01—Abstract
Summary
Summary of the 10-K filed February 7, 2013. Cited figures are marked; the original filing is the authoritative source.
United Technologies (UTC) reported 2012 net sales of $57.7 billiona, up 3.5% year over year, but organic sales were flat (no organic growth) as the 4-point total increase came almost entirely from acquisitions, led by the July 2012 Goodrich acquisition for roughly $18.3 billion enterprise value.
Diluted EPS from continuing operations rose modestly to $5.35b from $5.33, while segment operating margin fell 110 basis points to 14.0%, reflecting a $590 million restructuring charge, a 70 basis point drag from higher R&D, and a $157 million loss provision on Sikorsky's Canadian CH-148 helicopter contract. Operating profit declined to $7.7 billion from $7.8 billion, though other income and a lower effective tax rate of 24.8% helped cushion the decline. The balance sheet changed materially.
Total debt nearly tripled to $23.2 billionc, pushing the debt-to-capitalization ratio to 46% from 31%, and goodwill and intangibles expanded sharply. Management has signaled a deleveraging plan: roughly $3 billion of after-tax proceeds from divesting non-core businesses (including the legacy Hamilton Sundstrand industrial units, Clipper, and UTC Power), suspended share repurchases through 2012, a significantly reduced buyback pace for 2013 and 2014, and reduced acquisition spending of about $1 billion in 2013. Management guides to 3% to 5% organic sales growth in 2013 and expects roughly $300 million of additional restructuring costs.
Investors should weigh several legal and regulatory overhangs: a 1999 False Claims Act case at Pratt & Whitney seeking $624 milliond in damages, a $55 million export-control consent agreement and a deferred prosecution agreement tied to Z-10 helicopter software exports to China, a partial ITAR debarment of Pratt & Whitney Canada, a $94 million DOD claim against Sikorsky, and the open dispute with the Canadian government over the CH-148 program, where further losses could be material. Against these, the company continues to generate strong operating cash flow of $6.6 billion and has a diversified global base, with about 60% of sales international.
02—Key points
Key Highlights
- Net sales rose 3.5% to $57.7 billion, but organic growth was zero; the increase was driven by acquisitions net of divestitures (about 6 points), notably Goodrich and the IAE restructuring.
- Goodrich acquisition (July 26, 2012) at about $18.3 billion enterprise value, the largest deal in UTC history, created the UTC Aerospace Systems segment, which posted sales of $8.3 billion, up 75%.
- Total debt jumped to $23.2 billion from $10.3 billion; debt-to-capitalization rose to 46% from 31%, and share repurchases were suspended in 2012 with a significant reduction planned for 2013 and 2014.
- Segment operating margin fell 110 basis points to 14.0%, hurt by $590 million in restructuring charges, higher R&D (up to $2.4 billion), and a $157 million Sikorsky CH-148 loss provision.
- Diluted EPS from continuing operations was $5.35 versus $5.33, and operating cash flow was $6.6 billion; a new 60 million share buyback authorization was approved in February 2013.
- Management plans about $3 billion of after-tax divestiture proceeds to repay Goodrich-related debt and guides to 3% to 5% organic sales growth in 2013.
- Significant legal and regulatory exposures include a $624 million False Claims Act claim, export-control penalties and a deferred prosecution agreement, a partial ITAR debarment of P&WC, and an unresolved dispute with the Canadian government over the CH-148 helicopter.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, RTX kept $0.09.
- Revenue$57.71B100.0%
- Cost of revenue−$31.09B53.9%
- Gross profit$26.61B46.1%
- Operating costs−$18.93B32.8%
- Operating income$7.68B13.3%
- Interest, other & tax−$2.55B4.4%
- Net income$5.13B8.9%
Where FY2012 revenue went
$57.71B- Cost of revenue: $31.09B, 54% of revenue
- Other operating costs: $10.11B, 18% of revenue
- Net income: $5.13B, 8.9% of revenue
- R&D: $2.37B, 4.1% of revenue
- SG&A: $6.45B, 11% of revenue
- Interest, other & tax: $2.55B, 4.4% of revenue
Kept 8.9% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 7, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $57.71B$55.75B | +3.5% |
| Cost of Revenue | $31.09B$29.25B | +6.3% |
| Gross Profit | $26.61B$26.50B | +0.4% |
| R&D Expenses | $2.37B$1.95B | +21.5% |
| SG&A Expenses | $6.45B$6.16B | +4.7% |
| Operating Expenses | $50.98B$48.48B | +5.1% |
| Operating Income | $7.68B$7.85B | −2.1% |
| Net Income | $5.13B$4.98B | +3.0% |
| EPS (Basic) | $5.73$5.58 | +2.7% |
| EPS (Diluted) | $5.66$5.49 | +3.1% |
| Shares Outstanding (Basic) | 895.20M892.30M | +0.3% |
| Shares Outstanding (Diluted) | 906.60M906.80M | 0.0% |
05—Questions
Frequently Asked Questions
Why did UTC's revenue grow in 2012 if organic sales were flat?
Total sales rose 3.5% to $57.7 billion, but the entire increase came from acquisitions net of divestitures, most notably Goodrich (acquired July 2012) and the consolidation of the IAE engine joint venture. Currency translation was a 2-point drag, and organic volume was flat, with growth at UTC Aerospace Systems and Pratt & Whitney offset by a decline at Sikorsky.
How did the Goodrich acquisition change UTC's financial risk profile?
Goodrich was financed largely with debt, lifting total debt from $10.3 billion to $23.2 billion and raising the debt-to-total-capitalization ratio to 46%. Goodwill rose to $27.8 billion and intangibles to $15.2 billion. Management has responded by divesting non-core businesses to repay roughly $3 billion of debt, suspending buybacks, and cutting acquisition spending, but leverage will remain elevated for some time.
What were the main drags on profitability in 2012?
Segment operating margin fell to 14.0% from 15.1%. Key drags were restructuring costs of $590 million (up from $315 million), a 70 basis point increase in R&D spending, and a $157 million loss provision on Sikorsky's CH-148 contract with the Canadian government. These were partly offset by gains from the UTC Climate, Controls & Security portfolio transformation and a lower effective tax rate of 24.8%.
What are the most significant legal or regulatory risks disclosed?
The largest items are the Department of Justice False Claims Act case against Pratt & Whitney, where the government seeks $624 million plus interest, and a 2012 export-control settlement involving a $55 million consent agreement and a deferred prosecution agreement. Pratt & Whitney Canada also received a partial ITAR debarment, and Sikorsky faces a roughly $94 million DOD cost accounting claim plus a dispute with Canada over the CH-148 helicopter. The company says most of these are not expected to have a material adverse effect, except that an adverse outcome in the False Claims Act case could be material.
What is the outlook for UTC's cash returns to shareholders?
Share repurchases were suspended for 2012 and will be significantly reduced in 2013 and 2014 to prioritize debt reduction. Dividends increased to $2.03 per share in 2012 (about $1.8 billion paid). On February 4, 2013, the Board approved a new authorization for up to 60 million shares, but management indicated that repurchases will remain well below historical levels while leverage is reduced.
06—Continue