NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at
September 30, 2013
and for the
quarters and nine months ended September 30, 2013 and 2012
are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The financial information included herein should be read in conjunction with the financial statements and notes in our Annual Report to Shareowners (
2012
Annual Report) incorporated by reference to our Annual Report on Form 10-K for calendar year
2012
(
2012
Form 10-K).
Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets
Business Acquisitions and Dispositions.
During the first nine months of 2013, our cash investment in business acquisitions was
$120 million
, and consisted of a number of small acquisitions, primarily in our commercial businesses.
On
May 17, 2013
, we completed the sale of the Pratt & Whitney Power Systems business to Mitsubishi Heavy Industries (MHI) and entered into a long-term engineering and manufacturing agreement with MHI. The sale generated a pre-tax gain of approximately
$193 million
(
$132 million
after tax). Cash received in connection with the sale was
$432 million
, excluding contingent consideration valued at approximately
$200 million
. Pratt & Whitney Power Systems has not been reclassified to Discontinued Operations due to our level of continuing involvement in the business post-sale.
On
February 7, 2013
, we completed the acquisition of Grupo Ascensores Enor, S.A. (Enor), a privately held company headquartered in Spain with operations in Spain and Portugal, which designs, manufactures, installs and services elevators. Enor's 2012 sales were approximately
$50 million
. Under the terms of the transaction, Zardoya Otis, S.A. (ZOSA), a non-wholly owned subsidiary of the Company, exchanged publicly traded shares of ZOSA with a fair value of approximately
$240 million
as of the transaction completion date for all of the shares of Enor.
On
July 26, 2012
, UTC acquired Goodrich Corporation (Goodrich), a global supplier of systems and services to the aerospace and defense industry with 2011 sales of
$8.1 billion
. Goodrich products include aircraft nacelles and interior, actuation, landing and electronic systems. Under the terms of the agreement, Goodrich shareholders received
$127.50
in cash for each share of Goodrich common stock they owned on July 26, 2012. This equated to a total enterprise value of
$18.3 billion
, including
$1.9 billion
in net debt assumed. The acquired Goodrich businesses were combined with the legacy Hamilton Sundstrand businesses to form the new UTC Aerospace Systems segment. The Goodrich acquisition and the formation of UTC Aerospace Systems provides increased scale, financial strength and complementary product offerings, allowing us to significantly strengthen our position in the aerospace and defense industry, create aftermarket efficiencies for our customers, accelerate our ability to drive innovation within the aerospace industry, and enhance our ability to support our customers with more integrated systems. This acquisition, coupled with our acquisition of an additional interest in IAE International Aero Engines AG (IAE), as discussed below, further advances UTC's strategy of focusing on our core businesses.
To finance the cash consideration for the Goodrich acquisition and pay related fees, expenses and other amounts due and payable, we utilized the previously disclosed net proceeds of approximately
$9.6 billion
from the
$9.8 billion
of long-term notes issued on
June 1, 2012
, the net proceeds of approximately
$1.1 billion
from the equity units issued on
June 18, 2012
,
$3.2 billion
from the issuance of commercial paper during July 2012, and
$2.0 billion
of proceeds borrowed under our
April 24, 2012
term loan credit agreement. For the remainder of the cash consideration, we utilized approximately
$0.5 billion
of cash and cash equivalents generated from operating activities.
Allocation of Consideration Transferred to Net Assets Acquired:
The following amounts represent the final determination as of July 26, 2012 of the fair value of identifiable assets acquired and liabilities assumed from the Goodrich acquisition, through completion of the one year measurement period from the date of acquisition as required by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, “Business Combinations” (ASC Topic 805). Measurement period adjustments were not significant and were not retroactively reclassified to prior periods.
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Cash and cash equivalents
|
$
|
538
|
|
|
Accounts receivable, net
|
1,205
|
|
|
Inventories and contracts in progress, net
|
1,673
|
|
|
Future income tax benefits, current
|
515
|
|
|
Other assets, current
|
647
|
|
|
Fixed assets
|
2,209
|
|
|
Intangible assets:
|
|
|
Customer relationships and related program assets
|
8,550
|
|
|
Trademarks
|
1,550
|
|
|
Other assets
|
1,501
|
|
|
Short-term borrowings
|
(84
|
)
|
|
Accounts payable
|
(587
|
)
|
|
Accrued liabilities
|
(1,919
|
)
|
|
Long-term debt
|
(2,961
|
)
|
|
Future pension and postretirement benefit obligations
|
(1,743
|
)
|
|
Other long-term liabilities:
|
|
|
Customer contractual obligations
|
(2,200
|
)
|
|
Other long-term liabilities
|
(4,013
|
)
|
|
Noncontrolling interest
|
(41
|
)
|
|
Total identifiable net assets
|
4,840
|
|
|
Goodwill
|
11,580
|
|
|
Total consideration transferred
|
$
|
16,420
|
|
In order to allocate the consideration transferred for Goodrich, the fair values of all identifiable assets and liabilities needed to be established. For accounting and financial reporting purposes, fair value is defined under FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (ASC Topic 820) as the price that would be received upon sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. Use of different estimates and judgments could yield different results.
In determining the fair value of identifiable assets acquired and liabilities assumed, a review was conducted for any significant contingent assets or liabilities existing as of the acquisition date. As of
September 30, 2013
, no significant contingencies related to existing legal or government action have been identified which existed as of the opening balance sheet date. Based upon our existing practices and phase II environmental assessments done on a number of Goodrich sites, we have determined that environmental liability obligations of
$325 million
were assumed in connection with the Goodrich acquisition.
The fair values of the customer relationships and related program intangible assets, which include the related aerospace program original equipment manufacturing (OEM) and aftermarket cash flows, were determined by using an “income approach” which is the most common valuation approach utilized. Under this approach, the net earnings attributable to the asset or liability being measured are isolated using the discounted projected net cash flows. These projected cash flows are isolated from the projected cash flows of the combined asset group over the remaining economic life of the intangible asset or liability being measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant net cash flows considered historical and projected pricing, remaining developmental effort, operational performance including company specific synergies, aftermarket retention, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where appropriate, the net cash flows are probability-adjusted to reflect the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future cash flows are then discounted to present value using an appropriate discount rate. The customer relationship and related program intangible assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of the underlying programs of 10 to 25 years.
We also identified customer contractual obligations on certain OEM development programs where the expected costs exceed the expected revenue under contract. We measured these liabilities under the measurement provisions of ASC Topic 820, which is based on the price to transfer the obligation to a market participant at the measurement date, assuming that the liability will remain outstanding in the marketplace. Based on the estimated net cash outflows of the OEM developmental programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, we recorded assumed liabilities of approximately
$2.2 billion
. These liabilities will be liquidated in accordance with the underlying economic pattern of obligations, as reflected by the net cash outflows incurred on the OEM developmental programs. Total consumption of the contractual obligation for the
quarter and nine months ended September 30, 2013
was approximately
$60 million
and
$210 million
, respectively. Total consumption of the contractual obligation is expected to be as follows:
$70 million
remaining in 2013,
$274 million
in 2014,
$213 million
in 2015,
$242 million
in 2016,
$233 million
in 2017 and
$894 million
thereafter.
Goodrich had not recorded an income tax liability on the unremitted earnings of its non-U.S. subsidiaries, which were approximately
$853 million
as of December 31, 2011. In connection with the Goodrich acquisition, UTC made a determination to repatriate certain of these unremitted earnings, making such amounts subject to both U.S. and non-U.S. income taxes. Accordingly, an income tax liability of
$215 million
was recorded in purchase accounting for the unremitted earnings no longer considered permanently reinvested.
In 2010, Pratt & Whitney entered into a preferred supplier contract with Goodrich for the development and subsequent production of nacelles for the PW1500G (Bombardier C Series) and PW1200G (Mitsubishi Regional Jet). That preferred supplier contract replaced previous contracts and preliminary Memorandum of Understandings entered into in 2006 and 2008. Under the 2010 agreement, Pratt & Whitney agreed to fund Goodrich's non-recurring development effort and established a recurring price for the production nacelles. Prior to the date of the Goodrich acquisition, Pratt & Whitney and Goodrich had asserted claims against each other in a contractual dispute and would have ultimately arbitrated the matter were it not for the acquisition. In accordance with ASC Topic 805, pre-existing relationships must be effectively settled at acquisition as the relationships become intercompany relationships upon acquisition and are eliminated in the post-combination financial statements. Any resulting settlement gains or losses should be measured at fair value and recorded on the acquisition date. Accordingly, a
$46 million
gain was recorded in other income by Pratt & Whitney in the quarter ended September 30, 2012 based upon a third party determination of the probability-weighted outcome had the matter gone to arbitration. No additional gain or loss was recorded in connection with the settlement of these pre-existing relationships as we determined that the terms of these two contracts were consistent with other similar market transactions at the time of our acquisition of Goodrich.
Under Goodrich's pre-existing management continuity arrangements (MCAs), we assumed change-in-control obligations related to certain executives at Goodrich. We evaluated the change-in-control provisions governed by the MCAs and for certain of the executives, we determined that we had assumed liabilities of approximately
$74 million
as the benefit payments were effectively single trigger arrangements in substance. We measured the assumed liability based on fair value concepts of ASC Topic 820, using weighted average techniques of possible outcomes of the employees electing to receive such benefits. We expensed approximately
$12 million
in the quarter ended September 30, 2012 for MCAs where we amended the term of the MCAs beyond the original expiration date for certain executives. We incurred expense of approximately
$9 million
in connection with MCA payments made during the quarter ended June 30, 2013.
Supplemental Pro-Forma Data:
Goodrich's results of operations have been included in UTC's financial statements for the periods subsequent to the completion of the acquisition on July 26, 2012. The following unaudited supplemental pro-forma data for the quarter and nine months ended September 30, 2012 presents consolidated information as if the acquisition had been completed on January 1, 2011. There were no significant pro-forma adjustments required for the quarter and nine months ended September 30, 2013. The pro-forma results were calculated by combining the results of UTC with the stand-alone results of Goodrich for the pre-acquisition periods, which were adjusted to account for certain costs which would have been incurred during this pre-acquisition period:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, except per share amounts)
|
Quarter Ended September 30, 2012
|
|
Nine Months Ended September 30, 2012
|
|
Net sales
|
$
|
15,512
|
|
|
$
|
45,730
|
|
|
Net income attributable to common shareowners from continuing operations
|
1,315
|
|
|
4,145
|
|
|
Basic earnings per share of common stock from continuing operations
|
1.47
|
|
|
4.63
|
|
|
Diluted earnings per share of common stock from continuing operations
|
1.45
|
|
|
4.57
|
|
The unaudited supplemental pro-forma data above includes the following significant adjustments made to account for certain costs which would have been incurred if the acquisition had been completed on January 1, 2011, as adjusted for the applicable tax impact:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Quarter Ended September 30, 2012
|
|
Nine Months Ended September 30, 2012
|
|
Amortization of inventory fair value adjustment
1
|
$
|
(49
|
)
|
|
$
|
(49
|
)
|
|
Amortization of acquired Goodrich intangible assets, net
2
|
15
|
|
|
107
|
|
|
Utilization of contractual customer obligation
3
|
(10
|
)
|
|
(103
|
)
|
|
Interest expense incurred on acquisition financing, net
4
|
(3
|
)
|
|
63
|
|
1 Removed the expense for the amortization of inventory fair value adjustments recognized in the quarter ended September 30, 2012, as the corresponding inventory would have been completely sold during the first two quarters of 2011.
2 Added the additional amortization of the acquired Goodrich intangible assets recognized at fair value in purchase accounting and eliminated the historical Goodrich intangible asset amortization expense.
3 Added the additional utilization of the Goodrich contractual customer obligation recognized in purchase accounting.
4 Added the additional interest expense for the indebtedness we incurred to finance the acquisition of Goodrich and reduced interest expense for the debt fair value adjustment which would have been amortized.
The unaudited supplemental pro-forma financial information does not reflect the potential realization of cost savings relating to the integration of the two companies. Further, the pro-forma data should not be considered indicative of the results that would have occurred if the acquisition and related financing had been consummated on January 1, 2011, nor are they indicative of future results.
In connection with regulatory approval of UTC's acquisition of Goodrich, regulatory authorities required UTC to dispose of the Goodrich electric power systems and the Goodrich pumps and engine controls businesses. Pursuant to regulatory obligations, these businesses had been held separately from UTC's and Goodrich's ongoing businesses since the acquisition of Goodrich by UTC. On March 18, 2013, we completed the sale of the Goodrich pumps and engine controls business to Triumph Group, Inc., and on March 26, 2013, we completed the sale of the Goodrich electric power systems business to Safran S.A. Combined proceeds from the sales of the two businesses were approximately
$600 million
.
In 2012, the UTC Board of Directors approved plans for the divestiture of a number of non-core businesses. Cash generated from these divestitures was used to repay debt incurred to finance the acquisition of Goodrich. See Note 2 for further discussion.
On
June 29, 2012
, Pratt & Whitney, Rolls Royce plc (Rolls-Royce), MTU Aero Engines AG (MTU), and Japanese Aero Engines Corporation (JAEC), participants in the IAE collaboration, completed a restructuring of their interests in IAE. Under the terms of the agreement, Rolls-Royce sold its ownership and collaboration interests in IAE to Pratt & Whitney, while also entering into an agreement to license its V2500 intellectual property to Pratt & Whitney. In exchange for the increased ownership and collaboration interests and intellectual property license, Pratt & Whitney paid Rolls-Royce
$1.5 billion
at closing with additional payments due to Rolls-Royce during the fifteen year period following closing of the purchase,
conditional upon each hour flown by V2500-powered aircraft in service at the closing. Payments made to Rolls-Royce under this agreement are capitalized as collaboration intangible assets, as further discussed below. In October 2011, Pratt & Whitney and Rolls-Royce announced their intention to form a new partnership to develop an engine to power future mid-sized aircraft. In September 2013, following further discussion and because of the current regulatory environment, the parties agreed not to proceed with this partnership. As a result of this decision, an additional collaboration intangible asset payment was made to Rolls-Royce in accordance with the underlying agreement.
The collaboration interest and intellectual property licenses are reflected as intangible assets and will be amortized in relation to the economic benefits received over the remaining estimated 30 year life of the V2500 program. As a result of these transactions, Pratt & Whitney holds a
61%
net interest in the collaboration and a
49.5%
ownership interest in IAE. IAE’s business purpose is to coordinate the design, development, manufacturing and product support of the V2500 program through involvement with the collaborators. IAE retains limited equity with the primary economics of the V2500 program passed to the participants in the separate collaboration arrangement. As such, we have determined that IAE is a variable interest entity, and Pratt & Whitney its primary beneficiary under the criteria established in the FASB ASC Topic 810 “Consolidations” and has, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for IAE in our Consolidated Balance Sheet as of
September 30, 2013
are as follows:
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Current assets
|
$
|
1,636
|
|
|
Noncurrent assets
|
1,023
|
|
|
Total assets
|
$
|
2,659
|
|
|
|
|
|
Current liabilities
|
$
|
1,821
|
|
|
Noncurrent liabilities
|
1,067
|
|
|
Total liabilities
|
$
|
2,888
|
|
Goodwill.
Changes in our goodwill balances for the
nine months ended September 30, 2013
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Balance as of
January 1, 2013
|
|
Goodwill
resulting from business combinations
|
|
Foreign currency translation and other
|
|
Balance as of
September 30, 2013
|
|
Otis
|
$
|
1,583
|
|
|
$
|
139
|
|
|
$
|
(7
|
)
|
|
$
|
1,715
|
|
|
UTC Climate, Controls & Security
|
9,868
|
|
|
2
|
|
|
(149
|
)
|
|
9,721
|
|
|
Pratt & Whitney
|
1,238
|
|
|
—
|
|
|
35
|
|
|
1,273
|
|
|
UTC Aerospace Systems
|
14,754
|
|
|
301
|
|
|
(20
|
)
|
|
15,035
|
|
|
Sikorsky
|
353
|
|
|
—
|
|
|
(1
|
)
|
|
352
|
|
|
Total Segments
|
27,796
|
|
|
442
|
|
|
(142
|
)
|
|
28,096
|
|
|
Eliminations and other
|
5
|
|
|
—
|
|
|
(1
|
)
|
|
4
|
|
|
Total
|
$
|
27,801
|
|
|
$
|
442
|
|
|
$
|
(143
|
)
|
|
$
|
28,100
|
|
Intangible Assets.
Identifiable intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
|
(Dollars in millions)
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Amortized:
|
|
|
|
|
|
|
|
|
Service portfolios
|
$
|
2,235
|
|
|
$
|
(1,272
|
)
|
|
$
|
2,127
|
|
|
$
|
(1,202
|
)
|
|
Patents and trademarks
|
382
|
|
|
(178
|
)
|
|
412
|
|
|
(167
|
)
|
|
IAE collaboration
|
2,093
|
|
|
—
|
|
|
1,526
|
|
|
—
|
|
|
Customer relationships and other
|
12,025
|
|
|
(2,064
|
)
|
|
11,901
|
|
|
(1,718
|
)
|
|
|
16,735
|
|
|
(3,514
|
)
|
|
15,966
|
|
|
(3,087
|
)
|
|
Unamortized:
|
|
|
|
|
|
|
|
|
Trademarks and other
|
2,274
|
|
|
—
|
|
|
2,310
|
|
|
—
|
|
|
Total
|
$
|
19,009
|
|
|
$
|
(3,514
|
)
|
|
$
|
18,276
|
|
|
$
|
(3,087
|
)
|
The customer relationships intangible assets include payments made to our customers to secure certain contractual rights and are being amortized on a straight-line basis, as it approximates the underlying economic pattern of benefits. In accordance with the FASB ASC Topic 605, “Customer Payments and Incentives,” we classify amortization of such payments as a reduction of sales. The IAE collaboration intangible asset is being amortized based upon the economic pattern of benefits as represented by the underlying cash flows. As these cash flows have been negative to date, no amortization has yet been recorded. Amortization of intangible assets for the
quarter and nine months ended September 30, 2013
was
$180 million
and
$531 million
respectively, compared with
$166 million
and
$360 million
for the same periods of
2012
. The following is the expected amortization of intangible assets for the years
2013
through
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Remaining 2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
Amortization expense
|
|
$
|
171
|
|
|
$
|
681
|
|
|
$
|
645
|
|
|
$
|
626
|
|
|
$
|
619
|
|
|
$
|
648
|
|
Note 2: Discontinued Operations
In 2012, the UTC Board of Directors approved plans for the divestiture of a number of non-core businesses, which were completed with the sale of Pratt & Whitney Rocketdyne (Rocketdyne) on June 14, 2013, as discussed below. Cash generated from these divestitures was used to repay debt incurred to finance the Goodrich acquisition.
The sale of substantially all operations of Rocketdyne to GenCorp Inc. generated a pre-tax loss of approximately
$7 million
(
$3 million
after tax) through September 30, 2013, which has been included in discontinued operations in the Condensed Consolidated Statement of Comprehensive Income. During the nine months ended September 30, 2012, we recorded pre-tax goodwill impairment charges of approximately
$360 million
(
$220 million
after tax) related to Rocketdyne.
On February 12, 2013, we completed the disposition of UTC Power to ClearEdge Power. The disposition resulted in payments by UTC totaling
$48 million
, which included capitalization of the business prior to the sale and interim funding of operations as the buyer took control of a loss generating business. We have no continuing involvement with the UTC Power business post disposition.
The legacy Hamilton Sundstrand Industrial businesses, as well as Clipper Windpower (Clipper), Rocketdyne and UTC Power all met the "held-for-sale" criteria in 2012. The results of operations, including the net realized gains and losses on disposition, and the related cash flows which resulted from these non-core businesses, have been reclassified to Discontinued Operations in our Condensed Consolidated Statements of Comprehensive Income and Cash Flows. The dispositions of Clipper and the legacy Hamilton Sundstrand Industrial businesses were completed in 2012.
The following summarized financial information for our discontinued operations businesses has been segregated from continuing operations and reported as Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
522
|
|
|
$
|
309
|
|
|
$
|
1,607
|
|
|
Income (loss) from operations
|
$
|
—
|
|
|
$
|
91
|
|
|
$
|
63
|
|
|
$
|
(1,017
|
)
|
|
Income tax expense
|
—
|
|
|
(30
|
)
|
|
(32
|
)
|
|
(38
|
)
|
|
Income (loss) from operations, net of income taxes
|
—
|
|
|
61
|
|
|
31
|
|
|
(1,055
|
)
|
|
Gain (loss) on disposal
|
10
|
|
|
(26
|
)
|
|
(30
|
)
|
|
(62
|
)
|
|
Income tax benefit
|
7
|
|
|
135
|
|
|
20
|
|
|
294
|
|
|
Net income (loss) on discontinued operations
|
$
|
17
|
|
|
$
|
170
|
|
|
$
|
21
|
|
|
$
|
(823
|
)
|
Income (loss) from operations of discontinued operations for the nine months ended
September 30, 2012
includes pre-tax impairment charges of approximately
$1,135 million
. There were no impairment charges for the quarter ended
September 30, 2012
. These amounts were previously included in loss on disposal of discontinued operations and have been reclassified for consistency of presentation.
Note 3: Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(Dollars in millions, except per share amounts; shares in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Net income attributable to common shareowners:
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
1,415
|
|
|
$
|
1,247
|
|
|
$
|
4,237
|
|
|
$
|
3,902
|
|
|
Net income (loss) from discontinued operations
|
17
|
|
|
168
|
|
|
21
|
|
|
(829
|
)
|
|
Net income attributable to common shareowners
|
$
|
1,432
|
|
|
$
|
1,415
|
|
|
$
|
4,258
|
|
|
$
|
3,073
|
|
|
Basic weighted average number of shares outstanding
|
900.8
|
|
|
896.3
|
|
|
900.9
|
|
|
893.6
|
|
|
Stock awards and equity units
|
14.7
|
|
|
10.9
|
|
|
13.2
|
|
|
11.7
|
|
|
Diluted weighted average number of shares outstanding
|
915.5
|
|
|
907.2
|
|
|
914.1
|
|
|
905.3
|
|
|
Earnings (Loss) Per Share of Common Stock - Basic:
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
1.57
|
|
|
$
|
1.39
|
|
|
$
|
4.70
|
|
|
$
|
4.37
|
|
|
Net income (loss) from discontinued operations
|
0.02
|
|
|
0.19
|
|
|
0.02
|
|
|
(0.93
|
)
|
|
Net income attributable to common shareowners
|
1.59
|
|
|
1.58
|
|
|
4.73
|
|
|
3.44
|
|
|
Earnings (Loss) Per Share of Common Stock - Diluted:
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
1.55
|
|
|
$
|
1.37
|
|
|
$
|
4.64
|
|
|
$
|
4.31
|
|
|
Net income (loss) from discontinued operations
|
0.02
|
|
|
0.19
|
|
|
0.02
|
|
|
(0.92
|
)
|
|
Net income attributable to common shareowners
|
1.57
|
|
|
1.56
|
|
|
4.66
|
|
|
3.39
|
|
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period. These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would be anti-dilutive. For the quarter and nine months ended
September 30, 2013
there were no anti-dilutive stock awards excluded from the computation. For the quarter and nine months ended September 30,
2012
, the number of stock awards excluded from the computation was 6.1 million and 4.8 million, respectively. The dilutive impact of our equity units issued in 2012 was not significant for the quarter and nine months ended September 30, 2013. There was no impact on diluted earnings per share due to equity units for the quarter and nine months ended September 30, 2012.
Note 4: Inventories and Contracts in Progress
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
September 30,
2013
|
|
December 31,
2012
|
|
Raw materials
|
$
|
1,967
|
|
|
$
|
1,861
|
|
|
Work-in-process
|
4,864
|
|
|
4,151
|
|
|
Finished goods
|
3,556
|
|
|
3,205
|
|
|
Contracts in progress
|
8,038
|
|
|
7,354
|
|
|
|
18,425
|
|
|
16,571
|
|
|
Less:
|
|
|
|
|
Progress payments, secured by lien, on U.S. Government contracts
|
(379
|
)
|
|
(274
|
)
|
|
Billings on contracts in progress
|
(7,281
|
)
|
|
(6,760
|
)
|
|
|
$
|
10,765
|
|
|
$
|
9,537
|
|
As of
September 30, 2013
and
December 31, 2012
, inventories include capitalized contract development costs of
$866 million
and
$823 million
, respectively, related to certain aerospace programs. These capitalized costs are liquidated as production units are delivered to the customer. The capitalized contract development costs within inventories principally relate to costs capitalized on Sikorsky’s CH-148 contract with the Canadian Government. The CH-148 is a derivative of the H-92, a military variant of the S-92 helicopter.
Note 5: Borrowings and Lines of Credit
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
September 30,
2013
|
|
December 31,
2012
|
|
Commercial paper
|
$
|
100
|
|
|
$
|
320
|
|
|
Other borrowings
|
203
|
|
|
183
|
|
|
Total short-term borrowings
|
$
|
303
|
|
|
$
|
503
|
|
At
September 30, 2013
, we had revolving credit agreements with various banks permitting aggregate borrowings of up to
$4 billion
pursuant to a
$2 billion
revolving credit agreement and a
$2 billion
multicurrency revolving credit agreement, both of which expire in
November 2016
. As of
September 30, 2013
, there were no borrowings under either of these revolving credit agreements. The undrawn portions of these revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of
September 30, 2013
, our maximum commercial paper borrowing authority as set by our Board of Directors was
$4 billion
. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, debt refinancing, and repurchases of our common stock.
On
May 7, 2013
, we commenced cash tender offers for two series of outstanding notes issued by Goodrich and the UTC 1.200% Senior Notes. A total of
$874 million
principal amount of all notes subject to the tender offers, and
$36 million
of the fair value adjustment related to the notes assumed in the Goodrich acquisition, were repaid, including approximately
$103 million
principal amount of the 2016 Goodrich 6.290% notes, approximately
$98 million
principal amount of the 2019 Goodrich 6.125% notes, and approximately
$674 million
principal amount of the 2015 UTC 1.200% Senior Notes. An extinguishment loss of approximately
$18 million
was recognized within Interest expense, net in the accompanying Condensed Consolidated Statements of Comprehensive Income.
On
June 24, 2013
, we redeemed all remaining outstanding 2015 UTC 1.200% Senior Notes, representing
$327 million
in aggregate principal, under our redemption notice issued on
May 24, 2013
. An extinguishment loss of approximately
$6 million
was recognized within Interest expense, net in the accompanying Condensed Consolidated Statements of Comprehensive Income.
On
August 23, 2013
, we redeemed all remaining outstanding 2019 Goodrich 6.125% notes, representing
$202 million
in aggregate principal, under our redemption notice issued on
July 24, 2013
. On
September 27, 2013
, we redeemed all remaining outstanding 2021 Goodrich 3.600% notes, representing
$294 million
in aggregate principal, under our redemption notice issued on
August 28, 2013
. A combined extinguishment gain of approximately
$1 million
was recognized within Interest expense, net in the accompanying Condensed Consolidated Statements of Comprehensive Income.
As previously disclosed, on
December 6, 2012
, we announced that we had commenced cash tender offers for six series of outstanding notes issued by Goodrich. These offers expired on
January 7, 2013
. Approximately
$637 million
in aggregate principal amount of notes subject to the tender offers and
$126 million
of the fair value adjustment were repaid, with
$635 million
in aggregate principal amount being eligible for the early tender premium and approximately
$2 million
in aggregate principal amount being paid on
January 8, 2013
. An extinguishment loss of approximately
$26 million
was recognized during 2012 within Interest expense, net in the accompanying Condensed Consolidated Statements of Comprehensive Income.
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
September 30,
2013
|
|
December 31,
2012
|
|
LIBOR
§
plus 0.270% floating rate notes due 2013
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
LIBOR
§
plus 0.500% floating rate notes due 2015
|
500
|
|
|
500
|
|
|
1.200% notes due 2015*
|
—
|
|
|
1,000
|
|
|
4.875% notes due 2015*
|
1,200
|
|
|
1,200
|
|
|
6.290% notes due 2016
‡
|
188
|
|
|
291
|
|
|
5.375% notes due 2017*
|
1,000
|
|
|
1,000
|
|
|
1.800% notes due 2017*
|
1,500
|
|
|
1,500
|
|
|
6.800% notes due 2018
‡
|
99
|
|
|
99
|
|
|
6.125% notes due 2019
‡
|
—
|
|
|
300
|
|
|
6.125% notes due 2019*
|
1,250
|
|
|
1,250
|
|
|
8.875% notes due 2019
|
272
|
|
|
272
|
|
|
4.500% notes due 2020*
|
1,250
|
|
|
1,250
|
|
|
4.875% notes due 2020
‡
|
171
|
|
|
171
|
|
|
3.600% notes due 2021
‡
|
—
|
|
|
295
|
|
|
8.750% notes due 2021
|
250
|
|
|
250
|
|
|
3.100% notes due 2022*
|
2,300
|
|
|
2,300
|
|
|
1.550% junior subordinated notes due 2022
†
|
1,100
|
|
|
1,100
|
|
|
7.100% notes due 2027
‡
|
141
|
|
|
141
|
|
|
6.700% notes due 2028
|
400
|
|
|
400
|
|
|
7.500% notes due 2029*
|
550
|
|
|
550
|
|
|
5.400% notes due 2035*
|
600
|
|
|
600
|
|
|
6.050% notes due 2036*
|
600
|
|
|
600
|
|
|
6.800% notes due 2036
‡
|
134
|
|
|
134
|
|
|
7.000% notes due 2038
‡
|
159
|
|
|
159
|
|
|
6.125% notes due 2038*
|
1,000
|
|
|
1,000
|
|
|
5.700% notes due 2040*
|
1,000
|
|
|
1,000
|
|
|
4.500% notes due 2042*
|
3,500
|
|
|
3,500
|
|
|
Project financing obligations
|
69
|
|
|
100
|
|
|
Other (including capitalized leases and discounts)
‡
|
438
|
|
|
403
|
|
|
Total principal long-term debt
|
20,671
|
|
|
22,365
|
|
|
Other (fair market value adjustment)
‡
|
214
|
|
|
353
|
|
|
Total long-term debt
|
20,885
|
|
|
22,718
|
|
|
Less: current portion
|
1,100
|
|
|
1,121
|
|
|
Long-term debt, net of current portion
|
$
|
19,785
|
|
|
$
|
21,597
|
|
|
|
|
|
*
|
We may redeem the above notes, in whole or in part, at our option at any time at a redemption price in U.S. Dollars equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semiannual basis at the adjusted treasury rate plus 10-50 basis points. The redemption price will also include interest accrued to the date of redemption on the principal balance of the notes being redeemed.
|
|
|
|
|
†
|
The junior subordinated notes are redeemable at our option, in whole or in part, on a date not earlier than August 1, 2017. The redemption price will be the principal amount, plus accrued and unpaid interest, if any, up to but excluding the redemption date. We may extend or eliminate the optional redemption date as part of a remarketing of the junior subordinated notes which could occur between April 29, 2015 and July 15, 2015 or between July 23, 2015 and July 29, 2015.
|
|
|
|
|
‡
|
Includes notes and remaining fair market value adjustments that were assumed as a part of the Goodrich acquisition on July 26, 2012.
|
|
|
|
|
§
|
The three-month LIBOR rate as of
September 30, 2013
was approximately
0.3%
.
|
We have an existing universal shelf registration statement filed with the Securities and Exchange Commission (SEC) for an indeterminate amount of equity and debt securities for future issuance, subject to our internal limitations on the amount of equity and debt to be issued under this shelf registration statement.
Note 6: Income Taxes
We conduct business globally and, as a result, UTC or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Belgium, Canada, China, France, Germany, Hong Kong, Italy, Japan, South Korea, Singapore, Spain, the United Kingdom and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2000.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest has also been recognized; interest accrued in relation to unrecognized tax benefits is recorded in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense.
It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change within a range of a net increase of
$45 million
to a net decrease of
$490 million
as a result of additional worldwide uncertain tax positions, the revaluation of current uncertain tax positions arising from developments in examinations, in appeals or in the courts, or the closure of tax statutes. A portion of this net change may impact the Company's income tax expense. Not included in the range are assessments made by the French Tax Authority of
€237 million
(approximately
$320 million
) related to the proposed disallowance of certain deductions claimed in France for tax years 2008 through 2011. This is a recurring issue and it is expected that similar challenges will be raised in subsequent tax years until the issue is resolved. Resolution discussions with the French Revenue Authority on this matter have been unsuccessful to date and UTC may be required to pursue the defense of the issue through litigation, which could be commenced as early as the fourth quarter of 2013. UTC intends to assert a vigorous defense and believes it should prevail on the issue. Accordingly, no accrual has been made for this matter. Also, not included in the range is
€204 million
(approximately
$275 million
) of tax benefits that we have claimed related to a 1998 German reorganization. A portion of these tax benefits was denied by the German Tax Office on July 5, 2012, as a result of the audit of tax years 1999 to 2000. On August 3, 2012, the Company filed suit in the German Tax Court and expects to litigate this case. In 2008 the German Federal Tax Court denied benefits to another taxpayer in a case involving a German tax law relevant to our reorganization. The determination of the German Federal Tax Court on this other matter was appealed to the European Court of Justice (ECJ) to determine if the underlying German tax law is violative of European Union (EU) principles. On September 17, 2009 the ECJ issued an opinion in this case that is generally favorable to the other taxpayer and referred the case back to the German Federal Tax Court for further consideration of certain related issues. In May 2010, the German Federal Tax Court released its decision, in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development. After consideration of the ECJ decision and the latest German Federal Tax Court decision, we continue to believe that it is more likely than not that the relevant German tax law is violative of EU principles and we have not accrued tax expense for this matter. As we continue to monitor developments related to this matter, it may become necessary for us to accrue tax expense and related interest.
UTC tax years 2006 through 2008 are currently before the Appeals Division of the IRS (IRS Appeals) for resolution discussions regarding certain proposed adjustments with which UTC does not agree. Such resolution discussions are currently expected to continue into 2014 and be completed within the next 12 months. Tax years 2009 and 2010 are under review by the Examination Division of the IRS (IRS Examination), which is expected to continue into 2014 and be completed within the next 12 months.
The Company is currently engaged in litigation regarding the proper timing of certain deductions taken by Goodrich in its tax years 2001 and 2002, prior to its acquisition by UTC, which could be settled as early as the fourth quarter of 2013. UTC believes that this matter is adequately reserved and it is not expected that any potential settlement would have a material adverse impact on financial results. The Company is also engaged in litigation with respect to a separate issue involving the proper timing of deductions taken by Goodrich Corporation in its tax years 2005 and 2006, prior to its acquisition by UTC, which is expected to continue into 2014. This is a recurring issue and it is expected that the IRS will continue to challenge it in
subsequent tax years, potentially including post-acquisition years, until the issue is resolved. Goodrich pre-acquisition tax years 2007 through 2010 are currently before IRS Appeals for resolution discussions regarding certain disputed proposed adjustments, including the recurring timing issue described above. These resolution discussions are expected to continue into 2014.
Note 7: Employee Benefit Plans
Pension and Postretirement Plans.
We sponsor both funded and unfunded domestic and foreign defined pension and other postretirement benefit plans, and defined contribution plans. As part of our acquisition of Goodrich on July 26, 2012, we assumed approximately
$1.5 billion
of pension and postretirement benefit plan obligations. Contributions to our plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Defined Benefit Plans
|
$
|
21
|
|
|
$
|
209
|
|
|
$
|
72
|
|
|
$
|
233
|
|
|
Defined Contribution Plans
|
$
|
75
|
|
|
$
|
65
|
|
|
$
|
258
|
|
|
$
|
183
|
|
There were
no
contributions to our domestic defined benefit pension plans in the first nine months of 2013. In the first nine months of 2012, we made contributions of
$201 million
to our domestic defined benefit pension plans, all of which was contributed in the third quarter of 2012.
The following tables illustrate the components of net periodic benefit cost for our defined pension and other postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
Quarter Ended
September 30,
|
|
Other Postretirement Benefits
Quarter Ended
September 30,
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Service cost
|
$
|
142
|
|
|
$
|
131
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
Interest cost
|
343
|
|
|
344
|
|
|
9
|
|
|
10
|
|
|
Expected return on plan assets
|
(526
|
)
|
|
(503
|
)
|
|
—
|
|
|
—
|
|
|
Amortization
|
(8
|
)
|
|
(7
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
Recognized actuarial net loss (gain)
|
237
|
|
|
180
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Net settlement and curtailment loss
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
Total net periodic benefit cost
|
$
|
188
|
|
|
$
|
160
|
|
|
$
|
7
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
Nine Months Ended
September 30,
|
|
Other Postretirement Benefits
Nine Months Ended
September 30,
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Service cost
|
$
|
428
|
|
|
$
|
361
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Interest cost
|
1,029
|
|
|
970
|
|
|
28
|
|
|
26
|
|
|
Expected return on plan assets
|
(1,579
|
)
|
|
(1,415
|
)
|
|
—
|
|
|
—
|
|
|
Amortization
|
(26
|
)
|
|
(13
|
)
|
|
(8
|
)
|
|
(2
|
)
|
|
Recognized actuarial net loss (gain)
|
717
|
|
|
541
|
|
|
(3
|
)
|
|
(5
|
)
|
|
Net settlement and curtailment (gain) loss
|
(17
|
)
|
|
50
|
|
|
—
|
|
|
—
|
|
|
Total net periodic benefit cost
|
$
|
552
|
|
|
$
|
494
|
|
|
$
|
20
|
|
|
$
|
22
|
|
Net settlements and curtailment gains for pension benefits include curtailment gains of approximately
$24 million
related to, and recorded in, discontinued operations for the nine months ended September 30, 2013. There were
no
curtailment gains related to discontinued operations for the quarter ended September 30, 2013. Net settlements and curtailment losses for pension benefits include curtailment losses of approximately
$24 million
related to, and recorded in, discontinued operations for the nine months ended September 30, 2012. There were no curtailment losses related to discontinued operations for the quarter ended September 30, 2012.
Note 8: Restructuring Costs
During the
nine months ended September 30, 2013
, we recorded net pre-tax restructuring costs totaling
$343 million
for new and ongoing restructuring actions as follows:
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Otis
|
$
|
68
|
|
|
UTC Climate, Controls & Security
|
66
|
|
|
Pratt & Whitney
|
122
|
|
|
UTC Aerospace Systems
|
65
|
|
|
Sikorsky
|
25
|
|
|
Eliminations and other
|
(1
|
)
|
|
Restructuring costs recorded within continuing operations
|
345
|
|
|
Restructuring costs recorded within discontinued operations
|
(2
|
)
|
|
Total
|
$
|
343
|
|
The net costs included
$145 million
recorded in cost of sales,
$199 million
in selling, general and administrative expenses,
$1 million
in other income, net, and
($2) million
in discontinued operations. As described below, these costs primarily relate to actions initiated during
2013
and
2012
.
2013 Actions
.
During the
nine months ended September 30, 2013
, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We recorded net pre-tax restructuring costs totaling
$298 million
, including
$100 million
in cost of sales and
$198 million
in selling, general and administrative expenses.
We expect the actions initiated in the
nine months ended September 30, 2013
to result in net workforce reductions of
approximately 3,600 hourly and salaried employees
, the exiting of
approximately 600 thousand net square feet
of facilities and the disposal of assets associated with exited facilities.
As of September 30, 2013
, we have completed net workforce reductions of
approximately 2,400 employees
and have exited
approximately 5,000 net square feet
. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during
2013
and
2014
. No specific plans for significant other actions have been finalized at this time.
The following table summarizes the accrual balances and utilization by cost type for the
2013
restructuring actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Severance
|
|
Asset
Write-Downs
|
|
Facility Exit,
Lease
Termination and
Other Costs
|
|
Total
|
|
Restructuring accruals at July 1, 2013
|
|
$
|
153
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
160
|
|
|
Net pre-tax restructuring costs
|
|
89
|
|
|
1
|
|
|
6
|
|
|
96
|
|
|
Utilization and foreign exchange
|
|
(108
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(111
|
)
|
|
Balance at September 30, 2013
|
|
$
|
134
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
145
|
|
The following table summarizes expected, incurred and remaining costs for the
2013
restructuring actions by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Severance
|
|
Asset
Write-Downs
|
|
Facility Exit,
Lease
Termination and
Other Costs
|
|
Total
|
|
Expected costs
|
|
$
|
287
|
|
|
$
|
13
|
|
|
$
|
41
|
|
|
$
|
341
|
|
|
Costs incurred - quarter ended March 31, 2013
|
|
(19
|
)
|
|
—
|
|
|
(1
|
)
|
|
(20
|
)
|
|
Costs incurred - quarter ended June 30, 2013
|
|
(163
|
)
|
|
(12
|
)
|
|
(7
|
)
|
|
(182
|
)
|
|
Costs incurred - quarter ended September 30, 2013
|
|
(89
|
)
|
|
(1
|
)
|
|
(6
|
)
|
|
(96
|
)
|
|
Balance at September 30, 2013
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
43
|
|
The following table summarizes expected, incurred and remaining costs for the
2013
restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Expected
Costs
|
|
Costs incurred Quarter ended
March 31, 2013
|
|
Costs incurred Quarter ended June 30, 2013
|
|
Costs incurred Quarter ended September 30, 2013
|
|
Remaining Costs at September 30, 2013
|
|
Otis
|
$
|
61
|
|
|
$
|
(6
|
)
|
|
$
|
(35
|
)
|
|
$
|
(12
|
)
|
|
$
|
8
|
|
|
UTC Climate, Controls & Security
|
81
|
|
|
(8
|
)
|
|
(18
|
)
|
|
(34
|
)
|
|
21
|
|
|
Pratt & Whitney
|
127
|
|
|
(6
|
)
|
|
(93
|
)
|
|
(22
|
)
|
|
6
|
|
|
UTC Aerospace Systems
|
55
|
|
|
—
|
|
|
(28
|
)
|
|
(19
|
)
|
|
8
|
|
|
Sikorsky
|
18
|
|
|
—
|
|
|
(8
|
)
|
|
(10
|
)
|
|
—
|
|
|
Eliminations and other
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Total
|
$
|
341
|
|
|
$
|
(20
|
)
|
|
$
|
(182
|
)
|
|
$
|
(96
|
)
|
|
$
|
43
|
|
2012 Actions
.
During the
nine months ended September 30, 2013
, we recorded net pre-tax restructuring costs totaling
$44 million
for restructuring actions initiated in
2012
, including
$40 million
in cost of sales,
$3 million
in selling, general and administrative expenses, and
$1 million
in other income, net. The
2012
actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations.
As of September 30, 2013
, we have completed net workforce reductions of
approximately 6,100 employees
of an expected
7,300 employees
, and have exited approximately
1.6 million net square feet
of facilities of an expected
3.6 million net square feet
. We are targeting the majority of the remaining workforce and facility related cost reduction actions for completion during
2013
and
2014
.
The following table summarizes the accrual balances and utilization by cost type for the
2012
restructuring actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Severance
|
|
Asset
Write-Downs
|
|
Facility Exit,
Lease
Termination and
Other Costs
|
|
Total
|
|
Restructuring accruals at July 1, 2013
|
$
|
142
|
|
|
$
|
—
|
|
|
$
|
47
|
|
|
$
|
189
|
|
|
Net pre-tax restructuring costs
|
(3
|
)
|
|
—
|
|
|
9
|
|
|
6
|
|
|
Utilization and foreign exchange
|
(32
|
)
|
|
—
|
|
|
(13
|
)
|
|
(45
|
)
|
|
Balance at September 30, 2013
|
$
|
107
|
|
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
150
|
|
The following table summarizes expected, incurred and remaining costs for the
2012
restructuring actions by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Severance
|
|
Asset
Write-Downs
|
|
Facility Exit,
Lease
Termination and
Other Costs
|
|
Total
|
|
Expected costs
|
$
|
477
|
|
|
$
|
15
|
|
|
$
|
168
|
|
|
$
|
660
|
|
|
Costs incurred through December 31, 2012
|
(452
|
)
|
|
(14
|
)
|
|
(110
|
)
|
|
(576
|
)
|
|
Costs incurred - quarter ended March 31, 2013
|
(18
|
)
|
|
(1
|
)
|
|
(10
|
)
|
|
(29
|
)
|
|
Costs incurred - quarter ended June 30, 2013
|
1
|
|
|
—
|
|
|
(10
|
)
|
|
(9
|
)
|
|
Costs incurred - quarter ended September 30, 2013
|
3
|
|
|
—
|
|
|
(9
|
)
|
|
(6
|
)
|
|
Balance at September 30, 2013
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
40
|
|
The following table summarizes expected, incurred and remaining costs for the
2012
restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Expected
Costs
|
|
Costs incurred through
December 31, 2012
|
|
Costs incurred Quarter ended
March 31, 2013
|
|
Costs incurred Quarter ended June 30, 2013
|
|
Costs incurred Quarter ended September 30, 2013
|
|
Remaining Costs at September 30, 2013
|
|
Otis
|
$
|
157
|
|
|
$
|
(146
|
)
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
|
$
|
7
|
|
|
UTC Climate, Controls & Security
|
149
|
|
|
(123
|
)
|
|
(14
|
)
|
|
(1
|
)
|
|
1
|
|
|
12
|
|
|
Pratt & Whitney
|
98
|
|
|
(94
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
3
|
|
|
UTC Aerospace Systems
|
154
|
|
|
(121
|
)
|
|
(8
|
)
|
|
(5
|
)
|
|
(5
|
)
|
|
15
|
|
|
Sikorsky
|
57
|
|
|
(47
|
)
|
|
(5
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
3
|
|
|
Eliminations and other
|
19
|
|
|
(19
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Discontinued operations
|
26
|
|
|
(26
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
660
|
|
|
$
|
(576
|
)
|
|
$
|
(29
|
)
|
|
$
|
(9
|
)
|
|
$
|
(6
|
)
|
|
$
|
40
|
|
2011 Actions
.
As of September 30, 2013
, we have approximately
$5 million
of accrual balances remaining related to
2011
actions.
Note 9: Financial Instruments
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures.
By their nature, all financial instruments involve market and credit risks. We enter into derivative and other financial instruments with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. We limit counterparty exposure and concentration of risk by diversifying counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.
Foreign Currency Forward Contracts.
We manage our foreign currency transaction risks to acceptable limits through the use of derivatives that hedge forecasted cash flows associated with foreign currency transaction exposures, which are accounted for as cash flow hedges, as we deem appropriate. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria of the Derivatives and Hedging Topic of the FASB ASC, the changes in the derivatives’ fair values are not included in current earnings but are included in “Accumulated other comprehensive loss.” These changes in fair value will subsequently be reclassified into earnings as a component of product sales or expenses, as applicable, when the forecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period in which it occurs.
To the extent the hedge accounting criteria are not met, the foreign currency forward contracts are utilized as economic hedges and changes in the fair value of these contracts are recorded currently in earnings in the period in which they occur. These include hedges that are used to reduce exchange rate risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (e.g. payables, receivables) and other economic hedges where the hedge accounting criteria were not met.
The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was
$12.6 billion
and
$11.8 billion
at
September 30, 2013
and
December 31, 2012
, respectively.
We enter into transactions that are subject to arrangements designed to provide for netting of offsetting obligations in the event of the insolvency or default of a counterparty. However, we have not elected to offset multiple contracts with a single counterparty and, as a result, the fair value of the derivative instruments in a loss position is not offset against the fair value of derivative instruments in a gain position.
The following table summarizes the fair value of derivative instruments as of
September 30, 2013
and
December 31, 2012
which consist solely of foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
|
(Dollars in millions)
|
Derivatives
designated
as hedging
instruments
|
|
Derivatives not
designated as
hedging
instruments
|
|
Derivatives
designated
as hedging
instruments
|
|
Derivatives not
designated as
hedging
instruments
|
|
Balance Sheet Asset Locations:
|
|
|
|
|
|
|
|
|
Other assets, current
|
$
|
38
|
|
|
$
|
23
|
|
|
$
|
48
|
|
|
$
|
47
|
|
|
Other assets
|
22
|
|
|
3
|
|
|
30
|
|
|
3
|
|
|
|
60
|
|
|
26
|
|
|
78
|
|
|
50
|
|
|
Total Asset Derivative Contracts
|
|
|
$
|
86
|
|
|
|
|
$
|
128
|
|
|
Balance Sheet Liability Locations:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
$
|
20
|
|
|
$
|
53
|
|
|
$
|
10
|
|
|
$
|
136
|
|
|
Other long-term liabilities
|
13
|
|
|
2
|
|
|
1
|
|
|
2
|
|
|
|
33
|
|
|
55
|
|
|
11
|
|
|
138
|
|
|
Total Liability Derivative Contracts
|
|
|
$
|
88
|
|
|
|
|
$
|
149
|
|
The impact from foreign exchange derivative instruments that qualified as cash flow hedges was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Gain (loss) recorded in Accumulated other comprehensive loss
|
$
|
97
|
|
|
$
|
146
|
|
|
$
|
(64
|
)
|
|
$
|
83
|
|
|
Gain (loss) reclassified from Accumulated other comprehensive loss into Product sales (effective portion)
|
$
|
1
|
|
|
$
|
7
|
|
|
$
|
(22
|
)
|
|
$
|
26
|
|
Assuming current market conditions continue, a
$15 million
pre-tax gain is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At
September 30, 2013
, all derivative contracts accounted for as cash flow hedges will mature by September 2015.
The effect on the Condensed Consolidated Statement of Comprehensive Income from derivative contracts not designated as hedging instruments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Gain (loss) recognized in Other income, net
|
$
|
10
|
|
|
$
|
(19
|
)
|
|
$
|
33
|
|
|
$
|
(21
|
)
|
Valuation Hierarchy.
The following table provides the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and nonrecurring basis in our Condensed Consolidated Balance Sheet as of
September 30, 2013
and
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Total Carrying
Value at
September 30, 2013
|
|
Quoted price in
active markets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Unobservable
inputs
(Level 3)
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
882
|
|
|
$
|
882
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative assets
|
86
|
|
|
—
|
|
|
86
|
|
|
—
|
|
|
Derivative liabilities
|
(88
|
)
|
|
—
|
|
|
(88
|
)
|
|
—
|
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
|
Business dispositions
|
40
|
|
|
—
|
|
|
40
|
|
|
—
|
|
During the nine months ended September 30, 2013, we recorded an approximately
$38 million
net gain from UTC Climate, Controls & Security's ongoing portfolio transformation, primarily due to a gain on the sale of a business in Hong Kong. In addition, we recorded an approximately
$193 million
gain from the sale of the Pratt & Whitney Power Systems business (see Note 1), as well as an approximately
$25 million
charge to adjust the fair value of a Pratt & Whitney joint venture investment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Total Carrying
Value at
December 31,
2012
|
|
Quoted price in
active markets
(Level 1)
|
|
Significant other
observable
inputs
(Level 2)
|
|
Unobservable
inputs
(Level 3)
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
781
|
|
|
$
|
781
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative assets
|
128
|
|
|
—
|
|
|
128
|
|
|
—
|
|
|
Derivative liabilities
|
(149
|
)
|
|
—
|
|
|
(149
|
)
|
|
—
|
|
|
Nonrecurring fair value measurements:
|
|
|
|
|
|
|
|
|
Equity method investment
|
432
|
|
|
—
|
|
|
432
|
|
|
—
|
|
|
Business dispositions
|
84
|
|
|
—
|
|
|
84
|
|
|
—
|
|
During the nine months ended September 30, 2012, we recorded net gains on nonrecurring fair value measurements of approximately
$220 million
within Other income, net from UTC Climate, Controls & Security's ongoing portfolio transformation efforts. These net gains include approximately
$357 million
from the sales of controlling interests in manufacturing and distribution joint ventures in Asia and Canada, of which approximately
$272 million
were non-cash. These gains were partially offset by
$103 million
of other-than-temporary impairment charges related to business dispositions and a
$32 million
loss on the disposition of the U.S. fire and security branch operations. In addition, we recorded a
$34 million
gain on the fair market measurement of the shares of Goodrich that the Company held prior to its acquisition of Goodrich.
Valuation Techniques.
Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally. They are measured at fair value using closing stock prices from active markets and are classified within Level 1 of the valuation hierarchy. Our derivative assets and liabilities are managed on the basis of net exposure to market and credit risks of each of the counterparties. The fair value for these derivative assets and liabilities is measured at the price that would be received on a net asset position for a particular risk or to transfer a net liability position for a particular risk in an orderly transaction between market participants at the measurement date. Our derivative assets and liabilities include foreign exchange contracts and commodity derivatives that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. Based on our continued ability to trade securities and enter into forward contracts, we consider the markets for our fair value instruments to be active. As of
September 30, 2013
, there were no significant transfers in and out of Level 1 and Level 2.
As of
September 30, 2013
, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.
The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Condensed Consolidated Balance Sheet at
September 30, 2013
and
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
|
(Dollars in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Long-term receivables
|
$
|
651
|
|
|
$
|
642
|
|
|
$
|
499
|
|
|
$
|
464
|
|
|
Customer financing notes receivable
|
438
|
|
|
388
|
|
|
375
|
|
|
371
|
|
|
Short-term borrowings
|
(303
|
)
|
|
(303
|
)
|
|
(503
|
)
|
|
(503
|
)
|
|
Long-term debt (excluding capitalized leases)
|
(20,837
|
)
|
|
(20,937
|
)
|
|
(22,665
|
)
|
|
(25,606
|
)
|
|
Long-term liabilities
|
(284
|
)
|
|
(257
|
)
|
|
(182
|
)
|
|
(167
|
)
|
The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Condensed Consolidated Balance Sheet as of
September 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Total Fair
Value at
September 30,
2013
|
|
Quoted price in
active markets
(Level 1)
|
|
Significant other
observable inputs
(Level 2)
|
|
Unobservable
inputs
(Level 3)
|
|
Long-term receivables
|
$
|
642
|
|
|
$
|
—
|
|
|
$
|
642
|
|
|
$
|
—
|
|
|
Customer financing notes receivable
|
388
|
|
|
—
|
|
|
388
|
|
|
—
|
|
|
Short-term borrowings
|
(303
|
)
|
|
—
|
|
|
(100
|
)
|
|
(203
|
)
|
|
Long-term debt (excluding capitalized leases)
|
(20,937
|
)
|
|
—
|
|
|
(20,830
|
)
|
|
(107
|
)
|
|
Long-term liabilities
|
(257
|
)
|
|
—
|
|
|
(257
|
)
|
|
—
|
|
Valuation Techniques.
Our long-term receivables and customer financing notes receivable include our commercial and aerospace long-term trade, government and other receivables, leases, and notes receivable. Our long-term receivables and customer financing notes receivable are measured and presented in the table above at fair value using an income approach based on the present value of the contractual, promised or most likely cash flows discounted at observed or estimated market rate for comparable assets or liabilities that are traded in the market. Based on these inputs, long-term receivables and customer financing notes receivable are presented in the table above within Level 2 of the valuation hierarchy. Our short-term borrowings include commercial paper and other international credit facility agreements. Our long-term debt includes domestic and international notes. Commercial paper and domestic long-term notes are measured and presented in the table above at fair values based on comparable transactions and current market interest rates quoted in active markets for similar assets, and are classified within Level 2 of the valuation hierarchy. Foreign short-term borrowings and foreign long-term notes are measured and presented in the table above at fair value based on comparable transactions and rates calculated from the respective countries’ yield curves. Based on these inputs, foreign borrowings and foreign long-term notes are classified within Level 3 of the valuation hierarchy. The fair values of Accounts receivable and Accounts payable approximate the carrying amounts due to the short-term maturities of these instruments.
We had commercial aerospace financing and other contractual commitments totaling approximately
$11.7 billion
at
September 30, 2013
, including approximately
$6.4 billion
of IAE commitments, related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms. We had commercial aerospace financing and other contractual commitments of approximately
$10.9 billion
at
December 31, 2012
, which included approximately
$5.8 billion
of IAE commitments. Risks associated with changes in interest rates on these commitments are mitigated by the fact that interest rates are variable during the commitment term, and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded. The fair value of the commitments is not readily determinable.
Note 10: Credit Quality of Long-Term Receivables
A long-term or financing receivable represents a contractual right to receive money on demand or on fixed and determinable dates, including trade receivable balances with maturity dates greater than one year. Our long-term and financing receivables primarily represent balances related to the aerospace businesses such as long-term trade accounts receivable, leases, and notes receivable. We also have other long-term receivables in our commercial businesses; however, both the individual and aggregate amounts are not significant.
Long-term trade accounts receivable represent amounts arising from the sale of goods and services with a contractual maturity date of greater than one year and are recognized as “Other assets” in our Condensed Consolidated Balance Sheet. Notes and leases receivable represent notes and lease receivables other than receivables related to operating leases, and are recognized as “Customer financing assets” in our Condensed Consolidated Balance Sheet. The following table summarizes the balance by class of aerospace long-term receivables as of
September 30, 2013
and
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
September 30,
2013
|
|
December 31,
2012
|
|
Long-term trade accounts receivable
|
$
|
630
|
|
|
$
|
593
|
|
|
Notes and leases receivable
|
630
|
|
|
584
|
|
|
Total long-term receivables
|
$
|
1,260
|
|
|
$
|
1,177
|
|
Economic conditions and air travel influence the operating environment for most airlines, and the financial performance of our aerospace businesses is directly tied to the economic conditions of the commercial aerospace and defense industries. Additionally, the value of the collateral is also closely tied to commercial airline performance and may be subject to exposure of reduced valuation as a result of market declines.
We determine a receivable is impaired when, based on current information and
events, it is probable that we will be unable to collect amounts due according to the contractual terms of the receivable agreement.
Factors considered in assessing collectability and risk include, but are not limited to, examination of credit quality indicators and other evaluation measures, underlying value of any collateral or security interests, significant past due balances, historical losses, and existing economic conditions.
Long-term receivables can be considered delinquent if payment has not been received in accordance with the underlying agreement. If determined delinquent, long-term trade accounts receivable and notes and leases receivable balances accruing interest may be placed on non-accrual status. We record potential losses related to long-term receivables when identified. The reserve for credit losses on these receivables relates to specifically identified receivables that are evaluated individually for impairment. For notes and leases receivable, we determine a specific reserve for exposure based on the difference between the carrying value of the receivable and the estimated fair value of the related collateral in connection with the evaluation of credit risk and collectability. For long-term trade accounts receivable, we evaluate credit risk and collectability individually to determine if an allowance is necessary.
Uncollectible long-term receivables are written-off when collection of the indebtedness has been pursued for a reasonable period of time without collection; the customer is no longer in operation; or judgment has been levied, but the underlying assets are not adequate to satisfy the indebtedness.
At both
September 30, 2013
and
December 31, 2012
, we did not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or considered to be impaired.
The following table provides the balance of aerospace industry long-term receivables and summarizes the associated changes in the reserve for estimated credit losses and exposure for the nine months ended
September 30, 2013
and
2012
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
Beginning balance of the reserve for credit losses and exposure as of January 1
|
$
|
60
|
|
|
$
|
70
|
|
|
Provision
|
7
|
|
|
1
|
|
|
Charge-offs
|
(13
|
)
|
|
—
|
|
|
Recoveries
|
(1
|
)
|
|
(5
|
)
|
|
Other
|
(3
|
)
|
|
(5
|
)
|
|
Ending balance of the reserve for credit losses and exposure: individually evaluated for impairment as of September 30
|
$
|
50
|
|
|
$
|
61
|
|
|
Ending balance of long-term receivables: individually evaluated for impairment as of September 30
|
$
|
1,260
|
|
|
$
|
1,036
|
|
We determine credit ratings for each customer in the portfolio based upon public information and information obtained directly from our customers. We conduct a review of customer credit ratings, published historical credit default rates for different rating categories, and multiple third party aircraft value publications as a basis to validate the reasonableness of the allowance for losses on these balances quarterly or when events and circumstances warrant. The credit ratings listed below range from “A” which indicates an extremely strong capacity to meet financial obligations and the receivable is either collateralized or uncollateralized, to “D” which indicates that payment is in default and the receivable is uncollateralized.
There can be no assurance that actual results will not differ from estimates or that consideration of these factors in the future will not result in an increase or decrease to the allowance for credit losses on long-term receivables.
The following table summarizes the credit risk profile by creditworthiness category for aerospace long-term receivable balances at
September 30, 2013
and
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
|
(Dollars in millions)
|
Long-term
trade accounts
receivable
|
|
Notes and
leases
receivable
|
|
Long-term
trade accounts
receivable
|
|
Notes and
leases
receivable
|
|
A - (low risk, collateralized/uncollateralized)
|
$
|
607
|
|
|
$
|
30
|
|
|
$
|
569
|
|
|
$
|
26
|
|
|
B - (moderate risk, collateralized/uncollateralized)
|
20
|
|
|
478
|
|
|
21
|
|
|
458
|
|
|
C - (high risk, collateralized/uncollateralized)
|
3
|
|
|
122
|
|
|
3
|
|
|
100
|
|
|
D - (in default, uncollateralized)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
630
|
|
|
$
|
630
|
|
|
$
|
593
|
|
|
$
|
584
|
|
Note 11: Shareowners’ Equity and Noncontrolling Interest
A summary of the changes in shareowners’ equity and noncontrolling interest comprising total equity for the quarter and nine months ended September 30, 2013 and 2012 is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
|
2013
|
|
2012
|
|
(Dollars in millions)
|
|
Share-owners’
Equity
|
|
Non-controlling Interest
|
|
Total
Equity
|
|
Share-owners’
Equity
|
|
Non-controlling Interest
|
|
Total
Equity
|
|
Equity, beginning of period
|
|
$
|
26,987
|
|
|
$
|
1,382
|
|
|
$
|
28,369
|
|
|
$
|
22,604
|
|
|
$
|
1,121
|
|
|
$
|
23,725
|
|
|
Comprehensive income for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
1,432
|
|
|
111
|
|
|
1,543
|
|
|
1,415
|
|
|
96
|
|
|
1,511
|
|
|
Total other comprehensive income
|
|
675
|
|
|
17
|
|
|
692
|
|
|
1,012
|
|
|
23
|
|
|
1,035
|
|
|
Total comprehensive income for the period
|
|
2,107
|
|
|
128
|
|
|
2,235
|
|
|
2,427
|
|
|
119
|
|
|
2,546
|
|
|
Common Stock issued under employee plans
|
|
312
|
|
|
|
|
312
|
|
|
275
|
|
|
|
|
275
|
|
|
Common Stock repurchased
|
|
(330
|
)
|
|
|
|
(330
|
)
|
|
—
|
|
|
|
|
—
|
|
|
Treasury Stock reissued under employee plans
|
|
—
|
|
|
|
|
—
|
|
|
141
|
|
|
|
|
141
|
|
|
Equity Units Issuance
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
Dividends on Common Stock
|
|
(465
|
)
|
|
|
|
(465
|
)
|
|
(463
|
)
|
|
|
|
(463
|
)
|
|
Dividends on ESOP Common Stock
|
|
(17
|
)
|
|
|
|
(17
|
)
|
|
(18
|
)
|
|
|
|
(18
|
)
|
|
Dividends attributable to noncontrolling interest
|
|
|
|
|
(161
|
)
|
|
(161
|
)
|
|
|
|
|
(162
|
)
|
|
(162
|
)
|
|
Purchase of subsidiary shares from noncontrolling interest
|
|
(17
|
)
|
|
(56
|
)
|
|
(73
|
)
|
|
(11
|
)
|
|
(1
|
)
|
|
(12
|
)
|
|
Sale of subsidiary shares in noncontrolling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
17
|
|
|
Acquisition of noncontrolling interest
|
|
|
|
—
|
|
|
—
|
|
|
|
|
39
|
|
|
39
|
|
|
Disposition of noncontrolling interest
|
|
|
|
|
(1
|
)
|
|
(1
|
)
|
|
|
|
|
—
|
|
|
—
|
|
|
Redeemable noncontrolling interest in subsidiaries’ earnings
|
|
|
|
|
(1
|
)
|
|
(1
|
)
|
|
|
|
|
(11
|
)
|
|
(11
|
)
|
|
Redeemable noncontrolling interest in total other comprehensive income
|
|
|
|
(1
|
)
|
|
(1
|
)
|
|
|
|
(7
|
)
|
|
(7
|
)
|
|
Change in redemption value of put options
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
Redeemable noncontrolling interest reclassification to noncontrolling interest
|
|
|
|
52
|
|
|
52
|
|
|
|
|
21
|
|
|
21
|
|
|
Equity, end of period
|
|
$
|
28,577
|
|
|
$
|
1,342
|
|
|
$
|
29,919
|
|
|
$
|
24,955
|
|
|
$
|
1,136
|
|
|
$
|
26,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
2012
|
|
(Dollars in millions)
|
|
Share-owners’
Equity
|
|
Non-controlling
Interest
|
|
Total
Equity
|
|
Share-owners’
Equity
|
|
Non-controlling
Interest
|
|
Total
Equity
|
|
Equity, beginning of period
|
|
$
|
25,914
|
|
|
$
|
1,155
|
|
|
$
|
27,069
|
|
|
$
|
21,880
|
|
|
$
|
940
|
|
|
$
|
22,820
|
|
|
Comprehensive income for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
4,258
|
|
|
286
|
|
|
4,544
|
|
|
3,073
|
|
|
267
|
|
|
3,340
|
|
|
Total other comprehensive income (loss)
|
|
123
|
|
|
(9
|
)
|
|
114
|
|
|
827
|
|
|
4
|
|
|
831
|
|
|
Total comprehensive income for the period
|
|
4,381
|
|
|
277
|
|
|
4,658
|
|
|
3,900
|
|
|
271
|
|
|
4,171
|
|
|
Common Stock issued under employee plans
|
|
764
|
|
|
|
|
764
|
|
|
608
|
|
|
|
|
608
|
|
|
Common Stock repurchased
|
|
(1,000
|
)
|
|
|
|
(1,000
|
)
|
|
—
|
|
|
|
|
—
|
|
|
Treasury Stock reissued under employee plans
|
|
—
|
|
|
|
|
—
|
|
|
141
|
|
|
|
|
141
|
|
|
Equity Units Issuance
|
|
—
|
|
|
|
|
—
|
|
|
(216
|
)
|
|
|
|
(216
|
)
|
|
Dividends on Common Stock
|
|
(1,395
|
)
|
|
|
|
(1,395
|
)
|
|
(1,288
|
)
|
|
|
|
(1,288
|
)
|
|
Dividends on ESOP Common Stock
|
|
(51
|
)
|
|
|
|
(51
|
)
|
|
(50
|
)
|
|
|
|
(50
|
)
|
|
Dividends attributable to noncontrolling interest
|
|
|
|
(288
|
)
|
|
(288
|
)
|
|
|
|
(292
|
)
|
|
(292
|
)
|
|
Purchase of subsidiary shares from noncontrolling interest
|
|
(36
|
)
|
|
(67
|
)
|
|
(103
|
)
|
|
(19
|
)
|
|
(4
|
)
|
|
(23
|
)
|
|
Sale of subsidiary shares in noncontrolling interest
|
|
—
|
|
|
242
|
|
|
242
|
|
|
—
|
|
|
52
|
|
|
52
|
|
|
Acquisition of noncontrolling interest
|
|
|
|
—
|
|
|
—
|
|
|
|
|
94
|
|
|
94
|
|
|
Disposition of noncontrolling interest
|
|
|
|
(6
|
)
|
|
(6
|
)
|
|
|
|
(4
|
)
|
|
(4
|
)
|
|
Redeemable noncontrolling interest in subsidiaries’ earnings
|
|
|
|
(3
|
)
|
|
(3
|
)
|
|
|
|
(22
|
)
|
|
(22
|
)
|
|
Redeemable noncontrolling interest in total other comprehensive income
|
|
|
|
5
|
|
|
5
|
|
|
|
|
1
|
|
|
1
|
|
|
Change in redemption value of put options
|
|
—
|
|
|
|
|
—
|
|
|
(1
|
)
|
|
|
|
(1
|
)
|
|
Redeemable noncontrolling interest reclassification to noncontrolling interest
|
|
|
|
27
|
|
|
27
|
|
|
|
|
100
|
|
|
100
|
|
|
Equity, end of period
|
|
$
|
28,577
|
|
|
$
|
1,342
|
|
|
$
|
29,919
|
|
|
$
|
24,955
|
|
|
$
|
1,136
|
|
|
$
|
26,091
|
|
As of January 1, 2013, we adopted the provisions of the FASB issued Accounting Standards Update ("ASU") No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." As a result of this adoption, we have disclosed below the significant items reclassified to net income in their entirety during the period.
A summary of the changes in each component of accumulated other comprehensive loss, net of tax for the
nine months ended September 30, 2013
are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Foreign
Currency
Translation
|
|
Defined
Benefit
Pension and
Post-
retirement
Plans
|
|
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
|
|
Unrealized
Hedging
(Losses)
Gains
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Balance at December 31, 2012
|
$
|
654
|
|
|
$
|
(6,250
|
)
|
|
$
|
145
|
|
|
$
|
3
|
|
|
$
|
(5,448
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
(439
|
)
|
|
27
|
|
|
140
|
|
|
(48
|
)
|
|
(320
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss (income)
|
31
|
|
|
445
|
|
|
(50
|
)
|
|
17
|
|
|
443
|
|
|
Balance at September 30, 2013
|
$
|
246
|
|
|
$
|
(5,778
|
)
|
|
$
|
235
|
|
|
$
|
(28
|
)
|
|
$
|
(5,325
|
)
|
Details of the reclassification out of accumulated other comprehensive loss for the
quarter and nine months ended September 30, 2013
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Loss
Components Reclassified to Net Income
(Dollars in millions)
|
|
Quarter Ended September 30, 2013
|
|
Nine Months Ended September 30, 2013
|
|
Affected Line Item in the Condensed Consolidated Statement of Comprehensive Income
|
|
|
Income (Expense)
|
|
Income (Expense)
|
|
|
Foreign Currency Translation:
|
|
|
|
|
|
|
|
Recognized due to business disposition
|
|
$
|
1
|
|
|
$
|
(31
|
)
|
|
Other income, net
|
|
Defined Benefit Pension and Post-retirement Plans:
|
|
|
|
|
|
|
|
Amortization of prior-service costs and transition obligation
|
|
$
|
10
|
|
|
$
|
34
|
|
|
Note (1)
|
|
Recognized actuarial net loss
|
|
(236
|
)
|
|
(714
|
)
|
|
Note (1)
|
|
Total before tax
|
|
(226
|
)
|
|
(680
|
)
|
|
|
|
Tax benefit
|
|
71
|
|
|
235
|
|
|
Income tax expense
|
|
Net of tax
|
|
$
|
(155
|
)
|
|
$
|
(445
|
)
|
|
|
|
Unrealized Gains on Available-for-Sale Securities:
|
|
|
|
|
|
|
|
Realized gain on sale of securities, before tax
|
|
$
|
27
|
|
|
$
|
81
|
|
|
Other income, net
|
|
Tax expense
|
|
(10
|
)
|
|
(31
|
)
|
|
Income tax expense
|
|
Net of tax
|
|
$
|
17
|
|
|
$
|
50
|
|
|
|
|
Unrealized Hedging (Losses) Gains:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
1
|
|
|
$
|
(22
|
)
|
|
Product sales
|
|
Other contracts
|
|
—
|
|
|
2
|
|
|
Other income, net
|
|
Total before tax
|
|
1
|
|
|
(20
|
)
|
|
|
|
Tax (expense) benefit
|
|
(1
|
)
|
|
3
|
|
|
Income tax expense
|
|
Net of tax
|
|
$
|
—
|
|
|
$
|
(17
|
)
|
|
|
(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 7 for additional details).
All noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests) are reported in the mezzanine section of the Condensed Consolidated Balance Sheet, between liabilities and equity, at the greater of redemption value or initial carrying value. A summary of the changes in redeemable noncontrolling interest recorded in the mezzanine section of the Condensed Consolidated Balance Sheet for the
quarters and nine months ended September 30, 2013 and 2012
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Redeemable noncontrolling interest, beginning of period
|
$
|
174
|
|
|
$
|
238
|
|
|
$
|
238
|
|
|
$
|
358
|
|
|
Net income
|
1
|
|
|
11
|
|
|
3
|
|
|
22
|
|
|
Foreign currency translation, net
|
1
|
|
|
7
|
|
|
(5
|
)
|
|
(1
|
)
|
|
Dividends attributable to noncontrolling interest
|
—
|
|
|
(2
|
)
|
|
(3
|
)
|
|
(13
|
)
|
|
Purchase of subsidiary shares from
noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
(34
|
)
|
|
Disposition of noncontrolling interest
|
—
|
|
|
—
|
|
|
(82
|
)
|
|
—
|
|
|
Change in redemption value of put options
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Redeemable noncontrolling interest reclassification to noncontrolling interest
|
(52
|
)
|
|
(21
|
)
|
|
(27
|
)
|
|
(100
|
)
|
|
Redeemable noncontrolling interest, end of period
|
$
|
124
|
|
|
$
|
233
|
|
|
$
|
124
|
|
|
$
|
233
|
|
Changes in noncontrolling interests that do not result in a change of control and where there is a difference between fair value and carrying value are accounted for as equity transactions. A summary of these changes in ownership interests in subsidiaries and the effect on shareowners’ equity for the
quarters and nine months ended September 30, 2013 and 2012
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Net income attributable to common shareowners
|
$
|
1,432
|
|
|
$
|
1,415
|
|
|
$
|
4,258
|
|
|
$
|
3,073
|
|
|
Transfers to noncontrolling interests:
|
|
|
|
|
|
|
|
|
Decrease in common stock for purchase of subsidiary shares
|
(17
|
)
|
|
(11
|
)
|
|
(36
|
)
|
|
(19
|
)
|
|
Change from net income attributable to common shareowners and transfers to noncontrolling interests
|
$
|
1,415
|
|
|
$
|
1,404
|
|
|
$
|
4,222
|
|
|
$
|
3,054
|
|
Note 12: Guarantees
We extend a variety of financial, market value and product performance guarantees to third parties. As disclosed in Note 2, on June 14, 2013 we completed the sale of substantially all operations of Rocketdyne to GenCorp Inc. Following the sale, certain guarantees of Rocketdyne's performance under existing contracts remain in place, which resulted in an increase in our performance guarantees of approximately
$124 million
, with no associated significant carrying amount of a liability as of
September 30, 2013
. There have been no other material changes to guarantees outstanding since
December 31, 2012
.
The changes in the carrying amount of service and product warranties and product performance guarantees for the
nine months ended September 30, 2013
and
2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2013
|
|
2012
|
|
Balance as of January 1
|
|
$
|
1,332
|
|
|
$
|
1,468
|
|
|
Warranties and performance guarantees issued
|
|
232
|
|
|
235
|
|
|
Settlements made
|
|
(223
|
)
|
|
(217
|
)
|
|
Other
|
|
22
|
|
|
(165
|
)
|
|
Balance as of September 30
|
|
$
|
1,363
|
|
|
$
|
1,321
|
|
The decrease reflected in “Other” during the
nine months ended September 30, 2012
primarily reflects the impact of warranty reserves reclassified to Liabilities held for sale, as part of the Clipper disposition, partially offset by an increase in warranty reserves arising out of our acquisition of Goodrich. See Notes 1 and 2 for further discussion.
Note 13: Contingent Liabilities
Summarized below are the matters previously described in Note 18 of the Notes to the Consolidated Financial Statements in our
2012
Annual Report, incorporated by reference in our
2012
Form 10-K, updated as applicable.
Environmental.
Our operations are subject to environmental regulation by federal, state and local authorities in the U.S. and regulatory authorities with jurisdiction over our non-U.S. operations. We accrue for the costs of environmental investigatory, remediation, operating and maintenance costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site, including existing technology, current laws and regulations and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. For sites with multiple responsible parties, we consider our likely proportionate share of the anticipated remediation costs and the ability of the other parties to fulfill their obligations in establishing a provision for those costs. We discount liabilities with fixed or reliably determinable future cash payments. We do not reduce accrued environmental liabilities by potential insurance reimbursements. We periodically reassess these accrued amounts. We believe that the likelihood of incurring losses materially in excess of amounts accrued is remote.
In conjunction with the completion of our acquisition of Goodrich on July 26, 2012, we recorded additional environmental reserves of
$325 million
. See Note 1 for further discussion.
Government.
We are now, and believe that in light of the current U.S. Government contracting environment we will continue to be, the subject of one or more U.S. Government investigations. If we or one of our business units were charged with wrongdoing as a result of any of these investigations or other government investigations (including violations of certain environmental or export laws) the U.S. Government could suspend us from bidding on or receiving awards of new U.S. Government contracts pending the completion of legal proceedings. If convicted or found liable, the U.S. Government could fine and debar us from new U.S. Government contracting for a period generally not to exceed three years. The U.S. Government could void any contracts found to be tainted by fraud.
Our contracts with the U.S. Government are also subject to audits. Like many defense contractors, we have received audit reports, which recommend that certain contract prices should be reduced to comply with various government regulations. Some of these audit reports involve substantial amounts. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and continue to litigate certain other cases. In addition, we accrue for liabilities associated with those matters that are probable and can be reasonably estimated. The most likely settlement amount to be incurred is accrued based upon a range of estimates. Where no amount within a range of estimates is more likely, then we accrue the minimum amount.
As previously disclosed, the United States government sued us in 1999 in the United States District Court for the Southern District of Ohio, claiming that Pratt & Whitney violated the civil False Claims Act and common law. The claims relate to the “Fighter Engine Competition” between Pratt & Whitney's F100 engine and General Electric's F110 engine. The government alleged that it overpaid for F100 engines under contracts awarded by the U.S. Air Force in fiscal years 1985 through 1990 because Pratt & Whitney inflated its estimated costs for some purchased parts and withheld data that would have revealed the overstatements. At trial, which ended in April, 2005, the government claimed Pratt & Whitney's liability to be approximately $624 million.
On August 1, 2008, the trial court held that the Air Force had not suffered any actual damages because Pratt & Whitney had made significant price concessions after the alleged overstatements were made. However, the trial court judge found that Pratt & Whitney violated the False Claims Act due to inaccurate statements contained in its 1983 initial engine pricing proposal. In the absence of actual damages, the trial court awarded the government the maximum civil penalty of approximately $7 million, or $10,000 for each of the 709 invoices Pratt & Whitney submitted in 1989 and later under the contracts.
In September 2008, both the government and UTC appealed the decision to the United States Court of Appeals for the Sixth Circuit. On November 18, 2010, the Sixth Circuit affirmed Pratt & Whitney's liability under the False Claims Act, but remanded the case to the trial court for further proceedings on the issues of False Claims Act damages and common law liability and damages.
On June 18, 2012, the trial court found that Pratt & Whitney had breached obligations imposed by common law based on the same conduct with respect to which the court previously found liability under the False Claims Act. Under the common law claims, the U.S. Air Force is entitled to seek damages for events occurring before March 3, 1989, which are not recoverable under the False Claims Act.
On June 17, 2013, the trial court awarded the government approximately $473 million in damages and penalties, plus prejudgment interest in an amount to be determined. On July 1, 2013, the trial court, after determining the amount of prejudgment interest, entered judgment in favor of the government in the amount of approximately $664 million. The trial court also awarded postjudgment interest on the full amount of the judgment to accrue from July 2, 2013, at the federal variable interest rate determined pursuant to 28 U.S.C. § 1961. The judgment included four different components of damages: (1) common law damages of approximately $109 million; (2) prejudgment interest on common law damages of approximately $191 million; (3) False Claims Act treble damages of approximately $357 million; and (4) penalties of approximately $7 million. The penalty component of the judgment previously was affirmed by the United States Court of Appeals in 2010.
We strongly disagree with the trial court's analysis and conclusions. We filed an appeal from the judgment to the United States Court of Appeals for the Sixth Circuit on August 26, 2013. Based on our analysis, we continue to believe that there is no basis for any common law liability for the inaccurate statements. We also believe that the government suffered no actual damages as a result of the inaccurate statements made in 1983 and, therefore, there is no basis in fact or law for the award of common law damages, prejudgment interest or False Claims Act treble damages. If, contrary to our expectations, all or any portion of the judgment should ultimately be affirmed, we estimate a range of possible loss from approximately $24 million to $657 million in excess of amounts previously accrued, plus postjudgment interest. The outcome of this matter could result in a material adverse effect on our results of operations in the period in which a liability would be recognized and cash flows for the period in which damages would be paid.
As previously disclosed, in December 2008, the Department of Defense (DOD) issued a contract claim against Sikorsky to recover overpayments the DOD alleges that it made to Sikorsky since January 2003 in connection with cost accounting changes approved by the DOD and implemented by Sikorsky in 1999 and 2006. These changes relate to the calculation of material overhead rates in government contracts. The DOD claimed that Sikorsky's liability was approximately $96 million (including interest through September 30, 2013).
We believed this claim was without merit and Sikorsky filed an appeal in December 2009 with the U.S. Court of Federal Claims. Trial in the matter concluded in January 2013, and on March 22, 2013,
the U.S. Court of Federal Claims issued a written decision in favor of Sikorsky determining that the DOD had failed to prove its claims because Sikorsky's calculation of material overhead complied with the cost accounting standards. While the DOD has appealed this decision, we do not believe the ultimate resolution of this matter will have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.
Tax Matters
.
As previously disclosed, UTC is involved in litigation in Germany concerning €204 million (approximately $275 million) of tax benefits that we have claimed related to a 1998 reorganization of the corporate structure of Otis operations in Germany. A portion of these tax benefits were disallowed by the local German Tax Office on July 5, 2012, as a result of the audit of tax years 1999 to 2000. The legal and factual issues relating to the denial of the tax benefits center on the interpretation and application of a German tax law.
On August 3, 2012, the Company filed suit in the local German tax court and intends to litigate vigorously the matter to conclusion. We do not believe the resolution of this matter will have a material adverse effect on our results of operations, cash flows or financial condition.
UTC has also been involved in administrative review proceedings with the French Revenue Authority concerning €237 million (approximately $320 million) related to certain deductions claimed in France for tax years 2008 through 2011 that the French Revenue Authority has proposed to disallow.
This is a recurring issue and it is expected that similar challenges will be raised in subsequent tax years until the issue is resolved. Resolution discussions with the French Revenue Authority on this matter have been unsuccessful to date and UTC may be required to pursue the defense of the issue through litigation, which could be commenced as early as the fourth quarter of 2013. UTC intends to assert a vigorous defense and believes it should prevail on the issue. Accordingly, no accrual has been made for this matter.
See “Note 6 Income Taxes” of our Condensed Consolidated Financial Statements for further discussion of these tax matters.
Other.
We extend performance and operating cost guarantees beyond our normal warranty and service policies for extended periods on some of our products. We have accrued our estimate of the liability that may result under these guarantees and for service costs that are probable and can be reasonably estimated.
Like many other industrial companies in recent years, we or our subsidiaries are named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos integrated into certain of our products or premises. While we have never manufactured asbestos and no longer incorporate it in any currently-manufactured products, certain of our historical products, like those of many other manufacturers, have contained components incorporating asbestos. A substantial majority of these asbestos-related claims have been covered by insurance or other forms of indemnity or have been dismissed without payment. The remainder of the closed cases have been resolved for amounts that are not material individually or in the aggregate. While insurance coverage litigation is pending against a number of Goodrich insurers, based on information currently available we do not believe that resolution of asbestos-related matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
We are involved in a number of other legal proceedings, investigations and other contingency matters, including government audit matters, environmental investigatory, remediation, operating and maintenance costs, performance guarantees, self-insurance programs and matters arising out of the normal course of business. We are also subject to a number of routine lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the ordinary course of our business. Many of these proceedings are at preliminary stages, and many of these cases seek an indeterminate amount of damages. We regularly evaluate the status of legal proceedings in which we are involved, to assess whether a loss is probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time or there is a reasonable possibility that a loss or additional loss may have been incurred and determine if accruals and related disclosures are appropriate. The Company has established reserves for several hundred of its legal proceedings and other matters. We accrue contingencies based upon a range of possible outcomes. If no amount within this range is a better estimate than any other, then we accrue the minimum amount. With respect to any additional losses that may be incurred in excess of those accrued, either they are considered not material or we do not believe that a range of reasonably possible losses (defined by the relevant accounting literature to include all potential losses other than those deemed “remote”) can be determined. We do not believe that these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
All forward-looking statements concerning the possible or anticipated outcome of environmental, investigatory, litigation proceedings and other contingency matters involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. For further information as to these risks and uncertainties, see “Cautionary Note Concerning Factors That May Affect Future Results” and Part II, Item 1A, “Risk Factors” in this Form 10-Q.
Note 14: Segment Financial Data
Our operations are classified into five principal segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems and Sikorsky. The segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. On
September 23, 2013
, we announced the formation of UTC Building and Industrial Systems, a new organizational structure consisting of Otis and UTC Climate, Controls & Security. This new organizational structure is intended to enhance our ability to deliver more integrated solutions to our customers and accelerate innovation in smart building technologies and sustainable designs. Otis and UTC Climate, Controls & Security each will continue to report their financial and operational results as separate segments, which is consistent with how we will allocate resources and measure the financial performance of these businesses. Subsequent to the completion of our acquisition of Goodrich on July 26, 2012, the Goodrich businesses were combined with the legacy Hamilton Sundstrand businesses to form the new UTC Aerospace Systems segment. Effective
July 1, 2012
, the Auxiliary Power Unit (APU) business of UTC Aerospace Systems was transferred to the Pratt & Whitney business segment. The APU business designs and manufactures a variety of products for commercial and military aircraft. Annual sales for the APU business are approximately
$600 million
. The reclassification has been made prospectively; prior year segment results have not been restated for the transfer of the business.
Results for the
quarters ended September 30, 2013 and 2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Operating Profits
|
|
Operating Profit Margins
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Otis
|
$
|
3,188
|
|
|
$
|
3,054
|
|
|
$
|
681
|
|
|
$
|
651
|
|
|
21.4
|
%
|
|
21.3
|
%
|
|
UTC Climate, Controls & Security
|
4,237
|
|
|
4,259
|
|
|
696
|
|
|
632
|
|
|
16.4
|
%
|
|
14.8
|
%
|
|
Pratt & Whitney
|
3,386
|
|
|
3,574
|
|
|
439
|
|
|
409
|
|
|
13.0
|
%
|
|
11.4
|
%
|
|
UTC Aerospace Systems
|
3,312
|
|
|
2,670
|
|
|
501
|
|
|
271
|
|
|
15.1
|
%
|
|
10.1
|
%
|
|
Sikorsky
|
1,541
|
|
|
1,649
|
|
|
159
|
|
|
203
|
|
|
10.3
|
%
|
|
12.3
|
%
|
|
Total segments
|
15,664
|
|
|
15,206
|
|
|
2,476
|
|
|
2,166
|
|
|
15.8
|
%
|
|
14.2
|
%
|
|
Eliminations and other
|
(202
|
)
|
|
(164
|
)
|
|
7
|
|
|
(22
|
)
|
|
|
|
|
|
General corporate expenses
|
—
|
|
|
—
|
|
|
(117
|
)
|
|
(103
|
)
|
|
|
|
|
|
Consolidated
|
$
|
15,462
|
|
|
$
|
15,042
|
|
|
$
|
2,366
|
|
|
$
|
2,041
|
|
|
15.3
|
%
|
|
13.6
|
%
|
Results for the
nine months ended September 30, 2013
and
2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Operating Profits
|
|
Operating Profit Margins
|
|
(Dollars in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Otis
|
$
|
9,140
|
|
|
$
|
8,851
|
|
|
$
|
1,906
|
|
|
$
|
1,868
|
|
|
20.9
|
%
|
|
21.1
|
%
|
|
UTC Climate, Controls & Security
|
12,617
|
|
|
12,943
|
|
|
1,968
|
|
|
1,965
|
|
|
15.6
|
%
|
|
15.2
|
%
|
|
Pratt & Whitney
|
10,412
|
|
|
10,073
|
|
|
1,412
|
|
|
1,225
|
|
|
13.6
|
%
|
|
12.2
|
%
|
|
UTC Aerospace Systems
|
9,896
|
|
|
5,160
|
|
|
1,501
|
|
|
680
|
|
|
15.2
|
%
|
|
13.2
|
%
|
|
Sikorsky
|
4,356
|
|
|
4,615
|
|
|
405
|
|
|
552
|
|
|
9.3
|
%
|
|
12.0
|
%
|
|
Total segments
|
46,421
|
|
|
41,642
|
|
|
7,192
|
|
|
6,290
|
|
|
15.5
|
%
|
|
15.1
|
%
|
|
Eliminations and other
|
(554
|
)
|
|
(377
|
)
|
|
32
|
|
|
(54
|
)
|
|
|
|
|
|
General corporate expenses
|
—
|
|
|
—
|
|
|
(345
|
)
|
|
(303
|
)
|
|
|
|
|
|
Consolidated
|
$
|
45,867
|
|
|
$
|
41,265
|
|
|
$
|
6,879
|
|
|
$
|
5,933
|
|
|
15.0
|
%
|
|
14.4
|
%
|
See Note 8 to the Condensed Consolidated Financial Statements for a discussion of restructuring costs included in segment operating results.
Note 15: Accounting Pronouncements
In March 2013, the FASB issued ASU No. 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Group of Assets within a Foreign Entity or of an Investment in a Foreign Entity." This ASU is intended to eliminate diversity in practice on the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest. In addition, the amendments in this ASU resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2013 and must be applied prospectively. This ASU is not expected to have a material impact on our financial statements or disclosures.
In July 2013, the FASB issued ASU No. 2013-10, "Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes." This ASU is intended to permit the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under FASB ASC Topic 815, "Derivatives and Hedging", in addition to UST and LIBOR, as well as to remove the restriction on using different benchmark rates for similar hedges. The provisions of this ASU are effective for new or redesignated hedging relationships entered into on or after July 17, 2013. This ASU is not expected to have a material effect on our financial statements or disclosures.
In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This ASU is intended to provide guidance and reduce diversity in practice in the presentation of an unrecognized tax benefit when a tax loss or credit carryforward exists. The provisions of this ASU are effective for periods beginning after December 15, 2013 and must be applied prospectively for unrecognized tax benefits that exist at the effective date. Early adoption is permitted. There are no material effects on, or changes to, our financial statements or disclosures as a result of this ASU.
With respect to the unaudited condensed consolidated financial information of UTC for the
quarters and nine months ended September 30, 2013 and 2012
, PricewaterhouseCoopers LLP (PricewaterhouseCoopers) reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated
October 25, 2013
, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the Act) for its report on the unaudited condensed consolidated financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareowners of United Technologies Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of United Technologies Corporation and its subsidiaries as of September 30, 2013 and the related condensed consolidated statements of comprehensive income for the three-month and nine-month periods ended September 30, 2013 and 2012 and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2013 and 2012. This interim financial information is the responsibility of the Corporation's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of operations, of comprehensive income, of cash flows, and of changes in equity for the year then ended (not presented herein), and in our report dated February 7, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
October 25, 2013
