01—Abstract
Summary
Summary of the 10-K filed February 6, 2020. Cited figures are marked; the original filing is the authoritative source.
United Technologies (UTC) closed 2019 with net sales of $77.0 billiona, up 16% year over year, driven by 5% organic growth and a 12% contribution from the Rockwell Collins acquisition completed in November 2018.
Operating profit rose 5% to $8.97 billionb, but the operating margin fell to 11.6% from 12.9%, pressured by $600 million of separation-related charges, restructuring costs of $425 million, and higher SG&A. Diluted EPS from continuing operations was $6.41, down from $6.50, and reported net income attributable to common shareowners was $5.54 billion. Operating cash flow improved to $8.9 billion, though free cash flow after capex of $2.3 billion was about $6.6 billion, and reduced factoring activity weighed on the cash flow comparison.
The balance-sheet story is dominated by two pending transactions. UTC agreed in June 2019 to an all-stock merger of equals with Raytheon (2.3348 UTC shares per Raytheon share), with closing expected in early Q2 2020. Before that, UTC plans to spin off Otis and Carrier as tax-free entities, leaving a pure-play aerospace company of Pratt & Whitney and Collins Aerospace Systems.
Total debt was $43.6 billionc, with a debt-to-capitalization ratio of 50%, down from 53%. Share repurchases were sharply curtailed ($151 million in 2019 versus $325 million in 2018) and are restricted by the Raytheon agreement. Quarterly dividends were $2.94 per share for the year, and the board declared $0.735 for Q1 2020.
Investors should weigh several risks: aerospace exposure to Boeing's 737 MAX grounding, the company's reliance on Airbus, Boeing and the U.S. Government after separation, a $1.73 billiond U.S. Government cost-accounting claim against Pratt & Whitney, ongoing PW1000G Geared Turbofan technical and warranty issues, and substantial separation and merger execution risk. Backlog (RPO) reached $132.7 billion, about 45% of which is expected to convert to sales within 24 months, which supports revenue visibility.
02—Key points
Key Highlights
- Net sales rose 16% to $77.0B, with 5% organic growth across all four segments and 12 points from the Rockwell Collins acquisition.
- Operating profit grew 5% to $8.97B, but operating margin contracted to 11.6% from 12.9% due to separation costs (~$600M), restructuring ($425M), and higher SG&A.
- Diluted EPS from continuing operations was $6.41, down from $6.50 in 2018, reflecting roughly $1.85 per share of restructuring and nonrecurring charges.
- Pending all-stock merger with Raytheon (2.3348 UTC shares per Raytheon share) expected to close early Q2 2020, with UTC to be renamed Raytheon Technologies Corporation.
- Planned tax-free spin-offs of Otis and Carrier would leave a standalone aerospace company (Pratt & Whitney and Collins Aerospace Systems), which will be more concentrated and reliant on Airbus, Boeing and the U.S. Government.
- Total debt of $43.6B with debt-to-capitalization improved to 50% from 53%; share buybacks were curtailed to $151M in 2019 and are restricted under the Raytheon agreement.
- Record remaining performance obligations of $132.7B (vs. $115.5B), with about 45% expected to convert to sales within 24 months, providing strong revenue visibility.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 6, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $45.35B$34.70B | +30.7% |
| R&D Expenses | $2.45B$1.88B | +30.6% |
| SG&A Expenses | $3.71B$2.86B | +29.6% |
| Operating Expenses | $40.76B$32.21B | +26.6% |
| Operating Income | $4.91B$2.88B | +70.8% |
| Interest Expense | $1.59B$1.03B | +54.2% |
| Net Income | $5.54B$5.27B | +5.1% |
| EPS (Basic) | $6.48$6.58 | −1.5% |
| EPS (Diluted) | $6.41$6.50 | −1.4% |
| Shares Outstanding (Basic) | 854.80M800.40M | +6.8% |
| Shares Outstanding (Diluted) | 863.90M810.10M | +6.6% |
05—Questions
Frequently Asked Questions
Why did reported sales grow 16% when organic growth was only 5%?
The gap is mainly the full-year consolidation of Rockwell Collins, acquired on November 26, 2018, which added about 12 percentage points of growth. Foreign currency was a 1-point headwind. Organic growth of 5% reflected higher sales at all four segments, led by Pratt & Whitney (+8%) and Collins Aerospace (+6%).
Why did operating margin decline even though operating profit increased?
Operating profit rose 5% to $8.97B, but sales grew faster, so the margin fell to 11.6% from 12.9%. Drivers include about $600M of separation-related charges (mostly SG&A), $425M of restructuring costs, transaction and integration costs tied to Rockwell Collins and Raytheon, and a $521M decline in other income, net, which had included the 2018 Taylor Company gain.
What happens to shareholders in the Raytheon merger and separation?
UTC shareholders will hold shares in the combined company (renamed Raytheon Technologies), which will be an aerospace and defense company. Otis and Carrier are to be spun off to shareholders tax-free, creating two additional independent public companies. Completion depends on regulatory approvals, the spin-offs, and financing, and the spin-offs are subject to the terms of the Raytheon merger agreement.
What are the key risks to the aerospace business?
Key risks include the Boeing 737 MAX grounding (expected to last until mid-2020, with production suspended), dependence on a few large customers (Airbus was 31% of Pratt & Whitney sales; Boeing and Airbus were 27% of Collins sales), Pratt & Whitney's Geared Turbofan technical issues and warranty costs, a $1.73B U.S. Government cost-accounting claim against Pratt & Whitney under appeal, and cyclical commercial aviation demand. Management says the 737 MAX investments are expected to be recoverable.
How strong is the balance sheet and how much capital is returned to shareholders?
Total debt was $43.6B against cash of $7.4B, and net debt was $36.3B. Operating cash flow was $8.9B and capex was $2.3B. The company paid $2.4B in dividends ($2.94 per share for 2019, with $0.735 declared for Q1 2020) but cut share repurchases to $151M because of the pending merger. Management expects the separation to be financed with additional debt, and one rating agency placed the issuer rating on negative outlook.
06—Continue