01—Abstract
Summary
Summary of the 10-K filed February 5, 2015. Cited figures are marked; the original filing is the authoritative source.
United Technologies (UTC) enters 2015 with its strongest reported year in the filing: 2014 net sales rose 4.0% to $65.1 billiona, operating profit grew 6.0% to $9.8 billion, and diluted EPS from continuing operations reached $6.82, up from $6.21.
Growth was led by organic expansion at Otis, UTC Aerospace Systems and Sikorsky, while Pratt & Whitney's backlog jumped to $50.2 billionb on the FAA certification of the PurePower PW1100G-JM engine for the Airbus A320neo. Sales and earnings for the year were flattered by a one-time $830 million sales and $438 million loss adjustment (net of cost, roughly $1,268 million cost recognition) tied to the Sikorsky CH-148 Canadian helicopter contract restructuring, so underlying growth is somewhat lower than reported. Cash generation remained solid, with operating cash flow of $7.3 billion, capital expenditures of $1.7 billion and $1.5 billion of share repurchases, against $2.0 billion in dividends.
The filing also highlights several sources of risk for investors. Total debt stood at $19.8 billionc (38% of total capitalization), and management expects roughly $3 billion in 2015 share repurchases and approximately $1 billion of acquisition spending. Foreign currency is a meaningful headwind, with management expecting a significant adverse effect on 2015 results even though organic growth is guided at 3% to 5%.
Legal and contingent exposures are material: a $664 milliond F100 engine judgment under appeal (with a reasonably possible additional loss of up to $657 million), a DOJ/SEC investigation into China sales, a $170 million-plus False Claims Act claim against Sikorsky, and a German tax dispute with about $350 million of potential 2015 payments. Leadership also changed, with Gregory Hayes becoming CEO in November 2014 after Louis Chênevert's retirement and Akhil Johri joining as CFO effective January 2015.
02—Key points
Key Highlights
- Net sales rose 4.0% to $65.1 billion in 2014, with organic growth of 4%, though results include an $830 million one-time sales adjustment on the Sikorsky CH-148 contract.
- Diluted EPS from continuing operations increased to $6.82 from $6.21 in 2013, while operating profit rose to $9.8 billion (15.0% margin).
- Pratt & Whitney backlog reached $50.2 billion (up from $38.5 billion), driven by FAA certification of the PurePower engine for the Airbus A320neo and Airbus geared turbofan orders.
- Operating cash flow of $7.3 billion funded $1.7 billion of capex, $1.5 billion of share repurchases and $2.0 billion of dividends; 2015 buybacks are guided to about $3 billion.
- Total debt of $19.8 billion equals 38% of total capitalization; the company expects a significant adverse FX impact on 2015 results despite 3% to 5% organic growth guidance.
- Significant litigation exposure includes the F100 engine False Claims Act judgment (about $664 million, under appeal), the DOJ/SEC China sales investigation and a $170 million-plus Sikorsky False Claims Act complaint.
- Restructuring costs of $368 million in 2014 are expected to be about $300 million in 2015, and pension expense is projected to rise by roughly $275 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, RTX kept $0.11.
- Revenue$57.90B100.0%
- Cost of revenue−$30.37B52.4%
- Gross profit$27.53B47.6%
- Operating costs−$17.94B31.0%
- Operating income$9.59B16.6%
- Interest, other & tax−$3.37B5.8%
- Net income$6.22B10.7%
Where FY2014 revenue went
$57.90B- Cost of revenue: $30.37B, 52% of revenue
- Other operating costs: $9.29B, 16% of revenue
- Net income: $6.22B, 11% of revenue
- R&D: $2.48B, 4.3% of revenue
- SG&A: $6.17B, 11% of revenue
- Interest, other & tax: $3.37B, 5.8% of revenue
Kept 11% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 5, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $57.90B$56.60B | +2.3% |
| Cost of Revenue | $30.37B$30.05B | +1.1% |
| Gross Profit | $27.53B$26.55B | +3.7% |
| R&D Expenses | $2.48B$2.34B | +5.7% |
| SG&A Expenses | $6.17B$6.36B | −3.0% |
| Operating Expenses | $49.55B$49.17B | +0.8% |
| Operating Income | $9.59B$8.55B | +12.2% |
| Interest Expense | $881.00M— | — |
| Net Income | $6.22B$5.72B | +8.7% |
| EPS (Basic) | $6.92$6.35 | +9.0% |
| EPS (Diluted) | $6.82$6.25 | +9.1% |
| Shares Outstanding (Basic) | 898.30M901.00M | −0.3% |
| Shares Outstanding (Diluted) | 911.60M915.10M | −0.4% |
05—Questions
Frequently Asked Questions
Did the Sikorsky CH-148 contract change materially affect UTC's 2014 results?
Yes. A change in estimate on the Canadian Government's amended CH-148 Cyclone contract added $830 million to sales and $1,268 million to cost of sales, with $438 million of losses recognized in 2014. Roughly $250 million of remaining losses will be recognized as costs are incurred. Excluding this item, 2014 growth and margins would look weaker than reported, and Sikorsky's operating margin fell to 2.9% from 9.5%.
What is the outlook for 2015 and what are the main headwinds?
Management expects organic sales growth of 3% to 5% in 2015 and says it expects a significant adverse foreign currency impact. Other expected 2015 items include restructuring costs of about $300 million, pension expense up about $275 million, an effective tax rate near 29%, roughly $1 billion of acquisition spending, capex of about $1.7 billion and share repurchases of about $3 billion.
How much legal and regulatory risk does UTC face?
Substantial. The F100 engine case carries a judgment of about $664 million under appeal, with management estimating a reasonably possible additional loss of $24 million to $657 million. A DOJ/SEC investigation into a China sales representative is ongoing, Sikorsky faces a False Claims Act complaint seeking more than $170 million, the Russian FAS is reviewing Mos Otis, and a German tax dispute could require about $350 million of payments in 2015. Management says it does not believe most of these matters will be material, though several have uncertain outcomes.
How is UTC's balance sheet and capital allocation positioned?
Total debt was $19.8 billion at year-end 2014, with cash of $5.2 billion, giving net debt of $14.6 billion and a total debt-to-capitalization ratio of 38%. Shareholders received $2.0 billion in dividends and the company repurchased $1.5 billion of stock in 2014. Over 80% of cash sits in foreign subsidiaries, which could create tax or repatriation considerations.
06—Continue