01—Abstract
Summary
Summary of the 10-K filed February 7, 2019. Cited figures are marked; the original filing is the authoritative source.
RTX Corp's predecessor, United Technologies Corporation (UTC, ticker UTX), filed its 2018 Form 10-K on February 7, 2019, a year defined by two transformational moves: the November 26, 2018 completion of the $30.6 billiona enterprise-value acquisition of Rockwell Collins and the announced plan to separate into three independent companies by mid-2020 (an aerospace company comprising Collins Aerospace Systems and Pratt & Whitney, plus spin-offs of Otis and Carrier).
Reported 2018 net sales rose 11% to $66.5 billionb on 8% organic volume growth, with all four segments growing organically. However, profitability was pressured: gross margin fell 130 basis points to 24.8%, operating profit rose only 5% to $8.55 billion, and diluted EPS from continuing operations was $6.50, helped by a $799 million gain on the sale of Taylor Company but held back by a $744 million TCJA-related tax charge, a $300 million customer contract charge, and restructuring costs of $307 million. Pratt & Whitney's operating margin fell to 6.5% from 10.1% in 2016 amid negative engine margins on the PurePower Geared Turbofan program.
The balance sheet changed materially. Total debt rose to $45.5 billionc from $27.5 billion, debt-to-total-capitalization climbed to 53% from 47%, and net debt reached $39.4 billion. Total assets expanded to $134.2 billion, with goodwill of $48.1 billion and intangibles of $26.4 billion.
Operating cash flow from continuing operations was $6.3 billiond, with capital expenditures of $1.9 billion, leaving roughly $4.4 billion of free cash flow. Management guided 2019 organic sales growth of 3% to 5%, with an approximately 1% foreign exchange headwind.
Shareholder returns were limited: buybacks fell to $325 million from $1.45 billion, and the quarterly dividend was $0.735 per share. Investors should weigh the growth and backlog strength (remaining performance obligations of about $115.5 billion) against elevated leverage, margin pressure at Pratt & Whitney, and execution risk around the separation.
02—Key points
Key Highlights
- Revenue grew 11% to $66.5 billion, with 8% organic growth across all four segments; Pratt & Whitney led at 14% organic growth and Carrier grew 6%.
- Rockwell Collins acquisition closed November 26, 2018 for $15.5 billion in cash and 62.2 million shares plus $7.8 billion of assumed debt (about $30.6 billion enterprise value), creating the Collins Aerospace Systems segment and adding roughly $20.5 billion of goodwill.
- Planned three-way separation: spin-offs of Otis and Carrier are targeted for mid-year 2020, leaving UTC as an aerospace-focused company of Collins Aerospace Systems and Pratt & Whitney.
- Gross margin fell 130 basis points to 24.8%, and Pratt & Whitney's operating margin dropped to 6.5% (from 8.0% in 2017 and 10.1% in 2016) due to negative engine margins and customer contract matters.
- Total debt more than doubled to $45.5 billion, debt-to-capitalization rose to 53% from 47%, and net debt was $39.4 billion; the company also faced a one-notch rating downgrade following the acquisition.
- Diluted EPS from continuing operations was $6.50, up from $5.70, but 2018 results included a $744 million TCJA tax charge, a $300 million customer contract charge, and $307 million in restructuring costs, offset partly by an $799 million gain on the Taylor Company sale.
- Remaining performance obligations reached about $115.5 billion, with roughly 46% expected to convert to sales over the next 24 months; 2019 guidance calls for 3% to 5% organic sales growth.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 7, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $34.70B$59.84B | −42.0% |
| R&D Expenses | $1.88B$2.43B | −22.6% |
| SG&A Expenses | $2.86B$6.43B | −55.5% |
| Operating Expenses | $32.21B$53.06B | −39.3% |
| Operating Income | $2.88B$8.14B | −64.6% |
| Interest Expense | $1.03B$909.00M | +13.5% |
| Net Income | $5.27B$4.55B | +15.8% |
| EPS (Basic) | $6.58$5.76 | +14.2% |
| EPS (Diluted) | $6.50$5.70 | +14.0% |
| Shares Outstanding (Basic) | 800.40M790.00M | +1.3% |
| Shares Outstanding (Diluted) | 810.10M799.10M | +1.4% |
05—Questions
Frequently Asked Questions
Why did UTC acquire Rockwell Collins, and how did it change the company?
UTC acquired Rockwell Collins on November 26, 2018 to expand its aerospace presence in avionics, flight controls, interiors, and data connectivity. Rockwell Collins was combined with the legacy UTC Aerospace Systems business to form Collins Aerospace Systems, which became the company's fourth segment with 2018 sales of $16.6 billion (including only about $778 million of post-acquisition Rockwell Collins revenue). The deal added roughly 30,000 employees, $20.5 billion of goodwill, $10.8 billion of intangible assets, and significant debt, and it is expected to generate synergies, though the filing cautions integration could prove more difficult or costly than planned.
What is the status and rationale of the planned separation into three companies?
UTC announced on November 26, 2018 that it intends to spin off Otis (elevators and escalators) and Carrier (HVAC, refrigeration, fire, and security) as tax-free shareholder distributions, leaving UTC as an aerospace and defense company with Collins Aerospace Systems and Pratt & Whitney. The company expects completion by mid-2020, subject to board approval, tax rulings or opinions, Form 10 registration effectiveness, and financing. The filing notes risks that the separations could be delayed, become taxable, or fail to deliver expected benefits, and that each resulting company would be smaller and less diversified, with UTC relying heavily on Airbus, Boeing, and the U.S. Government.
How financially stable is the company after taking on the additional debt?
Leverage increased substantially. Total debt rose to $45.5 billion (from $27.5 billion), and debt-to-total-capitalization moved to 53%. Interest expense, net increased 14% to $1.04 billion, and the average maturity of long-term debt is about 11 years. Liquidity remains supported by $6.2 billion of cash (about 72% held overseas), $4.35 billion in committed revolving credit facilities plus a $1.5 billion facility, and operating cash flow of $6.3 billion. Management stated that future operating cash flow should be sufficient to meet operating needs, but the company also reduced share repurchases to conserve cash for deleveraging and the separation.
What are the main risks to Pratt & Whitney's profitability?
Pratt & Whitney's operating profit fell 2% in 2018 to $1.27 billion, and its margin declined to 6.5% as higher negative engine margins on the PurePower PW1000G Geared Turbofan rose with higher deliveries, along with customer contract matters and higher SG&A. The filing notes that new engine programs carry ramp-up, supplier capacity, and in-service technical issues that could lead to liquidated damages, warranty costs, and reduced contract estimates. Airbus accounted for about 36% of segment sales and the U.S. Government about 23%, so customer and program concentration is also a risk.
What drove the 2018 earnings and what should investors expect for 2019?
Operating profit rose 5% to $8.55 billion, but gross margin declined, and net income was affected by a $744 million TCJA-related charge tied to repatriation of previously reinvested foreign earnings, a $300 million customer contract charge at Pratt & Whitney, and $307 million in restructuring costs. A $799 million pre-tax gain on the sale of Carrier's Taylor Company partially offset these items. Management expects 2019 organic sales growth of 3% to 5%, with a roughly 1% unfavorable foreign exchange impact, and the company expects a net periodic pension benefit about $100 million higher than in 2018. Restructuring actions are expected to yield about $270 million of annual savings from 2018 actions and $240 million from 2017 actions once fully implemented.
06—Continue