United Technologies Corporation (UTC; predecessor to today’s RTX) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The interim financial statements are unaudited; PwC performed a review, not an audit. UTC operated Otis, Carrier, Pratt & Whitney, and Collins Aerospace Systems. The filing predates the company’s rebranding as RTX.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $19.50B | $16.51B | $57.50B | $48.46B |
| Operating profit | $2.49B | $1.84B | $7.12B | $6.64B |
| Operating margin | 12.8% | 11.1% | 12.4% | 13.7% |
| Net income attributable to common shareowners | $1.15B | $1.24B | $4.39B | $4.58B |
| Diluted EPS | $1.33 | $1.54 | $5.09 | $5.72 |
| Operating cash flow | Not separately provided | Not separately provided | $6.10B | $4.32B |
- Q3 sales rose 18%, including 5% organic growth and a 14% contribution from acquisitions and divestitures, primarily Rockwell Collins. Nine-month sales rose 19%, including 6% organic growth.
- Q3 gross margin increased to 27.1% from 24.1%; nine-month gross margin rose to 26.4% from 25.2%.
- Q3 net income and diluted EPS declined despite higher operating profit, principally amid a 47.3% effective tax rate (23.7% prior year) and significant non-operational/nonrecurring charges. Nine-month effective tax rate was 29.6% versus 25.2%.
Liquidity, debt, and cash flow
- At September 30, cash and cash equivalents were $7.34B; total debt was $44.60B and net debt was $37.26B. Debt-to-total capitalization was 51%, down from 53% at year-end 2018. Approximately 80% of cash was held by foreign subsidiaries.
- Current assets were $37.82B and current liabilities $35.57B. UTC had $984M of commercial paper outstanding and no borrowings under its $10.35B bank credit agreements.
- Nine-month operating cash flow of $6.10B was up $1.78B year over year. Investing used $1.97B, including $1.36B of capital expenditures; financing used $2.89B. Cash dividends paid were $1.83B.
- Management expected 2019 operating cash flow less capital expenditures of approximately $5.3B–$5.7B, including $1.0B of one-time cash payments related to portfolio separation.
Segments and material changes
- Otis: Q3 sales $3.31B, operating profit $508M, margin 15.4%; sales and profit increased modestly year over year.
- Carrier: Q3 sales $4.82B, operating profit $685M, margin 14.2%, versus 17.3% a year earlier. Profit was affected by an investment impairment, contract termination, lower volume and unfavorable mix.
- Pratt & Whitney: Q3 sales $5.28B, operating profit $471M, margin 8.9%, up from $109M and 2.3%. Improvement reflected favorable mix on large commercial engine shipments and the absence of a prior-year customer contract settlement; aftermarket mix and contract adjustments were headwinds.
- Collins Aerospace Systems: Q3 sales $6.50B and operating profit $1.17B, with an 18.0% margin. Results include Rockwell Collins, acquired in November 2018; organic growth was 7%, led by commercial aftermarket and military sales.
- Nine-month operating margin fell to 12.4% from 13.7%, partly reflecting weaker Carrier results and acquisition, separation, and other costs. Q3 improvement also benefited from the absence of a prior-year Pratt & Whitney contract settlement.
Outlook, transactions, risks, and unusual items
- UTC expected the Otis and Carrier spin-offs and the all-stock merger with Raytheon to close in the first half of 2020, subject to regulatory approvals, customary closing conditions, financing, and completion of the separations. Shareowners approved the merger proposals on October 11, 2019. The combined company was expected to be named Raytheon Technologies Corporation.
- UTC recorded $342M of separation-related SG&A costs and $618M of separation-related tax charges in the first nine months. Q3 common-shareowner earnings included a $712M net charge for significant non-operational/nonrecurring items and $48M of after-tax restructuring charges; nine-month figures were $880M and $179M, respectively.
- Restructuring charges were $244M pretax for the nine months. UTC estimated additional charges of $266M to complete 2019 actions and expected annual recurring pretax savings of about $358M over the following two years.
- UTC disclosed a DCMA claim against Pratt & Whitney seeking about $1.73B plus interest (about $540M through September 30, 2019) over alleged cost-accounting noncompliance. UTC disputed the claim and appealed. Two other related claims sought $177M plus interest and $269M plus interest; UTC also disputed those claims.
- Other key exposures include German tax litigation concerning about €215M of tax benefits plus estimated interest of €118M; asbestos liabilities estimated at $330M–$395M, with $330M accrued and about $142M of insurance recovery receivable; and U.S. government investigations and contract audits. Management stated it did not believe the listed matters would materially adversely affect the company, while noting outcomes were uncertain.
- Management cited economic and political uncertainty, demand and airline conditions, commodity and currency movements, government spending, supply-chain disruption, transaction execution and integration, and potential U.S. sanctions affecting Turkish aerospace suppliers as risks. Turkey-related sanctions could affect sole-sourced supply components.
Most important facts for investors to verify
- Whether the Raytheon merger and Otis/Carrier separations closed on the expected timetable and on what financing and tax terms.
- How much of reported growth and margin performance reflects Rockwell Collins acquisition effects versus organic results and synergies.
- Whether the $5.3B–$5.7B cash-flow outlook, separation cash costs, and restructuring savings were achieved.
- Developments and potential financial exposure from the Pratt & Whitney cost-accounting claims, German tax litigation, and other contingencies.
- The effect of the elevated Q3 tax rate and separation-related charges on ongoing earnings and cash generation.