01—Abstract
Summary
Summary of the 10-K filed February 11, 2016. Cited figures are marked; the original filing is the authoritative source.
United Technologies (RTX's predecessor, UTC) closed 2015 with net sales of $56.1 billiona, down 3.1% year over year, and organic growth of only 1%.
Reported operating profit fell 24% to $7.3 billionb, and diluted EPS from continuing operations dropped to $4.53 from $6.65. The decline was driven by an $867 million charge for a settlement with the Canadian government over Pratt & Whitney Canada royalties, a $237 million asbestos reserve charge, a $295 million customer contract negotiation charge at UTC Aerospace Systems, and weaker Pratt & Whitney margins from OEM engine mix. Excluding these items, underlying earnings were considerably stronger, though management still reported margin pressure at Pratt & Whitney.
The largest change for shareholders was the November 2015 sale of Sikorsky to Lockheed Martin for $9.08 billionc in cash, which generated a $3.4 billion after-tax gain. UTC used the proceeds for a $6 billion accelerated share repurchase, on top of $2.65 billion of ASRs earlier in 2015, bringing total 2015 buybacks to $10 billion. Diluted shares fell to 883 million from 912 million, and the company now carries a $12 billion authorization.
Total debt rose to $20.4 billiond, debt-to-capitalization reached 41%, and S&P and Moody's downgraded the company to A-/A3 on buyback-driven leverage. Total equity dropped to $28.8 billion from $32.6 billion. Looking ahead, management guided to 2016 organic sales growth of 1% to 3%, a full-year effective tax rate near 28%, roughly $3 billion in share repurchases, and $1 billion to $2 billion in acquisition spending.
Restructuring costs are expected near $500 million. Key risks include the Pratt & Whitney geared turbofan ramp (PW1000G, with the A320neo entering service in January 2016), U.S. Government False Claims Act and grand jury matters, the German tax dispute (about $235 million of tax benefits plus interest), the FCPA/SEC investigation in China, and foreign currency headwinds. Organic revenue growth has been modest, so investors should watch whether margins recover and whether leverage stays manageable as buybacks continue.
02—Key points
Key Highlights
- Net sales fell 3.1% to $56.1 billion, with organic growth of only 1%; Pratt & Whitney organic sales declined 1%.
- Operating profit dropped 24% to $7.3 billion (13.0% margin vs. 16.6% in 2014), largely due to $867M Canadian government settlement and $237M asbestos charge.
- Diluted EPS from continuing operations was $4.53 vs. $6.65 in 2014; net income attributable to common shareowners was $7.6 billion including the Sikorsky gain.
- Sikorsky sold to Lockheed Martin for $9.08B cash on November 6, 2015, producing a $3.4B after-tax gain in discontinued operations.
- Share repurchases totaled $10B in 2015 (including $6B ASR funded by Sikorsky proceeds), cutting diluted shares to 883M from 912M.
- Debt-to-capitalization rose to 41% from 38%; ratings downgraded to A-/A3 by rating agencies in September 2015.
- 2016 guidance: organic sales growth of 1%-3%, effective tax rate near 28%, ~$3B buybacks, and $1B-$2B in acquisitions.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, RTX kept $0.14.
- Revenue$56.10B100.0%
- Cost of revenue−$29.77B53.1%
- Gross profit$26.33B46.9%
- Operating costs−$19.04B33.9%
- Operating income$7.29B13.0%
- Interest, other & tax$317.0M0.6%
- Net income$7.61B13.6%
Where FY2015 revenue went
$56.10B- Cost of revenue: $29.77B, 53% of revenue
- Other operating costs: $10.87B, 19% of revenue
- Operating income: $7.29B, 13% of revenue
- R&D: $2.28B, 4.1% of revenue
- SG&A: $5.89B, 10% of revenue
Kept 13% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 11, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $56.10B$57.90B | −3.1% |
| Cost of Revenue | $29.77B$30.37B | −2.0% |
| Gross Profit | $26.33B$27.53B | −4.4% |
| R&D Expenses | $2.28B$2.48B | −7.9% |
| SG&A Expenses | $5.89B$6.17B | −4.6% |
| Operating Expenses | $48.60B$49.55B | −1.9% |
| Operating Income | $7.29B$9.59B | −24.0% |
| Interest Expense | $824.00M$881.00M | −6.5% |
| Net Income | $7.61B$6.22B | +22.3% |
| EPS (Basic) | $8.72$6.92 | +26.0% |
| EPS (Diluted) | $8.61$6.82 | +26.2% |
| Shares Outstanding (Basic) | 872.70M898.30M | −2.8% |
| Shares Outstanding (Diluted) | 883.20M911.60M | −3.1% |
05—Questions
Frequently Asked Questions
Why did operating profit and EPS decline sharply in 2015?
The decline reflected several one-time charges: an $867 million Pratt & Whitney Canada settlement with Canadian government agencies, a $237 million asbestos reserve, a $295 million customer contract negotiation charge at UTC Aerospace Systems, and a $126 million gain partially offsetting those items. Pratt & Whitney's operating profit fell to $861 million from $2.0 billion because of these charges, lower volume at P&WC, and losses on OEM engine sales.
How did the Sikorsky sale affect shareholders?
UTC sold Sikorsky for $9.08 billion in cash and recognized a $3.4 billion after-tax gain, reported in discontinued operations. The company used the proceeds for a $6 billion accelerated share repurchase and expects about $2.4 billion in related tax payments, mainly in Q1 2016. Sikorsky's removal also lowered UTC's U.S. Government defense exposure.
Is UTC's balance sheet becoming riskier because of buybacks?
Total debt increased to $20.4 billion, and debt-to-total capitalization rose to 41% from 38% as equity fell to $28.8 billion from $32.6 billion. Credit rating agencies cited share repurchase activity when they downgraded the company to A-/A3 in September 2015. Management says its debt capacity and commercial paper access remain adequate, but leverage is a key metric to watch.
What are the main legal and regulatory risks disclosed?
Key matters include the F100 engine False Claims Act litigation (the government now seeks about $85 million), a $211 million Cost Accounting Standards claim against Pratt & Whitney, a German tax dispute over about $235 million of Otis tax benefits plus interest, a grand jury subpoena related to titanium, DOJ and SEC investigations into sales practices in China, and asbestos claims through 2059. Management does not expect most of these to have a material adverse effect, but several remain unresolved.
What does the Pratt & Whitney PurePower engine program mean for future growth?
The PW1000G geared turbofan entered service on the Airbus A320neo in January 2016 and has been selected for several other aircraft, including the Bombardier CSeries, Mitsubishi Regional Jet, Irkut MC-21, and Embraer E-Jet E2. It is a major growth driver, but production ramp-up and supply chain capacity constraints, along with possible additional investment in the program, create execution risk and potential customer penalties.
06—Continue