United Technologies Corporation (UTC) — Q1 2018 Form 10-Q
Entity and period: The supplied filing is for United Technologies Corporation, for the quarter ended March 31, 2018—not a filing under the name RTX Corp. The interim financial statements are unaudited and were reviewed, not audited, by the independent accountant.
Business context and reporting period
UTC operated four segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems. Its businesses span building systems and commercial and military aerospace. Results are compared with the quarter ended March 31, 2017.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $15.242 billion | $13.815 billion |
| Operating profit | $1.928 billion | $2.144 billion |
| Net income attributable to common shareowners | $1.297 billion | $1.386 billion |
| Diluted earnings per share | $1.62 | $1.73 |
| Operating cash flow | $453 million | $993 million |
- Sales increased 10%: 6% organic growth, 3% foreign currency translation, and 1% other. All four segments reported organic sales growth.
- Cost of products and services sold rose 11% to $11.280 billion. Gross margin declined to 26.0% from 26.6%; operating margin fell to 12.6% from 15.5%.
- Other income decreased to $231 million from $588 million, principally because Q1 2017 included gains on investment sales, including Watsco. Q1 2018 included a $44 million tax charge related primarily to provisional Tax Cuts and Jobs Act adjustments.
- Cash and cash equivalents were $7.667 billion at quarter-end, down from $8.985 billion at December 31, 2017. Total debt was $27.347 billion and net debt was $19.680 billion; net debt was $18.500 billion at year-end. Debt to total capitalization was 46%.
- Current assets were $32.741 billion and current liabilities $24.747 billion at quarter-end. Short-term borrowings were $1.066 billion; long-term debt, including its current portion, totaled $26.281 billion.
- Investing cash outflow was $976 million and financing cash outflow was $910 million. UTC paid $535 million in common-stock dividends and repaid $993 million of long-term debt.
Material changes and segment results
- Pratt & Whitney sales rose 15% to $4.329 billion and operating profit rose 16% to $413 million. Higher commercial aftermarket and military sales were partly offset by lower commercial OEM profit, including higher negative engine margins and customer-support costs. Commercial aftermarket sales rose 18%.
- UTC Aerospace Systems sales rose 6% to $3.817 billion and operating profit rose 11% to $588 million; commercial aftermarket sales increased, while commercial OEM sales were lower. Commercial aftermarket sales rose 16%.
- Otis sales rose 8% to $3.037 billion, while operating profit was nearly flat at $450 million. Pricing pressure, particularly in China, weighed on margin; service growth partly offset lower new-equipment sales.
- UTC Climate, Controls & Security sales rose 12% to $4.376 billion, but operating profit fell 36% to $592 million. The prior-year period benefited from investment-sale gains; Q1 2018 also included costs related to a product recall program.
- Operating cash flow fell by $540 million year over year. Management attributed the decline mainly to working-capital use, including higher receivables and contract assets, and approximately $560 million less cash from factoring receivables versus Q1 2017.
- Q1 2017 net income included after-tax gains from investment sales of $238 million. Q1 2018 net income included $52 million of after-tax restructuring charges and a $72 million net charge for significant non-operational or nonrecurring items. Management reported a net $0.15-per-share charge from restructuring and such items in Q1 2018, versus a $0.25-per-share net gain in Q1 2017.
Outlook, management commentary, and risks
- UTC expected 2018 cash flow from continuing operations, less capital expenditures, of approximately $4.5–$5.0 billion. It estimated a 2018 full-year effective tax rate of approximately 25.5%, excluding restructuring, non-operational/nonrecurring items, and TCJA adjustments.
- UTC expected restructuring costs in 2018 to be consistent with 2017. It anticipated approximately $40 million of remaining costs for 2018 actions and $103 million for 2017 actions, with expected annual recurring pretax savings of approximately $26 million and $207 million, respectively, over the two-year periods following initiation.
- UTC expected to complete its Rockwell Collins acquisition around mid-2018, subject to customary closing conditions and regulatory approvals. It anticipated approximately $15 billion for the cash portion, expected to fund it with debt and cash on hand, and expected to assume approximately $7 billion of Rockwell Collins debt. A $6.5 billion, 364-day bridge facility was available if anticipated debt issuances were not completed. UTC had suspended share repurchases to manage acquisition-related cash needs.
- Management cited market uncertainties including construction and air-travel demand, airline financial health, government spending, commodity and energy costs, foreign exchange, interest rates, weather and natural disasters, regulation, and supplier delivery disruptions. It also identified acquisition financing, integration, and realization of anticipated benefits as risks.
- Cash flow was exposed to working-capital variability and customer-financing needs. Commercial aerospace financing and other contractual commitments were approximately $15.1 billion at quarter-end, with up to $0.8 billion potentially payable during the rest of 2018.
- Contingencies include a pending government contract-cost claim against Pratt & Whitney of approximately $177 million plus interest, German tax litigation involving approximately $267 million of claimed tax benefits plus estimated interest, and asbestos liabilities estimated at $343 million, partly offset by a $147 million insurance recovery receivable. UTC said it did not expect the described matters, other than as noted, to materially adversely affect its financial condition or results.
- The DOJ closed its investigation into a matter involving a sales representative; discussions with SEC staff remained ongoing and the outcome was uncertain. UTC also noted that accounting for certain TCJA effects remained provisional and was expected to be finalized by December 22, 2018.
Important facts for investors to verify
- Confirm the filing’s registrant: this is United Technologies Corporation’s 2018 Q1 filing, notwithstanding the request’s RTX Corp label.
- Assess whether weaker operating margin and operating cash flow reflect temporary timing and comparison effects or persistent pressure, especially at Pratt & Whitney and Otis.
- Track Rockwell Collins closing conditions, financing, assumed debt, integration costs, and the effect on UTC leverage and liquidity.
- Review the effects of the new revenue-recognition standard: adoption reduced retained earnings by $480 million at January 1, 2018; its reported Q1 impact increased net income by $10 million, including $8 million attributable to common shareowners. Management expected an immaterial impact on 2018 net income.
- Monitor resolution of the TCJA accounting, tax examinations and litigation, the Pratt & Whitney government claim, SEC discussions, and asbestos assumptions and insurance recoveries.
- Compare reported Q1 earnings with underlying performance while accounting for Q1 2017 investment-sale gains and Q1 2018 restructuring, recall, acquisition-related, and other unusual items.