Why did net income rise 22% when income from continuing operations fell 27%?

The difference is the one-time $650 million after-tax gain on the sale of the UT Automotive unit, which is reported in discontinued operations. Excluding that gain and the discontinued unit's results, the underlying business earned $841 million in 1999, down from $1,157 million in 1998, mainly because of restructuring and other charges of about $1.1 billion.

What is the outlook for margins after the 1999 restructuring?

Management expects the 1999 actions to offset their own additional costs, producing only a modest benefit in 2000. Recurring savings, mostly from workforce and facility reductions, are projected to build toward roughly $750 million pre-tax per year over three years, and are expected to appear mainly in cost of sales. The filing also notes that about $750 million of additional pre-tax cash outflows are expected in 2000, including up to $300 million of costs not accruable in 1999.

How exposed is the company to the commercial airline cycle?

Significantly. Pratt & Whitney sells to airlines and aircraft makers, and Boeing and Airbus together represented about 30% of its 1999 revenue. The filing warns that falling airline profits have already reduced new engine orders and that a continued slowdown would lower manufacturing volumes and aftermarket orders. Pratt & Whitney's backlog of $8.3 billion, of which about $3.5 billion is expected to convert to 2000 sales, provides partial visibility.

Is the balance sheet still healthy after the Sundstrand deal?

It is still investment grade in character but more leveraged. Total debt rose to $4.3 billion from $2.2 billion, and net debt to total capitalization increased to 32% from 27%. Management says existing liquidity, including a $1.5 billion revolving credit facility and about $1.4 billion in local bank lines, is adequate for foreseeable needs, and expects the debt-to-capital ratio to rise moderately as the company continues acquisitions and buybacks.

What government-related legal risks does the filing disclose?

Several. Pratt & Whitney is litigating a Defense Department claim over accounting for commercial engine parts, with an initial damages claim of $260.3 million, which could grow as interest accrues. The Justice Department has also filed a False Claims Act suit seeking at least $75 million tied to the F100/F110 fighter engine competition. Several qui tam whistleblower actions are pending. The company states that it expects the government contracting environment to keep it under investigation, and that a conviction could lead to debarment for up to three years. Management does not believe any of these matters will have a material adverse effect.

RTX 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 14, 2000. Cited figures are marked; the original filing is the authoritative source.

United Technologies Corporation (the filing names the registrant as UTC; the request refers to it as RTX Corp, which is the later name of the same company) reported a strong 1999 on the top line but a sharply weaker operating picture.

Revenues rose 6% to $24.1 billion^a, and net income climbed 22% to $1.531 billion, or $3.01 diluted EPS. That net figure, however, was flattered by a $650 million after-tax gain on the sale of the UT Automotive unit to Lear Corporation. Income from continuing operations fell to $841 million from $1,157 million, and diluted EPS from continuing operations dropped to $1.65 from $2.33.

The decline was driven by $1.12 billion^b of restructuring and related charges, which compressed the gross margin to 23.7% from 25.8%, and by a 38% drop in Pratt & Whitney operating profit. The year was also transformative for the balance sheet and portfolio. UTC spent roughly $6.3 billion on acquisitions, most notably Sundstrand (about $4.3 billion, folded into Hamilton Sundstrand within the Flight Systems segment), along with International Comfort Products, the Toshiba HVAC alliance, and Cade Industries.

Total assets rose to $24.4 billion^c from $17.8 billion, goodwill more than quadrupled to $5.6 billion, and total debt climbed to $4.3 billion, pushing net debt to total capitalization up to 32% from 27%. Operating cash flow was flat at $2.3 billion, and the company continued to repurchase stock ($822 million in 1999).

For investors, the central questions are whether the 1999 restructuring savings (targeted at about $750 million^d pre-tax annually) and the Sundstrand integration will restore margins, and how much the Pratt & Whitney commercial aerospace and military programs, which carry the most risk, will contribute as airline demand softens. The filing also flags ongoing U.S. government investigations and several pending legal matters, though management does not expect them to be material.

02—Key points

Key Highlights

Revenue grew 6% to $24.1 billion, but income from continuing operations fell 27% to $841 million as restructuring charges of about $1.1 billion weighed on results.
Reported 1999 net income of $1.531 billion (diluted EPS $3.01) was boosted by a $650 million after-tax gain on the May 1999 sale of UT Automotive to Lear for $2.3 billion.
The $4.3 billion Sundstrand acquisition, completed in June 1999, drove Flight Systems revenue up 32% to $3.8 billion and helped push total assets to $24.4 billion and goodwill to $5.6 billion.
Gross margin contracted to 23.7% from 25.8%, with restructuring recorded primarily in cost of sales; management expects recurring pre-tax savings of about $750 million annually within three years.
Pratt & Whitney operating profit fell 38% to $634 million on fewer engine shipments and restructuring charges, and the filing cites a slowdown in airline earnings that is likely to reduce new orders near term.
Leverage increased, with total debt of $4.3 billion and debt to total capitalization rising to 38% from 33%, while the company continued share repurchases of $822 million.
Management's disclosures identify several open legal matters, including a Department of Defense accounting dispute (initial claim of $260 million), a False Claims Act suit seeking at least $75 million, and multiple qui tam actions, though none are expected to be material.

03—Questions

Frequently Asked Questions

Why did net income rise 22% when income from continuing operations fell 27%?
The difference is the one-time $650 million after-tax gain on the sale of the UT Automotive unit, which is reported in discontinued operations. Excluding that gain and the discontinued unit's results, the underlying business earned $841 million in 1999, down from $1,157 million in 1998, mainly because of restructuring and other charges of about $1.1 billion.
What is the outlook for margins after the 1999 restructuring?
Management expects the 1999 actions to offset their own additional costs, producing only a modest benefit in 2000. Recurring savings, mostly from workforce and facility reductions, are projected to build toward roughly $750 million pre-tax per year over three years, and are expected to appear mainly in cost of sales. The filing also notes that about $750 million of additional pre-tax cash outflows are expected in 2000, including up to $300 million of costs not accruable in 1999.
How exposed is the company to the commercial airline cycle?
Significantly. Pratt & Whitney sells to airlines and aircraft makers, and Boeing and Airbus together represented about 30% of its 1999 revenue. The filing warns that falling airline profits have already reduced new engine orders and that a continued slowdown would lower manufacturing volumes and aftermarket orders. Pratt & Whitney's backlog of $8.3 billion, of which about $3.5 billion is expected to convert to 2000 sales, provides partial visibility.
Is the balance sheet still healthy after the Sundstrand deal?
It is still investment grade in character but more leveraged. Total debt rose to $4.3 billion from $2.2 billion, and net debt to total capitalization increased to 32% from 27%. Management says existing liquidity, including a $1.5 billion revolving credit facility and about $1.4 billion in local bank lines, is adequate for foreseeable needs, and expects the debt-to-capital ratio to rise moderately as the company continues acquisitions and buybacks.
What government-related legal risks does the filing disclose?
Several. Pratt & Whitney is litigating a Defense Department claim over accounting for commercial engine parts, with an initial damages claim of $260.3 million, which could grow as interest accrues. The Justice Department has also filed a False Claims Act suit seeking at least $75 million tied to the F100/F110 fighter engine competition. Several qui tam whistleblower actions are pending. The company states that it expects the government contracting environment to keep it under investigation, and that a conviction could lead to debarment for up to three years. Management does not believe any of these matters will have a material adverse effect.

04—Continue

← View all 10-K filings