01—Abstract
Summary
Summary of the 10-K filed February 11, 2009. Cited figures are marked; the original filing is the authoritative source.
This FY2008 Form 10-K from United Technologies Corporation (NYSE: UTX, the predecessor entity of today's RTX Corp) reports a year of solid top-line and earnings growth despite a deteriorating macro backdrop.
Revenues rose 7% to $58.7 billiona, with organic growth of 5%, and operating profit increased 8% to $7.6 billion. Net income reached $4.69 billion, and diluted EPS rose 15% to $4.90. Cash flow from operations was $6.16 billion, and the company returned over $4.4 billion to shareholders through $3.16 billion of buybacks (50.4 million shares) and $1.21 billion of dividends.
Growth was supported by strong aerospace backlogs: Pratt & Whitney's backlog was $23.6 billionb, Sikorsky's was $13.2 billion, and Otis's was $15.0 billion. The main investor concern is balance-sheet and earnings quality. Shareowners' equity fell to $15.9 billion from $21.4 billion, driven by a roughly $4.2 billion after-tax unrealized pension loss after domestic pension assets returned about negative 27%.
As a result, debt-to-total-capitalization rose to 42% from 30%, and pension expense is expected to increase by about $225 millionc in 2009. Management guided 2009 revenue down to roughly $57 billion, citing weaker organic growth and a strong U.S. dollar. It also flagged softening commercial aerospace aftermarket demand, U.S. residential housing weakness at Carrier, and restructuring charges of $357 million in 2008 with about $150 million expected in Q1 2009.
Legal and regulatory exposures are meaningful but, per management, not expected to be material in aggregate. The most significant items are the DOJ False Claims Act case against Pratt & Whitney (government claimed $624 milliond in liability; trial court awarded a $7.09 million penalty with no actual damages, and both sides have appealed), a $80 million Department of Defense overhead-rate claim against Sikorsky, and the EU antitrust fine against Otis (EUR 225 million, paid in 2007 and under appeal).
02—Key points
Key Highlights
- Revenue grew 7% to $58.7 billion (organic growth 5%, acquisitions 1%, FX 1%), while operating profit rose 8% to $7.6 billion and net income rose 11% to $4.69 billion.
- Diluted EPS increased to $4.90 from $4.27 (about 15%), helped by share repurchases that added roughly $0.11 per share.
- Strong aerospace backlog: Pratt & Whitney $23.6 billion, Sikorsky $13.2 billion, Hamilton Sundstrand $5.2 billion, Otis $15.0 billion and Carrier $2.0 billion, with about $8.5 billion of Otis backlog expected to convert in 2009.
- Shareowners' equity fell to $15.9 billion from $21.4 billion, and debt-to-capitalization rose to 42% from 30%, mainly from about $4.2 billion of after-tax pension losses after a roughly 27% negative return on domestic pension assets.
- 2009 outlook is weaker: revenue expected near $57 billion, with declining commercial aerospace aftermarket and RPM traffic (expected down about 3%), housing weakness at Carrier, and a strong U.S. dollar. 2009 buybacks are planned at about $2.0 billion and pension contributions at about $600 million.
- Key legal exposures include the DOJ False Claims Act suit against Pratt & Whitney (government claimed $624 million; trial court awarded only a $7.09 million penalty, under appeal), a $80 million DOD overhead claim against Sikorsky, and the EUR 225 million EU antitrust fine against Otis (appealed).
- Cash generation and capital returns remained robust: operating cash flow of $6.16 billion (up 16%), capex of $1.2 billion, $3.16 billion of share repurchases and a dividend of $1.35 per share (up 15%).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, RTX kept $0.08.
- Revenue$59.76B100.0%
- Cost of revenue−$32.83B54.9%
- Gross profit$26.92B45.1%
- Operating costs−$19.41B32.5%
- Operating income$7.51B12.6%
- Interest, other & tax−$2.82B4.7%
- Net income$4.69B7.8%
Where FY2008 revenue went
$59.76B- Cost of revenue: $32.83B, 55% of revenue
- Other operating costs: $10.92B, 18% of revenue
- Net income: $4.69B, 7.8% of revenue
- R&D: $1.77B, 3.0% of revenue
- SG&A: $6.72B, 11% of revenue
- Interest, other & tax: $2.82B, 4.7% of revenue
Kept 7.8% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 11, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $59.76B$55.72B | +7.3% |
| Cost of Revenue | $32.83B$30.87B | +6.4% |
| Gross Profit | $26.92B$24.85B | +8.4% |
| R&D Expenses | $1.77B$1.68B | +5.5% |
| SG&A Expenses | $6.72B$6.11B | +10.1% |
| Operating Income | $7.51B$7.05B | +6.5% |
| Interest Expense | $689.00M$666.00M | +3.5% |
| Net Income | $4.69B$4.22B | +11.0% |
| EPS (Basic) | $5.00$4.38 | +14.2% |
| EPS (Diluted) | $4.90$4.27 | +14.8% |
| Shares Outstanding (Basic) | 937.80M964.00M | −2.7% |
| Shares Outstanding (Diluted) | 956.40M989.00M | −3.3% |
05—Questions
Frequently Asked Questions
How did UTC perform financially in 2008 and what drove the results?
Revenue rose 7% to $58.7 billion and operating profit rose 8% to $7.6 billion. Growth came from the aerospace businesses (strong commercial OEM production, military helicopter demand at Sikorsky, and Pratt & Whitney aftermarket growth in the first half) and from Otis's strong opening backlog. Carrier's organic revenue declined 1% on U.S. residential and refrigeration weakness, and restructuring charges rose to $357 million.
Why did debt-to-capitalization jump to 42% and does it create liquidity risk?
The jump was driven mainly by roughly $4.2 billion of after-tax unrealized pension losses that reduced equity, along with $2.25 billion of 2008 debt issuances. Management says it retains access to commercial paper markets, a $2.5 billion committed credit facility, and about $2.0 billion of local bank lines, and that it does not expect a significant impact on liquidity in 2009. Ratings were affirmed at A (S&P) and A2 (Moody's) in late 2008.
What are the biggest risks to the 2009 outlook?
The main risks are a further decline in commercial aerospace traffic and aftermarket spares orders, possible deferrals of 2009 aircraft deliveries due to tight airline and business jet credit, weaker commercial construction and U.S. housing markets affecting Carrier and Otis, continued U.S. dollar strength hurting translated earnings, and rising pension costs (about $225 million higher in 2009). Management also flagged that post-2009 U.S. defense budgets depend on a new administration and Congress.
How material are the pending government and regulatory matters?
Management believes none of the disclosed matters is likely to have a material adverse effect individually, except that the DOJ False Claims Act case could be material if the government ultimately prevails on appeal (the government had claimed $624 million). The $80 million DOD claim against Sikorsky is being contested. The EU antitrust fine of about $300 million was paid in 2007 and is under appeal, and the Austrian and Korean elevator matters were resolved or closed.
What is the capital return and buyback outlook?
In 2008 UTC repurchased 50.4 million shares for $3.16 billion, with about 29 million shares remaining under the current authorization at year-end, and dividends rose to $1.35 per share. Management expects about $2.0 billion of share repurchases in 2009, though the amount may vary with acquisition spending, which is expected to be around $2 billion in 2009.
06—Continue