How did UTC perform financially in 2004?

Revenue rose 21% to $37.4 billion and net income rose 18% to $2.79 billion, or $5.52 per diluted share. Growth came from the Chubb acquisition, favorable currency translation, and volume increases in most segments. Gross margin declined about 0.9 points because of restructuring charges and higher commodity costs. Reported earnings also include some non-recurring benefits, including the DaimlerChrysler payment and a tax settlement.

What is the Kidde acquisition and how will it affect UTC?

UTC offered about $3.0 billion for Kidde plc, a UK fire protection company with about $1.5 billion of 2003 revenue. UTC already owned slightly less than 20% of Kidde and had tenders for about 79.8% as of February 10, 2005. The deal is expected to close at the end of Q1 2005 and will require about $2.5 billion more in 2005. It expands UTC's fire safety and aerospace fire protection businesses, but adds integration and financing risk.

What are the most material legal and regulatory risks?

The most significant items are the DoD demand of $755 million tied to Pratt & Whitney cost accounting, the DOJ False Claims Act suit over the F100 engine competition (government claim of $624 million, trial completed December 2004, decision expected in 2005), and the European Commission investigation into possible collusion at Otis. Management believes none will have a material adverse effect, but adverse outcomes could be material to results in the period resolved. Asbestos lawsuits and environmental remediation liabilities also remain ongoing.

How strong is UTC's cash generation and balance sheet?

Operating cash flow was $3.7 billion in 2004, up from $2.9 billion, though it was reduced by $906 million of voluntary pension contributions. Cash rose to $2.27 billion. Total debt was $5.6 billion, and net debt was $3.3 billion. Debt-to-capitalization improved to 29%. Available liquidity includes a $1.5 billion commercial paper backstop facility and a $2.5 billion 364-day facility for the Kidde purchase.

What is the outlook for 2005?

Management expects continued growth in commercial aerospace traffic and commercial construction, along with expected pressure from commodity costs and pricing. UTC expects its 2005 effective tax rate to be about 28%, and its 2005 restructuring cash outflows to rise about 20%. Company-funded R&D is expected to rise slightly. Share repurchases of about $600 million are planned, and a $500 million voluntary pension contribution is expected. Share-based compensation accounting will change under SFAS 123R, with 2005 option expense expected to be similar to 2004.

RTX 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 10, 2005. Cited figures are marked; the original filing is the authoritative source.

United Technologies Corporation (UTC) reported a strong 2004, with revenues up 21% to $37.4 billion^a and net income up 18% to $2.79 billion, or $5.52 per diluted share.

Growth was driven by the full-year effect of the July 2003 Chubb acquisition (about 8 points of revenue growth from acquisitions), favorable euro translation (about 3 points), and volume gains at Otis, Carrier, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Operating profit rose 16% to $4.47 billion^b, although gross margin contracted about 0.9 points to 25.8% due to $420 million of higher restructuring charges and roughly $200 million of commodity cost increases. Net income also benefited from one-time items, including a $250 million DaimlerChrysler settlement and an approximate $80 million tax benefit from the IRS settlement.

Free operating cash flow was solid, with operating cash flow of $3.7 billion^c, but that figure is after $906 million of voluntary pension contributions. The balance sheet strengthened. Debt to total capitalization fell to 29% from 31%, shareowners' equity rose to $14.0 billion, and net debt to net capitalization dropped to 19% from 24%.

Management returned capital through $992 million^d of share repurchases and $660 million of common dividends. The company also announced a $3.0 billion offer for Kidde plc, expected to close at the end of the first quarter of 2005, and planned about $4 billion of total business investments in 2005, including $2.5 billion for the remaining Kidde shares. The Board raised the dividend 26% in February 2005.

Key risks include several U.S. Government contract disputes, most notably a $755 million DoD cost accounting demand and a DOJ False Claims Act suit with a $624 million government damages claim, both of which could have a material effect if resolved adversely. There is also a European Commission investigation into Otis for possible elevator and escalator price collusion, with fines that could be material, plus asbestos litigation and environmental remediation exposure. Investors should also note that commodity inflation, pension funding needs, and the cost and execution risk of acquisitions such as Kidde and Linde are likely to weigh on 2005 margins.

02—Key points

Key Highlights

Revenue grew 21% to $37.4 billion in 2004, with acquisitions contributing 8 points and currency translation 3 points; Chubb was the largest driver.
Diluted EPS rose 18% to $5.52 and net income reached $2.79 billion, although results include one-time gains from a $250 million DaimlerChrysler settlement and an ~$80 million tax benefit from an IRS settlement.
Gross margin fell to 25.8% from 26.7% because of $420 million of higher restructuring charges and about $200 million of commodity cost pressure, mainly at Carrier and Otis.
Balance sheet improved: debt-to-capital fell to 29% from 31%, net debt-to-net capitalization fell to 19% from 24%, and shareowners' equity rose to $14.0 billion.
Capital returned to shareholders in 2004 totaled about $1.65 billion ($992 million in buybacks and $660 million in dividends), with a 26% dividend increase approved for 2005.
Pending $3.0 billion acquisition of Kidde plc (about 79.8% tendered as of Feb 10, 2005), with roughly $4 billion of total 2005 acquisition spending planned.
Significant legal exposure: a $755 million DoD cost accounting demand, a DOJ False Claims Act suit seeking $624 million, and an EU antitrust probe into Otis elevator and escalator operations.

03—Questions

Frequently Asked Questions

How did UTC perform financially in 2004?
Revenue rose 21% to $37.4 billion and net income rose 18% to $2.79 billion, or $5.52 per diluted share. Growth came from the Chubb acquisition, favorable currency translation, and volume increases in most segments. Gross margin declined about 0.9 points because of restructuring charges and higher commodity costs. Reported earnings also include some non-recurring benefits, including the DaimlerChrysler payment and a tax settlement.
What is the Kidde acquisition and how will it affect UTC?
UTC offered about $3.0 billion for Kidde plc, a UK fire protection company with about $1.5 billion of 2003 revenue. UTC already owned slightly less than 20% of Kidde and had tenders for about 79.8% as of February 10, 2005. The deal is expected to close at the end of Q1 2005 and will require about $2.5 billion more in 2005. It expands UTC's fire safety and aerospace fire protection businesses, but adds integration and financing risk.
What are the most material legal and regulatory risks?
The most significant items are the DoD demand of $755 million tied to Pratt & Whitney cost accounting, the DOJ False Claims Act suit over the F100 engine competition (government claim of $624 million, trial completed December 2004, decision expected in 2005), and the European Commission investigation into possible collusion at Otis. Management believes none will have a material adverse effect, but adverse outcomes could be material to results in the period resolved. Asbestos lawsuits and environmental remediation liabilities also remain ongoing.
How strong is UTC's cash generation and balance sheet?
Operating cash flow was $3.7 billion in 2004, up from $2.9 billion, though it was reduced by $906 million of voluntary pension contributions. Cash rose to $2.27 billion. Total debt was $5.6 billion, and net debt was $3.3 billion. Debt-to-capitalization improved to 29%. Available liquidity includes a $1.5 billion commercial paper backstop facility and a $2.5 billion 364-day facility for the Kidde purchase.
What is the outlook for 2005?
Management expects continued growth in commercial aerospace traffic and commercial construction, along with expected pressure from commodity costs and pricing. UTC expects its 2005 effective tax rate to be about 28%, and its 2005 restructuring cash outflows to rise about 20%. Company-funded R&D is expected to rise slightly. Share repurchases of about $600 million are planned, and a $500 million voluntary pension contribution is expected. Share-based compensation accounting will change under SFAS 123R, with 2005 option expense expected to be similar to 2004.

04—Continue

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