2%) in 2010 and $1.6 billion (3.0%) in 2009. Customer- and government-funded contract R&D was $1.9 billion in 2011, compared with $2.0 billion in 2010.
- Reported segment backlog at year-end included Otis $14.3 billion (up from $13.9 billion), Carrier $2.2 billion (unchanged), UTC Fire & Security $1.3 billion (up from $1.1 billion), Pratt & Whitney $22.4 billion (down from $23.5 billion), Hamilton Sundstrand $5.4 billion (up from $5.1 billion), and Sikorsky $9.4 billion (up from $9.3 billion). Backlog is not necessarily indicative of future demand or profitability.
Material changes and transactions
- In September 2011 UTC announced an organizational realignment: Carrier and UTC Fire & Security would report together as UTC Climate, Controls & Security beginning in Q1 2012; Pratt & Whitney and Hamilton Sundstrand would be grouped within UTC Propulsion & Aerospace Systems while continuing to report separately.
- UTC agreed to acquire Goodrich for $127.50 per share in cash, with stated enterprise value of $18.4 billion, including $1.9 billion of net debt to be assumed. The deal remained subject to approvals and other closing conditions; UTC expected a mid-2012 closing.
- Pratt & Whitney agreed to acquire Rolls-Royce’s interests in IAE for $1.5 billion plus contingent payments tied to V2500 engine flight hours, subject to approvals and closing conditions. The parties also agreed to form a joint venture to develop engines for future mid-size aircraft.
- UTC suspended additional share repurchases until at least September 30, 2012, in connection with the Goodrich acquisition, and said repurchases would be significantly reduced for the following two years.
Outlook, risks, contingencies and unusual items
- Management described the global recovery as gradual and uncertain, with particular concerns about Europe, unemployment, weak housing markets and sovereign-debt conditions. Demand is exposed to construction, air travel, commercial aerospace and government defense spending.
- UTC identified risks from foreign exchange movements, raw-material prices and availability, supplier disruptions, government contract audits and investigations, fixed-price development programs, product certification and technology execution, restructuring, cybersecurity, and legal, tax and environmental matters.
- Sikorsky’s Canadian CH-148 program is a large fixed-price development contract. Delivery schedules and specifications had been revised; additional interim aircraft, remaining work schedules and open disputes were still under discussion. Further testing and upgrades were required for full mission capability.
- UTC recognized a potential $45 million liability at year-end for export-compliance matters involving Hamilton Sundstrand and Pratt & Whitney; discussions with U.S. authorities continued, and the outcome and timing were uncertain.
- Other significant proceedings included the remanded False Claims Act case involving Pratt & Whitney’s historical F100 engine contracts and an appeal of the European Commission competition ruling against Otis entities. UTC stated that the ultimate outcomes of these matters could have adverse effects, while generally not expecting material adverse effects from the other described proceedings.
- UTC stated that environmental cleanup and compliance obligations were not expected to materially affect its financial condition, results or cash flows. It also warned that future regulation, including climate-related rules, could increase costs.
Key facts for investors to verify
- Review the incorporated 2011 Annual Report financial statements and MD&A for actual consolidated sales, earnings, margins, operating cash flow, capital spending, cash, liquidity and year-over-year performance.
- Assess the financing plan and resulting debt burden for the Goodrich acquisition, and confirm whether the acquisition and IAE restructuring closed on the expected terms and timetable.
- Track segment performance and the conversion, cancellation risk and profitability of backlog, especially in Pratt & Whitney and fixed-price aerospace programs.
- Monitor the $45 million export-compliance accrual, government contract litigation and investigations, and any resulting penalties, restrictions or additional liabilities.
- Evaluate the effects of the announced segment reorganization and the repurchase suspension on results, capital allocation and share count.