01—Abstract
Summary
Summary of the 10-K filed February 9, 2018. Cited figures are marked; the original filing is the authoritative source.
United Technologies (RTX's predecessor, filed as UTC) closed 2017 with net sales of $59.8 billiona, up 5% year over year, with organic growth of 4% across all four segments.
Operating profit rose to $8.7 billionb (14.5% margin) from $8.2 billion, but diluted EPS from continuing operations fell to $5.70 from $6.13 because of a $690 million one-time charge tied to the Tax Cuts and Jobs Act and a $196 million customer contract charge. Pratt & Whitney's margin compressed to 9.0% from 10.4%, driven by negative engine margins on the PurePower PW1000G ramp. Cash from operations declined to $5.6 billion, partly due to a $1.9 billion discretionary pension contribution, and free cash flow after capex was about $3.6 billion.
The dominant investor issue is the pending $30 billionc Rockwell Collins acquisition, announced September 2017 and approved by Rockwell shareowners on January 11, 2018, with closing expected in Q3 2018. UTC expects to pay roughly $15 billion in cash, fund it through debt and cash on hand, and assume about $7 billion of Rockwell Collins debt. Total debt rose to $27.5 billion and debt-to-capitalization reached 47%, up from 45%.
Share repurchases have been suspended except for employee savings plans, and rating agencies have placed UTC's ratings under review for possible downgrade. The company guides 2018 organic sales growth of 4%d to 6% and an effective tax rate near 25.5%.
Key risks include the execution of the PW1000G ramp and related engine issues, Pratt & Whitney's exposure to Airbus (38% of segment sales), the German tax litigation, the U.S. Government investigations, the FCPA/SEC investigations, and the Rockwell integration. Backlog stood at roughly $100 billion across the segments, and the company expects a significant decline in reported backlog in 2018 under the new revenue standard.
02—Key points
Key Highlights
- Net sales rose 5% to $59.8 billion in 2017, with organic growth of 4% across all four segments; Pratt & Whitney organic sales grew 9%.
- Diluted EPS from continuing operations was $5.70, down from $6.13, after a $690 million U.S. tax reform charge and $196 million in customer contract charges.
- Operating profit increased to $8.7 billion (14.5% margin) from $8.2 billion, led by UTC Climate, Controls & Security (operating profit up 12%, including $379 million of Watsco investment gains).
- Pratt & Whitney's operating margin fell to 9.0% from 10.4% on negative engine margins from PW1000G ramp costs; backlog reached $64.3 billion.
- Pending Rockwell Collins acquisition (~$15 billion cash plus stock, ~$7 billion of assumed debt) expected to close in Q3 2018; share repurchases suspended apart from employee plans.
- Total debt rose to $27.5 billion and debt-to-capitalization increased to 47% from 45%; rating agencies are reviewing UTC's ratings for possible downgrade.
- 2018 guidance calls for 4% to 6% organic sales growth and an effective tax rate of about 25.5%; the new revenue standard is expected to significantly reduce reported backlog.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, RTX kept $0.08.
- Revenue$59.84B100.0%
- Cost of revenue−$31.03B51.9%
- Gross profit$28.81B48.1%
- Operating costs−$20.67B34.5%
- Operating income$8.14B13.6%
- Interest, other & tax−$3.59B6.0%
- Net income$4.55B7.6%
Where FY2017 revenue went
$59.84B- Cost of revenue: $31.03B, 52% of revenue
- Other operating costs: $11.82B, 20% of revenue
- Net income: $4.55B, 7.6% of revenue
- R&D: $2.43B, 4.1% of revenue
- SG&A: $6.43B, 11% of revenue
- Interest, other & tax: $3.59B, 6.0% of revenue
Kept 7.6% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 9, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $59.84B$57.24B | +4.5% |
| Cost of Revenue | $31.03B$30.32B | +2.3% |
| Gross Profit | $28.81B$26.92B | +7.0% |
| R&D Expenses | $2.43B$2.38B | +2.1% |
| SG&A Expenses | $6.43B$5.96B | +7.9% |
| Operating Expenses | $53.06B$49.80B | +6.5% |
| Operating Income | $8.14B$8.22B | −1.0% |
| Interest Expense | $909.00M$1.04B | −12.5% |
| Net Income | $4.55B$5.05B | −10.0% |
| EPS (Basic) | $5.76$6.18 | −6.8% |
| EPS (Diluted) | $5.70$6.12 | −6.9% |
| Shares Outstanding (Basic) | 790.00M818.20M | −3.4% |
| Shares Outstanding (Diluted) | 799.10M826.10M | −3.3% |
05—Questions
Frequently Asked Questions
Why did UTC's EPS decline in 2017 even though sales and operating profit grew?
Diluted EPS from continuing operations fell to $5.70 from $6.13 mainly because of a one-time $690 million charge from the Tax Cuts and Jobs Act, plus a $196 million pre-tax charge from customer contract matters and $253 million in restructuring costs. These were partly offset by about $500 million in gains on available-for-sale securities, including the Watsco sale.
How will the Rockwell Collins acquisition affect UTC's balance sheet and capital returns?
UTC expects to pay about $15 billion in cash, fund it through debt issuances and cash on hand, and assume roughly $7 billion of Rockwell Collins debt. It has also arranged a $6.5 billion 364-day bridge loan as a backstop. Share repurchases are suspended apart from employee savings plans, and the company says it may later make limited repurchases to offset dilution. Leverage is already elevated, with debt-to-capitalization at 47%.
What is driving the weaker margins at Pratt & Whitney?
Pratt & Whitney's operating margin fell to 9.0% from 10.4%. The main drivers were higher negative engine margins and ramp-related costs on the PurePower PW1000G engine family, lower OEM profit contribution, and unfavorable contract settlements (about $110 million of net unfavorable aerospace estimate changes). Aftermarket growth partly offset these pressures.
What are the most significant legal and regulatory exposures disclosed?
Key matters include ongoing SEC and DOJ investigations relating to a China sales representative and anti-bribery laws, a securities class action alleging misstatements about 2015 earnings expectations, a Cost Accounting Standards claim against Pratt & Whitney of about $177 million plus interest, the German tax litigation over about €215 million of tax benefits (with about €118 million of interest), and asbestos reserves of roughly $344 million. Management does not expect these to have a material adverse effect, though outcomes are uncertain.
06—Continue