Annual report for Walmart
chia19
annual_report_example.pdf
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Outline
I. Company Overview
A. Business Segments
B. Market Conditions
C. Methods of Revenue Recognition
II. Ratio Analysis
A. Profitability
B. Liquidity
C. Stability
D. Shareholder Value
III. Summary
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United Technologies is a global corporation comprised of five principle business
segments, Otis, Carrier, Pratt & Whitney, Flight Systems (Hamilton Sundstrand and
Sikorsky) and UTC Fuel Cells. Ranked in order of revenue generation, Carrier is the
world’s largest manufacturer of commercial and residential heating, ventilating and air
conditioning systems and equipment (HVAC). Complementing this segment of the
business Carrier is also a major manufacturer of commercial and transport refrigeration
equipment. Pratt & Whitney represents the aerospace industry, manufacturing
commercial and military aircraft engines and is also a leading supplier in the spare parts
market. Otis is the world’s largest elevator and escalator manufacturing, installation and
service company. In order to sustain growth and meet future technological demands Otis
has expanded into the market of automated people movers and developed the
revolutionary new Gen2™ elevator system. The Flight Systems business is comprised of
two segments, Sikorsky and Hamilton Sundstrand. Sikorsky is one of the world's largest
manufacturers of military and commercial helicopters and the primary supplier of
transport helicopters to the U.S. Army and Navy. Hamilton Sundstrand provides
aerospace and industrial products and aftermarket services and is the prime contractor for
NASA's space suit/life support system and produces environmental control, life support,
mechanical systems and thermal control systems for international space programs. And
finally, UTC Fuel Cells builds fuel cell systems for commercial, transportation,
residential, defense and space applications (including the U.S. space shuttle program).
These five unique and complex businesses comprise the diverse portfolio of United
Technologies.
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As a global corporation UTC is impacted by political, economic, environmental and
climatic conditions throughout the world. Doing business in over 200 countries, speaking
98 languages and funding in 163 currencies adds an additional layer of complexity to this
organization. Since UTC has business operations throughout the world, changes in local
government regulations and policies, including those related to investments, export
policies and repatriation of earnings can have a huge impact on the financial health of the
organization. Further constraints involving foreign customers in the Corporation’s
aerospace and defense businesses and environmental regulations by federal, state and
local authorities in the United States and regulatory authorities with jurisdiction over its
foreign operations bring their share of financial complications as well. Each segment of
the business faces unique and challenging conditions, which, as we will see, place
additional burdens on the financial position of this corporation.
Changes in legislation or government policies also have an impact on the Corporation’s
worldwide operations. For example, governmental regulation of refrigerants is important
to Carrier’s businesses, while government safety regulations, restrictions on aircraft
engine noise and emissions and government procurement practices can impact the
Corporation’s aerospace and defense businesses. Both Otis and Carrier serve customers
in the commercial and residential sectors and are impacted by various economic factors,
including fluctuations in commercial construction, labor costs, fuel costs, interest rate
fluctuation and foreign currency and exchange rates. Pratt & Whitney and Flight
Systems are tied directly to the health of the aviation and defense industries. Factors such
as air traffic growth, fuel costs, air safety and consumer confidence have a direct and
correlative impact on the bottomline. As a result of September 11, both Pratt & Whitney
and Flight Systems have seen rapid a decline in both sales and profit margin. With the
health of the airline industry in jeopardy, the long-term impact will be felt for years to
come.
As we begin to look into the financial health of UTC and discuss the factors impacting
the financial ratios, you will gain a better appreciation for the importance of these market
factors and their impacts on the major corporations in worldwide markets.
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Earlier, we identified the business makeup of UTC, a diversified corporation comprised
of 5 separate business segments. As such, each business segment has it’s own method of
recognizing revenues, and in several segments, there are multiple methods employed.
Revenue Recognition Methods
In millions of Dollars Revenues Operating Profits Operating Profit Margin
2001 2000 1999 2001 2000 1999 2001 2000 1999
Otis $6,338 $6,153 $5,654 $ 847 $ 798 $ 493 13.4% 13.0% 8.7%
Carrier 8,895 8,340 7,353 590 795 459 6.6% 9.4% 6.2%
Pratt & Whitney 7,679 7,366 7,647 1,308 1,200 634 17.0% 16.3% 8.3%
Flight Systems 5,292 4,992 3,810 670 614 247 12.7% 12.3% 6.5%
Let’s begin our review with a look into Carrier since they contribute the largest portion of
revenues. First, it is important to distinguish the makeup of Carrier’s revenues. During
2001, 47% of Carrier’s revenue was generated outside the United States and by U.S.
exports. Carrier has three main methods of revenue recognition. Special orders or large
commercial projects are accounted for under cost-reimbursement contracts and are
recorded as work is performed and billed. Sales under installation and modernization
contracts are accounted for under the percentage-of-completion method. And distribution
sales (over the counter sales) are immediately recognized at the point of sale. Losses, if
any, are provided for when anticipated according to GAAP requirements. Carrier also
generates revenues via Intercompany and intracompany sales. All intracompany sales are
eliminated during month end consolidations and revenues for Intercompany sales are
recognized at the point of invoicing.
Pratt & Whitney generates 14% of their revenue from sales to the U.S. Government.
Sales under government and commercial fixed-price contracts and government fixed-
price-incentive contracts are recorded at the time deliveries are made or, in some cases,
on a percentage-of-completion basis. Sales under cost-reimbursement contracts are
recorded as work is performed and billed. Sales of commercial aircraft engines
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sometimes require participation by the Corporation in aircraft financing arrangements;
when appropriate, such sales are accounted for as operating leases.
Otis generated 76% of its revenues outside the United States. The majority of Otis’
business is from the sales and installation of elevators and escalators and unit
modernization contracts. These contracts are accounted for under the percentage-of-
completion method and revenue can be spread over several quarters. Anticipated losses
are ―accrued for‖ when anticipated. Losses arise from excess inventory manufacturing
and product and warranty guarantee costs over the net revenue from the contract
specifics. Revenue for service sales which includes aftermarket repair and maintenance
are recognized over the contractual period or as services are performed on non-contract
basis.
Flight Systems follows the same methods of revenue recognition as Pratt & Whitney.
Sales under government and commercial fixed-price contracts and government fixed-
price-incentive contracts are recorded at the time deliveries are made or, in some cases,
on a percentage-of-completion basis. Sales under cost-reimbursement contracts are
recorded as work is performed and billed. Sales of commercial aircraft engines
sometimes require participation by the Corporation in aircraft financing arrangements;
when appropriate, such sales are accounted for as operating leases.
Revenue recognition for UTC is a complicated business. With diversity in product,
customer type and duration of delivery, multiple methods are required and are occurring
simultaneously. What, if any, is the impact of these various methods on the profitability,
efficiency and leverage ratios of the corporation? Before we take a look into the financial
ratios’ of UTC we need to point out how certain events in 2001 have had an impact on
corporate revenues.
On an annual basis specific events trigger changes in the financial position of a company.
Systematic risk is part of the cost of doing business. Some corporations are impacted
more than others. UTC is largely impacted by several factors. First, a large portion of
the business portfolio is located outside of the United States. Second, a large number of
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sales are generated outside of the United States. Both of these circumstances are
impacted by foreign currency translations and the uncertainty associated with changes in
the value of foreign currency. As the dollar strengthens there is corresponding
devaluation in foreign currency. For UTC this devaluation was in two primary
currencies, European, i.e. Euro dollars and Asian currency.
Another significant factor impacting the financial results of UTC was acquisitions and
divestitures. During 2000 and 2001 Carrier enhanced their portfolio by acquiring five
major businesses; Electrolux Europe, Specialty Equipment, World Dryer, International
Comfort Products and 15 independent distributors merged into Carrier Distribution
Company. These acquisitions resulted in an increase to revenue of 17.5%. Offsetting
this increase however was a decrease in operating profits due to restructuring costs of
over 300 million. And finally, and sadly, September 11 happened. While the impact of
September 11 will surely be felt for years to come, an immediate impact hit Pratt &
Whitney and Flight Systems. The core of both businesses is in the manufacture and sale
of aerospace products. With the loss of customer confidence in airline security and
resulting decline in air travel sales plummeted and anticipated future contracts were
cancelled. A large portion of the portfolio consisted of the sale of spare parts within the
airline industry. With major airlines decreasing flight operations and grounding unused
planes, sales in this market became dry. Alternatively Sikorsky saw a small increase in
the sale of the Blackhawk helicopters to the government to assist in the war on terrorism.
However, this increase was not enough to offset the losses sustained by the other
businesses.
Now we are ready to begin our discussion on financial ratios and understand the financial
health of UTC. Since we have already determined how the various companies recognize
revenue, let’s focus on the ratios. Some accounts believe that ratio analysis should begin
with ROE using the DuPont framework. This analysis provides an in depth view of the
company’s strengths and weaknesses and highlights areas of concern. But before we
look at profitability, let’s quickly review the liquidity ratios.
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Liquidity
Current Ratio 1.34 1.14 1.15
Quick Ratio 0.67 0.56 0.57
Cash flow from Operations 1.84 1.42 1.38
Current ratio shows the company’s ability to meet current obligations in the short term.
Short term is defined as obligations due within 1 year and utilizes only current assets and
liabilities. Historically, a ratio was 2 was considered risky, however the rule of thumb
has changed to indicate any ratio over 1 provides adequate liquidity. In the case of UTC
for each dollar in liability, UTC has 1.34 available to cover existing liabilities. Research
shows the industry average is 1.28, so UTC is performing slightly better than industry. A
variable to current ratio is the quick ratio which removes inventory from the calculation.
As we will see a bit later on, UTC carries a high inventory value on their books, so the
quick ratio should show a large drop. As you can see, the quick ratio is under 1.0, which
indicates some concern in meeting current obligations. The third ratio which identifies a
company’s ability to meet obligations is the cash flow adequacy ratio. A sample of
Fortune 500 companies shows the average adequacy ratio is .88; UTC is well above the
average at 1.84. The importance in each of these trends is that they are strengthening
each year, indicating management is making the changes necessary in their business
conditions to meet the demands of the future.
The next area we will review surrounds the profitability of UTC. Again there are several
ratios’ that are helpful to understand the areas of concern and ongoing trends.
2001 2000 1999
Profitability
Return on Sales 6.95 6.80 6.35
Gross Profit Margin 27.38 28.64 24.63
Return on Total Assets 7.41 7.27 7.27
Profit Margin 7.05 6.90 6.35
Return on Shareholders Equity 24.18 24.47 26.64
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Despite the difficulties outlined earlier, UTC continues to shown strength over the past
three years.
2001 Quarters 2000 Quarters IN MILLIONS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS First Second Third Fourth First Second Third Fourth
Sales $6,597 $7,260 $6,734 $6,895 $6,307 $6,871 $6,339 $6,689
Gross margin 1,785 2,076 1,811 1,727 1,679 1,884 1,814 1,859
Income from continuing operations 440 588 565 345 377 509 496 426
Net income 440 588 565 345 377 509 496 426
Profitability over the past 3 years is relatively stable, with the return on sales and return
on assets showing continued strengthening each year. Within the various segments, all
demonstrated growth in their revenue base by 16%. This growth also translated into
improved operating profits for all segments except Carrier. Otis, Pratt and Flight
Systems increased operating profits by 24% while Carrier’s operating profits decreased
by 26% due to restructuring charges of over $2 Million. Growth could have been
stronger however; cost of goods sold as a percentage of sales grew from 72% to 73.8%,
sales & general administrative expenses also increased by 5%. It is also important to note
that while sales have increased year over year, 8% of the sales in 2001 came from newly
acquired operations. In the event these acquisitions were not made, the original core
businesses would have shown a decrease in sales. Again, as mentioned earlier this is due
to several factors; an overall decrease in airline travel resulting in lower engine sales and
aftermarket spare parts resulting from September, 11, the overall recession which caused
a decrease in the construction industry trickling down into reduced sales and
modernization contracts for both Otis and Carrier, and a reduction in sales in the
commercial refrigeration business stemming from higher fuel prices and reduced trucking
traffic within the interstate systems of the United States.
Now that we understand the factors that drive company profitability, let’s turn our
attention to efficiency ratios.
Efficiency Ratios
Fixed Asset Turnover 1.05 1.05 1.98
Accounts Receivable Turnover 6.44 5.97 6.22
Inventory Turnover 5.20 5.23 5.43
DSO 56.69 71.80 66.10
Return on Assets 7.41 7.27 7.27
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Let’s begin our review of efficiency ratios with a discussion on the fixed assets for the
corporation. As a major manufacturing company, UTC has significant investments in
property, plant and equipment in facilities throughout the world. As of December 31,
2001, the Corporation reported operating 37 plants in the U.S. which had 29.2 million
square feet, of which 3.5 million square feet were leased; 97 plants outside the U.S.
which had 20.0 million square feet, of which 2.3 million square feet were leased; 37
warehouses in the U.S. which had 10.6 million square feet, of which 6.9 million square
feet were leased; and 18 warehouses outside the U.S. which had 5.9 million square feet,
of which 3.7 million square feet were leased. Fixed assets are stated on the balance sheet
at cost. Depreciation is computed over the assets’ useful lives generally using the
straight-line method, except for aerospace assets acquired prior to January 1, 1999, which
are depreciated using accelerated methods. The change to straight-line depreciation for
aerospace assets did not have a material impact on the Corporation’s financial position.
IN MILLIONS OF DOLLARS Estimated
Useful Lives 2001 2000
Land Perpetual $ 188 $ 193
Buildings and improvements 20-40 years 3,373 3,403
Machinery, tools and equipment 3-12 years 6,524 6,292
Other, including under construction – 320 467
10,405 10,355
Accumulated depreciation (5,856) (5,868)
$ 4,549 $ 4,487
With regards to fixed assets, for each dollar invested in fixed assets, only 1.05 of sales in
generated. If you recall earlier discussions, Carrier began acquiring large distributorships
and several smaller companies in 2000 and 2001. This is clearly indicated in the drop in
the asset turnover between 1999 and 2001. In order to increase the asset turnover ratio
UTC needs to become more efficient in the size and usage of assets. Recent news articles
have indicated a move in this direction. Carrier, a division of UTC, has announced the
closing and consolidation of 3 major North American plants and an undisclosed number
of consolidations in Europe and Asia. In order to successfully reduce the number of
physical assets housing inventories and providing manufacturing services, Carrier has
identified the need to redefine their sourcing and distribution polices to meet the needs of
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their customers while reducing overall costs associated with property, plant and
equipment.
The next efficiency ratio we will discuss is Accounts Receivable turnover ratio.
Turnover bears a close relationship to the volume of credit sales generated by a company.
The higher the turnover times, the more rapidly the average collection period. As you
can see Accounts receivable turns only 6.4 times annually creating an average of 56 days
for customers to pay their bills. While there has been significant improvement from
2000 and 1999, cash flow is certainly impacted by the collection period. Factors
impacting the high collection period, industry average is 48 days. If you recall earlier
discussions of revenue recognition you will recall that much of the billing was
incremental based on the percentage of completion. With many long-term contracts in
progress, billings will continue for many months, quarters and possibly years. The
presentation of accounts receivable on the balance sheet makes it difficult to gauge the
portion of outstanding long-term receivables versus current as the long-term receivables
as lumped into ―other assets‖. Current receivables are in excess of 4 billion with 452
million reserved for doubtful accounts. Current and long-term accounts receivable
include retainage and unbilled costs of approximately $153 million and $169 million at
December 31, 2001 and 2000, respectively. Retainage represents amounts that, pursuant
to the contract, are not due until project completion and acceptance by the customer.
Unbilled costs represent revenues that are not currently billable to the customer under the
terms of the contract. These items are expected to be collected in the normal course of
business.
The next ratio we will discuss relates to the inventory carried on the balance sheet. An
efficient use of inventory will show inventory levels closely resembling monthly sales
and is computed for a manufacturing corporation as cost of good sold over average
inventory rather than using sales. UTC also values inventories and contracts in progress
at the lower of cost or estimated realizable value and is primarily based on first-in, first-
out (―FIFO‖) or average cost methods. Costs accumulated against specific contracts or
orders are stated at actual cost and materials in excess of requirements for contracts are
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reserved and will be written-off as appropriate.
Manufacturing costs are allocated to current production and firm contracts. General
and administrative expenses are charged to expense as incurred.
IN MILLIONS OF DOLLARS 2001 2000
Inventories consist of the following:
Raw material $ 728 $ 738
Work-in-process 1,208 1,179
Finished goods 2,176 2,099
Contracts in progress 2,106 1,849
6,218 5,865
Less:
Progress payments, secured by lien,
on U.S. Government contracts (146) (137)
Billings on contracts in progress (2,099) (1,972)
$ 3,973 $ 3,756
LIFO, inventory values would have been higher by $103 million and $106 million at
December 31, 2001 and 2000.
As discussed earlier, contracts in progress relate to elevator/escalator contracts and air
handler and rooftop chiller installations and include costs of manufactured components,
accumulated installation costs and estimated earnings on incomplete contracts. These
sales contracts are typically long-term contracts to be performed over periods exceeding
twelve months. Approximately 58% and 54% of total inventories and contracts in
progress have been acquired or manufactured under such long-term contracts at
December 31, 2001 and 2000, a portion of which is not scheduled for delivery under
long-term contracts within the next twelve months.
Due to these factors inventory typically turns 5.20 times annually with an average of 69
days sales in inventory. This ratio is trending upward and inventory efficiency is slowly
eroding each year, from 66 days in 1999 to the current level of 69 days. These inventory
levels are also indicative of the large investment in property, plant & equipment. With
the number of manufacturing and distribution centers managed by UTC, the high level of
inventory should be no surprise. Again, warehouse/plant consolidation efforts and better
logistics would certainly help to improve the high carrying cost of inventory.
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Overall return on assets for UTC is impacted by factors other than accounts receivable
and inventory. Other assets play a significant role in the asset valuation at UTC.
In Millions of Dollars Except Per Share Data (Shares in Thousands) 2001 2000 1999
Assets
Cash and cash equivalents $ 1,558 $ 748 $ 957
Accounts Receivable (net for allowance of doubtful accts) 4093 4445 4337
Inventories and contracts in progress 3973 3756 3504
Future income tax benefits 1378 1439 1563
Other current assets 261 274 266
Total Current Assets 11,263 10,662 10,627
Customer financing assets 665 550 553
Future income tax benefits 1205 1065 873
Fixed assets 4549 4487 4460
Goodwill (net of accumulated amortization) 6802 6771 5641
Other assets 2485 1829 2212
Total Assets $ 26,969 $ 25,364 $ 24,366
I will defer my discussion of future tax benefits until the section on the income tax
structure of UTC. I will however discuss the impact of goodwill on the balance sheet.
Goodwill is an intangible asset; it represents such items that identify the company such as
company name, logo, reputation, credit rating, location, history of products and service.
These factors allow a business to prosper above competitors. From a balance sheet
perspective goodwill is booked upon the acquisition of a business. It does not represent
the value associated with the UTC name but the value of the companies acquired. From
a calculation perspective it represents the acquisition costs of the purchased company
over the fair market values of physical assets. Goodwill is amortized using the straight-
line method of amortization over periods ranging from 10 to 40 years. In July 1, 2001,
UTC adopted FASB 141&142, which impacted how goodwill would be amortized.
Goodwill represents 25% of UTC’s current assets and has decreased over the past 2
years.
Research and development costs also represent the intangible assets owned by the
corporation. UTC classifies R &D as costs not specifically covered by contracts and
those related to the Corporation-sponsored share of research and development activity in
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connection with cost-sharing arrangements are charged to expense as incurred. Over the
past two years Research & Development costs have declined from 1,320 to 1,254
(million). Reductions in R&D are a result of the corporations downsizing and focus on
cost reduction over the past year.
UTC has invested and owns 33% interest in International Aero Engines; an international
consortium organized to support and develops the V2500 commercial aircraft engine
project. As party to this development opportunity UTC shares in the financing
commitments of IAE. To meet this commitment UTC has invested 291 million into the
IAE business and receives costs and revenues equal to the 33% investment. Beyond this
ownership interest there are no corporate assets pledged to IAE.
The next area of review surrounds the liabilities of the corporation.
Stability Ratio
Debt to Equity 2.23 2.31 2.43
Debt Ratio 0.69 0.7 0.71
Times Interest Earned 7.82 11.61 32.76
Book Value 18.29 17.63 17.11
With the exception of long term debt, total liabilities have decreased over the past 3
years. The decrease in Payables, accrued liabilities and short term debt are responsible
for the decrease in the debt to equity ratio. Long term debt however, is a concern since
this is predictive of a firms liabilities and their ability to service the debt. This debt is
also apparent in the times interest earned ratios. As you can see in the calculations the
interest requirements coverage has decreased significantly over the past 3 years.
IN MILLIONS OF DOLLARS Weighted
Average
Interest Rate
Maturity 2001 2000
Notes and other debt denominated in:
U.S. dollars 6.8% 2002-2029 $3,890 $3,195
Foreign currency 10.7% 2002-2018 199 212
Capital lease obligations 8.2% 2002-2015 16 64
ESOP debt 7.7% 2002-2009 266 301
4,371 3,772
Less: Long-term debt currently due 134 296
$4,237 $3,476
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Over the past two years UTC issued a total of $14 million in additional notes. The
interest rate on the 2001 notes is 5.694% and the 2000 notes carry an interest rate of
7.125%. Proceeds from the debt issuances were used for general corporate purposes,
including repayment of commercial paper, financing a portion of the acquisition of
Specialty Equipment Companies and other acquisitions and repurchasing the
Corporation’s Common Stock. This debt is to be retired over the next five years under a
repayment scheduled. The general concern voiced by several analysts over the past year
is the rate of increased debt over generated sales and the ability to repay the debt without
degradation to Earnings Per Share. We will have to watch over the next few years to see
if market analysts concern was justified.
Because of the nature of the business, UTC like many other major corporations provides
for contingency of future events. There are four areas for which contingencies have been
established, leases, environmental issues, U.S. government contracts and warranty
contingencies.
UT C leases office space and purchases equipment under lease arrangements. At the end
of 2001 UTC accounted for rental commitments of $661 million, the majority under long-
term noncancelable operating leases. In addition rent expense was $204 million in 2001,
$194 million in 2000 and $194 million in 1999. In addition UTC has receivables and
other financing assets with commercial aerospace industry customers totaling $1,438
million and $1,614 million at December 31, 2001 and 2000. These assets are related to
commercial aerospace industry customers holding products under lease. Financing
commitments, in the form of secured debt, guarantees or lease financing, are provided to
commercial aerospace customers as well.. The Corporation also may also lease aircraft
and subsequently sublease the aircraft to customers under long-term noncancelable
operating leases. Lastly, the Corporation has residual value and other guarantees related
to various commercial aircraft engine customer financing arrangements. The estimated
fair market values of the guaranteed assets equal or exceed the value of the related
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guarantees, net of existing reserves.
As mentioned in the opening pages UTC operations are subject to environmental
regulation by federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. In order to meet potential
obligations UTC accrues for the estimated costs of environmental remediation activities
and periodically reassesses these amounts. In order to cover these obligations UTC has
insurance in force with a number of insurance companies and continues to pursue
litigation seeking indemnity and defense in relation to environmental liabilities. In
January 2002, UTC settled the last of these lawsuits for payments totaling approximately
$100 million. Accrued environmental liabilities are not reduced by potential insurance
reimbursements.
Because of the volume of business conducted with the U.S. Government, there are
specific contracting requirements that must be adhered to. Compliance to FAR and
DFAS requirements are continually monitored and regular audits are conducted. In order
to safeguard the corporation in the event of a loss, accruals have been established to cover
any potential action and charge backs by the government.
And finally, UTC extends performance and operating cost guarantees beyond its normal
warranty and service policies for extended periods on some of its products, particularly
commercial aircraft engines. Liability under such guarantees is contingent upon future
product performance and durability. In addition, the Corporation incurs discretionary
costs to service its products in connection with product performance issues. The
Corporation has accrued its estimated liability that may result under these guarantees and
for service costs which are probable and can be reasonably estimated.
Income tax has a large impact on any corporation, and UTC is no exceptions. And like
any other corporation, methods of revenue recognition, expense accruals and changes in
tax laws provide both a positive and negative impact on the tax situation of a company.
As reported on the Balance sheet UTC has outstanding tax benefits to apply against
future income taxes in the amount of $1,205. This benefit is a result of transactions
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which are reported in different accounting periods for tax and financial reporting
purposes. These temporary differences are defined below:
IN MILLIONS OF DOLLARS 2001 2000
Future income tax benefits:
Insurance and employee benefits $ 840 $ 685
Other asset basis differences 300 313
Other liability basis differences 1,219 1,332
Tax loss carryforwards 176 165
Tax credit carryforwards 228 217
Valuation allowance (180) (208)
$ 2,583 $ 2,504
Future income taxes payable:
Fixed assets $ 64 $ 67
Other items, net 130 81
$ 194 $ 148
As a result of these benefits and future income taxes payable the effective tax rate for
UTC has decreased between 2000 and 2001. The decrease is attributable to favorable
settlement of prior year tax audits. Without this settlement, the 2001 effective tax rate
was 30.0%. If you remember our earlier discussion about interest expense, UTC does
receive an income tax benefit from these high payments. Income tax is calculated on
income remaining after payment of Interest expense. I would not suggest however, that
carrying high interest payment costs is a solution to reducing annual income taxes.
The effective tax rate for 2000 increased significantly over 1999 due to two particular
items, a revaluation of taxes due to the enactment of Connecticut tax law changes and
benefits received for prior periods from an industry related court decision.
A large expense for many major corporations is for pension and postretirement plans.
UTC provides both domestic and foreign defined benefit pension and retirement plans.
2001 2000 1999
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Varying tax rates of consolidated
subsidiaries (including Foreign
Sales Corporation)
(6.2) (6.0) (7.5)
Goodwill 1.8 1.7 2.5
Enacted tax law changes — 1.9 (0.3)
Tax audit settlement (3.1) — —
Other (0.6) (1.7) (3.8)
Effective income tax rate 26.9% 30.9% 25.9%
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One major benefit of employment with a large corporation is the ability to earn a pension
and participate in employee savings plans. UTC provides tremendous opportunity here.
One major benefit offered by UTC is in relation to the educational benefits provide to its’
employees. UTC President George David has one aspiration, ―To have the best educated
workforce in the world‖. To achieve this goal, UTC provides 100% upfront payment for
degree seeking students. Each student is allowed upto 5 hours of paid time off to attend
school and upon graduation receives stock awards valued up to $10,000. Beside
educational benefits, an employee savings plan is offered in the form of a 401K plan.
Employee contributions are matched by UTC at 6% of the employee’s annual salary.
Pension Benefits Other
Postretirement Benefits IN MILLIONS OF DOLLARS 2001 2000 2001 2000
Change in Benefit
Obligation:
Beginning balance $ 12,232 $ 11,830 $ 1,175 $ 1,118
Service cost 250 238 15 13
Interest cost 869 839 85 82
Actuarial (gain) loss (239) 133 (152) 8
Total benefits paid (796) (830) (106) (100)
Net settlement and
curtailment loss (gain)
13 (6) 8 —
Acquisitions 3 84 — 39
Other 22 (56) 15 15
Ending balance $ 12,354 $ 12,232 $ 1,040 $ 1,175
Change in Plan Assets:
Beginning balance $ 13,119 $ 12,196 $ 76 $ 78
Actual return on plan assets (2,338) 1,669 (7) 4
Employer contributions 51 47 1 1
Benefits paid from plan assets (755) (798) (11) (11)
Acquisitions 1 52 — —
Other (53) (47) 3 4
Ending balance $ 10,025 $ 13,119 $ 62 $ 76
Funded status $ (2,329) $ 887 $ (978) $ (1,099)
Unrecognized net actuarial loss (gain) 2,173 (1,035) (138) (9)
Unrecognized prior
service cost
287 284 (105) (111)
Unrecognized net liability
at transition
7 6 18 —
Net amount recognized $ 138 $ 142 $ (1,203) $ (1,219)
Amounts Recognized in
the Consolidated
Balance Sheet
Consist of:
Prepaid benefit cost $ 492 $ 482 $ — $ —
Accrued benefit liability (1,534) (449) (1,203) (1,219)
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Intangible asset 286 37 — —
Accumulated other
non-shareowners’
changes in equity
894 72 — —
Net amount recognized $ 138 $ 142 $ (1,203) $ (1,219)
The last set of ratios we will review and interpret related to Shareholders value.
2001 2000 1999
Shareholders Profitability
EPS - Basic 4.06 3.78 3.22
EPS - Diluted 3.83 3.55 3.01
Price Earnings Ratio 15.92 20.80 37.36
Dividend Yield 1.39 1.05 1.17
2001 2000 1999
Wall Street analysts pay particular attention to reported earnings per share vs. projected
earnings per share. Any deviation will result in an offsetting revaluation of the corporate
position on Wall Street. UTC pays particular attention to the projections provided Wall
Street and has continued to undertake dramatic cost reductions to meet these projections.
One such cost reduction method employed in late 2001 was a mandatory salaried
employee furlough equaling one weeks pay. With 152,000 employees on payroll and
50% of these being salaried, projected savings exceeded $10Million for 2001. In
addition a hiring freeze was implemented for all of 2002 and raises were frozen. UTC is
hoping these stringent methods will result in higher profitability and increased earnings
per share for 2002. Early estimates given to Wall Street indicated levels exceeding 4.50
per share. In addition UTC recently affirmed their commitment to dividend return and
paid .98 per share. By reviewing the existing trends, it is obvious that these cost cutting
measures are needed. Over the past 3 years the PE ratio has declined over 50% while
earnings per share have increased. One important note which has been mentioned
several times already is the impact of September 11. Prior to September 11, UTX was
trading at over 76$ per share. Immediately after September 11, stock dropped to under
$40.00 per share. This decrease was felt by UTC’s competitors in the aerospace industry
also and is directly attributable to market conditions, not unique events within UTC itself.
The value of UTC stock has appreciated since September, 11. While not yet back to it’s
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level of trading before this horrible event, market confidence has returned and both
trading volume and price per share are on the rise.
2001 Quarters 2000 Quarters IN MILLIONS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS First Second Third Fourth First Second Third Fourth
Sales $6,597 $7,260 $6,734 $6,895 $6,307 $6,871 $6,339 $6,689
Gross margin 1,785 2,076 1,811 1,727 1,679 1,884 1,814 1,859
Income from continuing operations 440 588 565 345 377 509 496 426
Net income 440 588 565 345 377 509 496 426
Earnings per share of Common Stock:
Basic:
Continuing operations $ .92 $ 1.23 $ 1.19 $ .72 $ .78 $ 1.07 $ 1.04 $ .89
Net earnings $ .92 $ 1.23 $ 1.19 $ .72 $ .78 $ 1.07 $ 1.04 $ .89
Diluted:
Continuing operations $ .86 $ 1.16 $ 1.12 $ .69 $ .74 $ 1.00 $ .98 $ .84
Net earnings $ .86 $ 1.16 $ 1.12 $ .69 $ .74 $ 1.00 $ .98 $ .84
Comparative Stock Data
2001 2000
Common Stock High Low Dividend High Low Dividend
First quarter 82.08 67.00 $.225 65.25 48.06 $ .20
Second quarter 87.21 70.83 $.225 66.19 54.50 $ .20
Third quarter 76.56 41.64 $.225 71.50 56.69 $ .20
Fourth quarter 65.56 47.25 $.225 79.75 63.50 $.225
As we have seen UTC is a very complex and diverse corporation impacted by the
systematic risk of doing business. From my readings it appears that many of the
difficulties experienced by UTC can be associated with one business unit, Carrier. While
the entire industry suffers from lack of consumer confidence and the recession, it appears
that Carrier also suffers from poor leadership and the ability to successful integrate newly
acquired business into the corporate fold. Shortly after the events of September 11, and
as a result of waning shareholder confidence, Carrier President Jon Ayers was replaced
with Geraud Darneu. Major cost cutting efforts were put in place including corporate
restructuring activites and plant consolidation and closure. The market has responded
postitively to these changes and first quarter results were above forecast. Hopefully
these changes will last and the remaining business will resume former levels of growth
and profitability.
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BIBLIOGRAPHY (including web references)
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FIVE-YEAR SUMMARY
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 2001 2000 1999 1998 1997
For the year
Revenues $ 27,897 $ 26,583 $ 24,127 $ 22,809 $ 21,288
Research and development 1,254 1,302 1,292 1,168 1,069
Income from continuing operations 1,938 1,808 841 1,157 962
Net income 1,938 1,808 1,531 1,255 1,072
Earnings per share:
Basic:
Continuing operations 4.06 3.78 1.74 2.47 1.98
Net earnings 4.06 3.78 3.22 2.68 2.22
Diluted:
Continuing operations 3.83 3.55 1.65 2.33 1.89
Net earnings 3.83 3.55 3.01 2.53 2.10
Cash dividends per common share .90 .825 .76 .695 .62
Average number of shares of Common Stock outstanding:
Basic 470.2 470.1 465.6 455.5 468.9
Diluted 505.4 508.0 506.7 494.8 507.1
Return on average common shareowners’ equity, after tax 23.6% 24.4% 24.6% 28.6% 24.5%
Operating cash flows 2,885 2,503 2,310 2,314 1,903
Acquisitions, including debt assumed 525 1,340 6,268 1,237 605
Share repurchase 599 800 822 650 849
At year end
Working capital, continuing operations $ 2,892 $ 1,318 $ 1,412 $ 1,359 $ 1,712
Total assets 26,969 25,364 24,366 17,768 15,697
Long-term debt, including current portion 4,371 3,772 3,419 1,669 1,389
Total debt 4,959 4,811 4,321 2,173 1,567
Debt to total capitalization 37% 39% 38% 33% 28%
ESOP Preferred Stock, net 429 432 449 456 450
Shareowners’ equity 8,369 7,662 7,117 4,378 4,073
Number of employees - continuing operations 152,000 153,800 148,300 134,400 130,400
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Consolidated Balance Sheet
In Millions of Dollars Except Per Share Data (Shares in Thousands) 2001 2000 1999
Assets
Cash and cash equivalents $1,558 $748 $957 Accounts Receivable (net for allowance of doubtful accts) 4093 4445 4337
Inventories and contracts in progress 3973 3756 3504 Future income tax benefits 1378 1439 1563
Other current assets 261 274 266
Total Current Assets 11,263 10,662 10,627 Customer financing assets 665 550 553 Future income tax benefits 1205 1065 873
Fixed assets 4549 4487 4460 Goodwill (net of accumulated amortization) 6802 6771 5641
Other assets 2485 1829 2212
Total Assets $26,969 $25,364 $24,366
Liabilities and Shareholder's Equity
Short-term borrowing $588 $1,039 $902 Accounts Payable 2,156 2,261 1,957 Accrued Liabilities 5,493 5,748 6,023
Long-term debt currently due 134 296 333
Total Current Liabilities 8,371 9,344 9,215 Long-term debt 4,237 3,476 3,086
Future pension and post retirement benefit obligations 2,703 1,636 1,601 Future income tax payables 126
Other long-term liabilities 2,310 2,317 2,245 Commitments and contingent liabilities
Minority interests in subsidiary companies 550 497 527
Series A ESOP Convertible Preferred Stock, $ 1 par value Authorized-20,000 shares
Outstanding-11,307 and 11,642 shares 743 767 808 ESOP deferred compensation $(314.00) $(335.00) $(359.00)
429 432 449
Shareholders' Equity: Capital Stock:
Preferred Stock, $1 par value; Authorized-250,000 shares - - - - none issued or outstanding
Common Stock, $1 par value; Authorized-2,000,000 shares 5,090 4,665 4,227 603,076 and 597,213 and 588,737
TreasuryStock - 130,917 and 126,907 and 114,191 (4,404) (3,955) (3,182) common shares at cost
Retained Earnings 9,149 7,743 6,463 Accumulated other non-shareholder changes in equity:
Foreign currency translation (889) (747) (563) Minimum pension liability (563) (44) (41)
Other (14) - 213
(1,466) (791) (391)
Total Shareowner' Equity 8,369 7,662 7,117
Total Liabilities and Shareowners' Equity $26,969 $25,364 $24,366
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