01—Abstract
Summary
Summary of the 10-K filed February 10, 2003. Cited figures are marked; the original filing is the authoritative source.
United Technologies Corporation (UTC, now RTX Corp) reported 2002 revenues of $28.2 billiona, up 1% from $27.9 billion in 2001, and net income of $2.24 billion, up 15%.
Diluted EPS rose to $4.42b from $3.83, helped by the end of goodwill amortization under SFAS No. 142 (worth about $0.42 per share in 2001) and a $100 million environmental insurance settlement. Gross margin improved to 27.9% from 26.9%. Operating cash flow was $2.85 billion, down from $2.98 billion, because of a $500 million voluntary contribution to domestic pension plans.
Results were uneven across segments. Otis (operating profit up 25%) and Flight Systems (up 11%) improved, while Carrier was pressured by weak commercial HVAC and refrigeration markets and Pratt & Whitney's commercial spare parts declined about 10%. The pension funding gap widened sharply: a $1.6 billionc after-tax charge to equity and a $5.1 billion pension liability, which management expects to weigh on 2003 pension expense.
The balance sheet remains moderately leveraged, with debt at 37% of total capitalization and net debt at 25%. Management plans about $1.5 billiond of acquisitions in 2003 and continued share repurchases, with 25.3 million shares remaining under the authorization. Commercial aerospace exposure is significant: airline industry stress is cited as reducing aerospace volume and orders, and UTC has $1.6 billion of aircraft financing and rental commitments.
Legal risk is also notable, including a Department of Defense cost accounting dispute (the Court of Appeals reversed a favorable ASBCA ruling on January 15, 2003), a False Claims Act suit over the F100 engine competition, and asbestos suits naming about 16,000 claimants. Management does not expect these to be material.
02—Key points
Key Highlights
- Revenue grew 1% to $28.2 billion, while net income rose 15% to $2.24 billion and diluted EPS increased 15% to $4.42, aided by the end of goodwill amortization.
- Otis was the standout performer, with revenue up 7% and operating profit up 25% to $1.06 billion, driven by profit gains in Europe and Asia.
- Carrier struggled, with revenue down 1% and operating profit up 32% only because of the goodwill accounting change and 2001 restructuring comparisons; excluding restructuring, operating profit rose 17%.
- Pratt & Whitney revenue was flat at $7.6 billion and operating profit fell 2%, as commercial spare parts orders dropped about 10% amid airline industry weakness.
- Pension underfunding became a major issue: UTC made a $500 million cash contribution plus $253 million in Treasury Stock, and recorded a $1.6 billion after-tax equity charge, with pension expense expected to rise in 2003.
- Cash flow from operations fell to $2.85 billion from $2.98 billion. Free cash flow after capex of $586 million remained solid, supporting $700 million in share buybacks and $462 million in dividends.
- Legal and government contract risks remain elevated, including a DoD cost accounting case that was reversed on appeal, a False Claims Act suit, and asbestos exposure, though management considers none material.
03—Questions
Frequently Asked Questions
How did UTC's profitability change in 2002 and what drove it?
Net income rose 15% to $2.24 billion and diluted EPS rose to $4.42 from $3.83. Part of the gain reflects SFAS No. 142, which ended goodwill amortization (about $230 million pre-tax in 2001), along with a roughly $100 million environmental insurance settlement and cost reduction actions, especially at Carrier and Otis. Restructuring charges of $321 million in 2002 partly offset these gains.
Why did operating cash flow decline, and does it signal a problem?
Operating cash flow fell to $2.85 billion from $2.98 billion mainly because of a $500 million voluntary cash contribution to domestic pension plans. Excluding that contribution, operating cash flow would have been higher, and management noted improved operating and working capital performance. Investors should watch the pension funding requirements going forward.
How exposed is UTC to the airline industry downturn?
Significant exposure. Commercial aerospace is about 30% of segment revenue and includes Pratt & Whitney and Hamilton Sundstrand aftermarket work. Management said airline conditions reduced aerospace volume and orders and expected that to continue into 2003. UTC also has $1.6 billion of aircraft financing and rental commitments, with up to $434 million potentially disbursed in 2003, plus $164 million of residual value guarantees.
What legal and government contracting risks should investors monitor?
The most notable items are the DoD cost accounting dispute over Pratt & Whitney engine parts, which the Court of Appeals reversed on January 15, 2003 (DoD claims about $158 million in damages plus $103 million in interest); a False Claims Act suit over the F100/F110 Fighter Engine Competition seeking about $76 million in trebled damages plus penalties; and asbestos suits naming about 16,000 claimants. Management does not expect these to have a material adverse effect, but government investigations could lead to suspension or debarment from new contracts.
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