Business context and reporting period
This is United Technologies Corporation (UTC) and subsidiaries’ unaudited Form 10-Q for the quarter ended March 31, 2012—not a filing under the RTX name. UTC reported five segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Effective January 1, 2012, the Climate, Controls & Security segment combined the former Carrier and UTC Fire & Security businesses. The interim financial information was reviewed, not audited.
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Net sales | $12,424 | $12,680 | Down 2% |
| Operating profit | $1,702 | $1,688 | Up 1%; margin 13.7% vs. 13.3% |
| Income from continuing operations attributable to common shareowners | $1,183 | $967 | Diluted EPS $1.31 vs. $1.06 |
| Net income attributable to common shareowners | $330 | $1,012 | Diluted EPS $0.36 vs. $1.11; includes discontinued-operations loss |
| Operating cash flow, continuing operations | $1,312 | $1,320 | Nearly unchanged |
| Cash and cash equivalents | $6,285 | $5,960 at Dec. 31, 2011 | Quarter-end balance |
| Total debt | $9,791 | $10,260 at Dec. 31, 2011 | Net debt $3,506 |
Gross margin improved to 28.0% from 27.7%. Company-funded R&D rose to $547 million from $470 million. Net interest expense declined to $129 million from $148 million. The effective tax rate was 20.0% versus 31.6%, principally reflecting a favorable non-cash tax benefit from the IRS audit conclusion.
Segment performance
Climate, Controls & Security operating profit increased 15% to $544 million despite sales declining 6%; reported results included portfolio-transformation gains. Hamilton Sundstrand sales rose 9% and operating profit 15%. Pratt & Whitney sales rose 6%, while operating profit fell 9%. Sikorsky sales fell 15% and operating profit fell 4%. Otis sales were essentially flat and operating profit declined 10%.
Material changes and unusual items
- Continuing-operations diluted EPS increased to $1.31 from $1.06, but included a net $0.30-per-share benefit from non-recurring items, partly offset by $0.09 per share of restructuring charges.
- Other income, net rose to $301 million from $98 million. It included an approximately $215 million gain on the sale of a controlling interest in an Asian joint venture, partly offset by $103 million of impairment charges related to planned dispositions. A separate approximately $218 million non-cash benefit followed completion of the IRS examination of tax years 2006–2008.
- UTC recorded a $961 million loss on disposal in discontinued operations, including approximately $360 million and $590 million of pre-tax goodwill impairment charges for Rocketdyne and Clipper. Discontinued operations produced a net loss of $851 million, versus income of $47 million in Q1 2011.
- The board approved divestitures of Hamilton Sundstrand’s industrial businesses, Rocketdyne and Clipper. UTC expected approximately $3 billion in net cash proceeds, with most sales expected in the second half of 2012. The proceeds were intended to repay debt associated with the proposed Goodrich acquisition.
Liquidity, outlook, risks and contingencies
- UTC reported $4.0 billion of revolving credit capacity, undrawn at quarter-end, and $221 million of short-term borrowings. It had a $15 billion acquisition bridge facility; on April 24, 2012, it also entered into a $2 billion term-loan agreement tied to the Goodrich transaction.
- The proposed Goodrich acquisition had an estimated enterprise value of $18.4 billion, including $1.9 billion of net debt to be assumed. UTC expected to pay $16.5 billion to shareholders in cash, financed through a combination of short- and long-term debt, mandatory convertible securities and cash; closing was expected in mid-2012, subject to conditions and regulatory approvals.
- UTC suspended share repurchases until at least September 30, 2012, and planned to reduce them significantly for the following two years. The first-quarter common dividend was $0.48 per share. Management expected 2012 acquisition spending of approximately $500 million, excluding Goodrich and the proposed IAE transaction.
- Management raised its estimate of 2012 restructuring costs in continuing operations from $350 million to approximately $450 million. It expected company-funded R&D to increase by about $150 million versus 2011, pension expense to increase by about $250 million, and the full-year effective tax rate to be approximately 29.5%, excluding Goodrich and absent one-time adjustments. No full-year revenue or EPS guidance is provided in the supplied filing text.
- Management expected approximately $150 million of annual recurring pre-tax savings from 2012 restructuring actions and approximately $300 million from 2011 actions once implemented. It cited uneven global growth, a mild European recession, a China construction slowdown, high fuel prices and pressure on U.S. defense spending as business factors.
- UTC recognized a potential $55 million liability for export-compliance matters under discussion with the State Department and DOJ, and expected resolution in the first half of 2012. The filing also describes government contract disputes and investigations; outcomes may affect results or cash flows.
- UTC disclosed potential additional remediation costs for Clipper wind-turbine main-shaft components but said it could not yet reasonably estimate the cost. It also noted tax uncertainty, including approximately €198 million (about $263 million) of claimed German tax benefits under review.
- Principal risks include economic and foreign-exchange exposure, construction and aerospace cycles, government budget and contracting risks, acquisition execution and financing, supplier disruptions, restructuring execution, legal and tax matters, and product or technology performance.
Most important facts for investors to verify
- Whether the planned divestitures closed on schedule and generated the expected net proceeds, and how proceeds affected acquisition-related borrowing.
- Whether Goodrich and the IAE transactions closed, their final financing terms, and subsequent debt, interest and integration costs.
- How much of reported continuing-earnings growth came from non-recurring gains and tax benefits versus recurring operating performance.
- Progress on restructuring costs, workforce and facility reductions, and delivery of the stated annual savings.
- Resolution and financial impact of export-compliance matters, the Clipper turbine remediation issue, and other disclosed legal and tax contingencies.