United Technologies Corporation (UTC) Form 10-Q Summary
Entity note: The supplied filing is for United Technologies Corporation, not an issuer named RTX Corp. It covers the quarter and nine months ended September 30, 2017. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context and reporting period
UTC reported four segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems. The filing’s results are not necessarily indicative of full-year results.
Financial performance
| Metric | Third quarter 2017 | Third quarter 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $15.062B | $14.354B | $44.157B | $42.585B |
| Operating profit | $2.163B | $2.251B | $6.720B | $6.533B |
| Operating margin | 14.4% | 15.7% | 15.2% | 15.3% |
| Net income attributable to common shareowners | $1.330B | $1.480B | $4.155B | $4.042B |
| Diluted EPS | $1.67 | $1.78 | $5.20 | $4.86 |
| Operating cash flow, continuing operations | Not reported quarterly | Not reported quarterly | $3.110B | $4.567B |
- Quarterly sales increased 5%; nine-month sales increased 4%. Nine-month diluted EPS rose about 7%, while quarterly EPS fell about 6%.
- Gross margin declined to 26.7% from 28.0% in the quarter and to 27.0% from 27.8% year to date. Management cited Pratt & Whitney’s higher negative engine margins and contract matters, Otis price/mix pressure (especially China), and unfavorable Climate, Controls & Security mix and project adjustments.
- Nine-month operating cash flow fell $1.457B year over year, including a discretionary $1.9B domestic pension contribution. Capital expenditures were $1.214B. Cash and cash equivalents were $8.523B at September 30.
- Total debt was $27.260B and net debt $18.737B; debt to total capitalization was 46%, versus 45% at year-end 2016. Current liabilities were $25.249B and current assets $32.963B. Available revolving credit was $4.35B, with no borrowings under those facilities.
Material changes and segment performance
- Quarterly revenue growth was led by Pratt & Whitney (+15% organic sales) and Climate, Controls & Security (+4%); UTC Aerospace Systems was flat organically. Otis grew 2% organically.
- Pratt & Whitney quarterly operating profit declined 33% to $229M, with margin down to 5.9% from 9.7%, despite stronger aftermarket and engine sales. Higher negative engine margins, ramp costs, and customer contract matters weighed on results. Nine-month operating profit declined 10%.
- Otis quarterly operating profit declined 5% to $555M, with margin down to 17.6% from 19.4%, mainly due to price/mix pressure, particularly in China. Climate, Controls & Security quarterly profit rose 3% to $828M; nine-month profit rose 17%, though large-project contract adjustments pressured year-to-date performance. UTC Aerospace Systems quarterly profit rose 3% to $616M.
- Other income for the first nine months rose to $1.095B from $600M, primarily including a $379M gain on the sale of Watsco investments. Quarterly other income included securities-sale gains. These items contributed to reported earnings.
- Operating cash flow was also affected by working-capital movements, pension contributions, and increased factoring activity; management reported approximately $400M of additional cash from factoring versus the comparable 2016 period.
Outlook, transactions, risks, and unusual items
- UTC agreed to acquire Rockwell Collins, with closing then expected in the third quarter of 2018, subject to shareholder and regulatory approvals and other closing conditions. The cash consideration was expected to total approximately $15B, funded with debt and cash; UTC also expected to assume about $7B of Rockwell Collins debt. A $6.5B 364-day bridge facility would be used only if anticipated debt issuances were not completed. UTC suspended share repurchases, apart from employee-plan-related activity.
- Management expected 2017 operating cash flow less capital expenditures to approximate $3.0B–$3.5B. The estimated full-year effective tax rate was approximately 27.5%, excluding restructuring and non-operational, nonrecurring items. Expected 2017 restructuring costs were approximately $300M. For 2017 restructuring actions, UTC expected about $150M of annual recurring pretax savings; 2016 actions were expected to generate about $180M annually.
- Management cited demand, airline and customer financial conditions, construction activity, commodity prices, currency and interest rates, regulation, weather, supplier disruptions, and defense spending as factors that could affect results. It also identified integration, financing, regulatory-approval, and execution risks related to the pending Rockwell Collins acquisition.
- Contingencies include a disputed Pratt & Whitney government claim of approximately $177M plus about $70M of interest; German tax litigation concerning approximately $256M of tax benefits plus estimated interest of about $140M (UTC had previously paid about $300M in tax and interest pending resolution); and estimated asbestos liabilities of $349M, with a $121M insurance-recovery receivable. UTC stated it did not expect the cited matters, based on information then available, to materially adversely affect its financial condition or results, while noting uncertainty in outcomes.
- UTC expected adoption of the new revenue standard on January 1, 2018 using the modified retrospective method. It anticipated changes in aerospace revenue and cost timing; $357M of deferred engine-unit costs in excess of contract-average cost was recorded at September 30, 2017. It also expected the new lease standard to result in potentially material right-of-use assets and lease liabilities, without a material cash-flow or earnings impact.
Most important facts for investors to verify
- Whether the Rockwell Collins transaction received required approvals, closed on the anticipated timetable, and was financed on terms consistent with UTC’s expectations.
- Whether Pratt & Whitney’s negative engine margins and contract adjustments improved, and whether the planned engine-production ramp delivered expected economics.
- Whether the decline in operating cash flow persisted after the unusually large pension contribution, and how much cash generation depended on factoring and working-capital timing.
- Whether the $3.0B–$3.5B cash-flow-less-capex expectation, tax-rate estimate, restructuring costs, and projected savings were achieved.
- Developments in the government claim, German tax litigation, asbestos exposure and insurance recoveries, and related government investigations.
- The effects of the new revenue and lease accounting standards, particularly on reported aerospace revenue, margins, retained earnings, and balance-sheet liabilities.