01—Abstract
Summary
Summary of the 10-K filed February 9, 2017. Cited figures are marked; the original filing is the authoritative source.
United Technologies (UTC) closed 2016 with net sales of $57.2 billiona, up 2% year over year on 2% organic growth, while diluted EPS from continuing operations rose to $6.13 from $4.53.
The increase was flattered by the absence of 2015's large one-time charges (an $867 millionb Canadian government settlement and a $237 million asbestos reserve), but 2016 carried its own items, including a $423 million pension settlement charge and $290 million in restructuring costs. Operating profit rose to $8.2 billion, and the operating margin expanded to 14.3% from 13.0%. Segment results were mixed: Otis and UTC Climate, Controls & Security were steady, Pratt & Whitney's operating profit fell 28% on the operational basis due to unfavorable contract adjustments and negative engine margins, and UTC Aerospace Systems improved on lower pension costs and higher aftermarket profit.
Balance sheet leverage rose meaningfully. Total debt climbed to $23.9 billionc, and the debt-to-capitalization ratio increased to 45% from 41%, reflecting borrowings to fund share repurchases and general corporate needs. UTC repurchased $2.25 billion of stock in 2016, and management expects about $3.5 billion of buybacks in 2017, with acquisition spending of $1 to 2 billion and capital expenditures near $1.8 billion.
The company guided 2017 organic sales growth of 2% to 4%. Investors should weigh the strong earnings and cash generation (operating cash flow of $6.4 billiond) against rising leverage, the Pratt & Whitney margin pressure tied to the PurePower engine ramp-up, and continuing government and legal exposures, including the German tax dispute, DOJ/SEC anti-bribery investigations, and a Defense Department civil subpoena.
The company is also preparing for the New Revenue Standard (ASU 2014-09), effective January 1, 2018, which will shift timing of recognition in the aerospace businesses. Management has said the change will eliminate roughly $233 million of capitalized early-unit costs through retained earnings, a transition that could alter reported aerospace profitability going forward.
02—Key points
Key Highlights
- Net sales of $57.2 billion in 2016, up 2.0% (organic growth 2%); diluted EPS from continuing operations of $6.13 versus $4.53 in 2015, which included large one-time charges.
- Operating margin improved to 14.3% from 13.0%, but 2016 included a $423 million pension settlement charge and $290 million of restructuring costs.
- Pratt & Whitney operating profit fell 79%... see note: segment operating profit rose 79% to $1.5 billion from $861 million on the reported basis, while operational profit declined 28% on unfavorable contract adjustments and negative engine margins.
- Total debt rose to $23.9 billion; debt-to-total-capitalization increased to 45% from 41% after borrowings to fund buybacks.
- Share repurchases totaled $2.25 billion in 2016 with about $3.7 billion remaining authorization; 2017 repurchases are expected to be about $3.5 billion.
- Operating cash flow from continuing operations of $6.4 billion; 2017 capital expenditures are expected near $1.8 billion and acquisition spending of $1 to 2 billion.
- Backlog reached $14.9 billion at Otis, $3.2 billion at UTC Climate, Controls & Security, $61.8 billion at Pratt & Whitney, and $13.4 billion at UTC Aerospace Systems, supporting future aerospace revenue visibility.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, RTX kept $0.09.
- Revenue$57.24B100.0%
- Cost of revenue−$30.32B53.0%
- Gross profit$26.92B47.0%
- Operating costs−$18.70B32.7%
- Operating income$8.22B14.4%
- Interest, other & tax−$3.17B5.5%
- Net income$5.05B8.8%
Where FY2016 revenue went
$57.24B- Cost of revenue: $30.32B, 53% of revenue
- Other operating costs: $10.36B, 18% of revenue
- Net income: $5.05B, 8.8% of revenue
- R&D: $2.38B, 4.2% of revenue
- SG&A: $5.96B, 10% of revenue
- Interest, other & tax: $3.17B, 5.5% of revenue
Kept 8.8% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 9, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $57.24B$56.10B | +2.0% |
| Cost of Revenue | $30.32B$29.77B | +1.9% |
| Gross Profit | $26.92B$26.33B | +2.2% |
| R&D Expenses | $2.38B$2.28B | +4.3% |
| SG&A Expenses | $5.96B$5.89B | +1.2% |
| Operating Expenses | $49.80B$48.60B | +2.5% |
| Operating Income | $8.22B$7.29B | +12.8% |
| Interest Expense | $1.04B$824.00M | +26.1% |
| Net Income | $5.05B$7.61B | −33.6% |
| EPS (Basic) | $6.18$8.72 | −29.1% |
| EPS (Diluted) | $6.12$8.61 | −28.9% |
| Shares Outstanding (Basic) | 818.20M872.70M | −6.2% |
| Shares Outstanding (Diluted) | 826.10M883.20M | −6.5% |
05—Questions
Frequently Asked Questions
What drove the large swing in EPS between 2015 and 2016?
Diluted EPS from continuing operations rose to $6.13 from $4.53, mainly because 2015 absorbed major one-time charges, including an $867 million Canadian government settlement and a $237 million asbestos reserve. 2016 had its own non-recurring items, such as a $423 million pension settlement charge, and share count fell as buybacks reduced diluted shares to 826 million from 883 million.
Why did Pratt & Whitney's profitability decline on an operational basis?
Operational operating profit fell 28%, driven by unfavorable year-over-year contract adjustments and settlements (about 38 points), higher research and development spending, and a larger negative engine margin on large commercial engines tied to the PurePower ramp-up. Strong commercial aftermarket volume partly offset these pressures.
How much financial leverage is UTC carrying, and does it constrain flexibility?
Total debt reached $23.9 billion, with net debt of $16.7 billion and a debt-to-capitalization ratio of 45%, up from 41%. The company has about $4.35 billion of undrawn revolving credit and commercial paper capacity, and average long-term debt maturity is about ten years. Rising leverage ties the company's ability to fund buybacks to its credit ratings, which were downgraded in September 2015.
What are the main legal and regulatory risks disclosed?
Key exposures include the ongoing SEC and DOJ investigations into sales-representative conduct in China, a German tax dispute over about $225 million of tax benefits plus interest (roughly $300 million already paid), a Defense Contract Management Agency claim of about $177 million plus interest on cost accounting standards, and a Department of Defense Inspector General civil subpoena related to titanium used in military engines. Management says it cannot reasonably estimate losses for several of these matters.
06—Continue