RTX Corp annual report, FY2009

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Filing summary

Entity and period: The supplied filing is United Technologies Corporation (UTC), not RTX Corporation, and is its Form 10-K for the fiscal year ended December 31, 2009—not a standalone 2009 fourth-quarter filing. The filing was signed February 11, 2010. Several financial statements and management’s discussion are incorporated by reference to UTC’s 2009 Annual Report but are not included in the supplied text.

Business context

UTC operated six principal segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Its businesses served building systems, commercial and military aerospace, and related industrial markets. In 2009, commercial and industrial businesses generated about 58% of consolidated revenue; commercial aerospace and military aerospace each generated about 21%. Revenue from outside the United States, including U.S. exports, was 59% of total segment revenue.

Financial and operating metrics

  • Revenue, profit, margins, cash flow, debt and liquidity: The supplied filing text does not provide clear consolidated values. These statements are incorporated by reference to the Annual Report.
  • Research and development: Company-funded R&D expense was $1.558 billion in 2009, or 3.0% of sales, versus $1.771 billion in 2008 and $1.678 billion in 2007. Customer- and government-funded contract R&D was $2.124 billion in 2009, compared with $2.101 billion in 2008 and $2.123 billion in 2007; $2.095 billion of the 2009 amount was expensed.
  • Year-end segment backlog: Otis $14.550 billion (2008: $15.025 billion); Carrier $2.199 billion ($1.996 billion); UTC Fire & Security $898 million ($1.064 billion); Pratt & Whitney $22.614 billion ($25.982 billion); Hamilton Sundstrand $5.077 billion ($5.226 billion); and Sikorsky $10.329 billion ($13.167 billion). The filing says substantially all Carrier and UTC Fire & Security backlog, and specified amounts of other segments’ backlog, was expected to convert to sales in 2010. Pratt & Whitney backlog figures reflect retrospective gross presentation of collaborators’ revenues; the filing notes the 2008 figure was $23.570 billion before that accounting change.
  • Share repurchases: UTC repurchased 4.655 million shares under its announced program during the fourth quarter at an average $68.74 per share. At quarter-end, 9.382 million shares remained authorized for purchase under the program.

Changes, outlook and management commentary

  • Backlog declined at Otis, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky, while Carrier backlog increased. The filing attributes the overall business environment to continued global recessionary conditions in 2009, although some indicators had begun to show improvement; management cautioned that recovery might not be broad-based or sustainable.
  • Carrier divested certain lower-margin operations, acquired service businesses and formed distribution and other ventures. UTC completed the acquisition of the remaining 71% of China-based GST Holdings in 2009.
  • UTC agreed to acquire GE Security in November 2009, subject to approvals and closing conditions, with closing anticipated early in the second quarter of 2010. It completed the acquisition of a 49.5% stake in Clipper Windpower on January 12, 2010.
  • UTC described ongoing product-development programs, including Pratt & Whitney’s PurePower PW1000G engine; demonstrator ground and flight testing was completed in 2009. Program selections and planned aircraft entry-into-service dates are not guarantees of commercial results.
  • No specific consolidated earnings or revenue guidance is stated in the supplied filing text. The filing identifies future results, cash flow, restructuring, acquisitions, product development, debt, capital spending and pension contributions as matters subject to uncertainty.

Risks, contingencies and unusual items

  • Key exposures include recession and credit conditions, construction and airline demand, foreign exchange, government procurement and defense budgets, supplier concentration and commodity costs, and execution, certification and cost risks on long-cycle fixed-price aerospace programs.
  • Government contract audits, investigations, export and regulatory compliance, litigation, environmental liabilities, taxes and collective bargaining negotiations could affect results or cash flows. Management stated it did not expect environmental compliance and cleanup payments to materially affect the company, but outcomes of legal matters remained uncertain.
  • Pratt & Whitney and the U.S. Department of Justice both appealed a ruling in the Fighter Engine Competition case. The trial judge found a False Claims Act violation but no actual government damages and imposed a $7.09 million civil penalty; the government had claimed $624 million in liability at trial.
  • The Department of Defense asserted an approximately $83 million claim against Sikorsky, including interest through December 2009; Sikorsky disputed the claim and appealed.
  • UTC had paid a €225 million (approximately $300 million) EU competition fine involving Otis entities and appealed the decision. A decision was expected within the following twelve months.
  • Pratt & Whitney recorded $53 million of restructuring costs for planned Connecticut facility closures. In February 2010, after year-end, a court found a breach of the collective bargaining agreement and enjoined the planned closures and work transfers for the agreement’s duration; UTC was reviewing the decision and considering an appeal.
  • UTC’s disclosure controls and internal control over financial reporting were assessed as effective as of December 31, 2009; the auditor’s internal-control report is incorporated by reference.

Important facts for investors to verify

  • Confirm the issuer and period: this is UTC’s 2009 annual 10-K, not an RTX filing or a separate quarterly report.
  • Review the incorporated Annual Report for consolidated revenue, net income, margins, cash flows, debt, liquidity, segment results and management’s full discussion; those values are not clear in the supplied text.
  • Assess the quality and expected timing of segment backlog conversion, particularly the declines in aerospace backlog and the accounting presentation change for Pratt & Whitney collaborators.
  • Check subsequent developments in the GE Security transaction, Clipper investment, Pratt & Whitney labor litigation and the disclosed government and competition-law claims.
  • Evaluate the sensitivity of results to economic recovery, currency movements, airline and construction demand, government spending, supplier costs and development-program execution.