10-QPeriod: Q3 FY2018

RTX Corp Quarterly Report for Q3 Ended Sep 30, 2018

Filed October 26, 2018For Securities:RTX

Summary

United Technologies Corporation (UTC) reported its third-quarter and nine-month results for the period ending September 30, 2018. Overall, the company demonstrated robust top-line growth, with net sales increasing by 10% year-over-year for the quarter and 9% for the nine-month period. This growth was driven by organic sales increases across all four segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems. Financially, the company saw a decrease in net income attributable to common shareowners for the quarter, from $1.33 billion in Q3 2017 to $1.24 billion in Q3 2018. However, for the nine-month period, net income attributable to common shareowners increased to $4.58 billion from $4.16 billion in the prior year. A significant event impacting liquidity and financial position was the issuance of $11 billion in aggregate principal notes to fund the pending acquisition of Rockwell Collins, resulting in a substantial increase in restricted cash and total debt. Management expressed confidence in the company's liquidity through operating cash flows and available credit facilities.

Financial Highlights

50 data points
Beta

Revenue

$16.51B

24.1% Gross Margin

Net Income

$1.24B

7.5% Net Margin

EPS (Diluted)

$1.54

Total Assets

$114.94B

Cash & Equivalents

$13.80B

Free Cash Flow

$1.76B

Financial Statements
Beta
Revenue$16.51B
Gross Profit$3.97B
R&D Expenses$586.00M
SG&A Expenses$1.68B
Operating Expenses$14.80B
Operating Income$1.84B
Interest Expense$258.00M
Net Income$1.24B
EPS (Basic)$1.56
EPS (Diluted)$1.54
Shares Outstanding (Basic)791.30M
Shares Outstanding (Diluted)801.80M

Key Highlights

  • 1Net sales increased by 10% to $16.51 billion for the quarter and 9% to $48.46 billion for the nine months ended September 30, 2018, driven by organic growth across all segments.
  • 2Net income attributable to common shareowners for the quarter decreased to $1.24 billion ($1.54 diluted EPS) from $1.33 billion ($1.67 diluted EPS) in the prior year, while it increased to $4.58 billion ($5.72 diluted EPS) for the nine months from $4.16 billion ($5.20 diluted EPS) in the prior year.
  • 3The company issued $11 billion in aggregate principal notes to fund the pending acquisition of Rockwell Collins, significantly increasing total debt and restricted cash.
  • 4Operating profit margin for the quarter decreased to 11.1% from 13.5% in the prior year, largely due to margin compression at Pratt & Whitney and Otis.
  • 5Pratt & Whitney's operating profit margin significantly declined to 2.3% for the quarter due to lower commercial OEM profit contribution.
  • 6Cash flows provided by operating activities increased by $1.21 billion to $4.32 billion for the nine months ended September 30, 2018, compared to the same period in 2017.
  • 7The company adopted the new revenue recognition standard (ASU 2014-09) effective January 1, 2018, which impacted revenue and expense classifications and resulted in the establishment of new balance sheet accounts like contract assets and liabilities.

Frequently Asked Questions

The adoption of the new revenue recognition standard effective January 1, 2018, resulted in changes to revenue and expense classifications, primarily in the aerospace businesses. It led to the creation of 'Contract assets' and 'Contract liabilities' on the balance sheet and affected how revenue and costs were recognized for certain long-term contracts, particularly those recognized over time. While it caused some reclassifications and adjustments, the company stated the ongoing effect on reported revenues was not expected to be materially different and the overall impact on net income for 2018 was expected to be immaterial.

The pending acquisition of Rockwell Collins significantly impacted UTC's financial position. The company issued $11 billion in aggregate principal notes to help fund the cash portion of the acquisition. This led to a substantial increase in total debt and resulted in $9.2 billion of net proceeds being classified as restricted cash as of September 30, 2018. The acquisition also led to a suspension of share repurchases, except for those related to equity awards, to manage cash flow and liquidity.

All four segments, Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems, reported organic sales growth. However, Pratt & Whitney experienced a significant decline in its operating profit margin for the quarter (from 4.9% to 2.3%) due to higher negative engine margins and other ramp-related costs, which is a key area of concern. Otis also saw its operating profit margin decline, primarily due to unfavorable price and mix.

UTC significantly increased its debt by issuing $11 billion in notes to finance the Rockwell Collins acquisition. Despite this, the company highlighted strong operating cash flows as its principal source of liquidity. It also maintained access to commercial paper markets and had undrawn revolving credit facilities totaling $4.35 billion. The company repatriated $5.2 billion of overseas cash and expects its future operating cash flows to be sufficient to meet its needs.