Exhibit 4.2
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
As of the date of the Annual Report on Form 10-K of which this exhibit is a part, United Technologies Corporation (the “Company,” “UTC,” “we,” “us,” and “our”) has 7 classes of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): (1) our common stock, $1 par value per share; (2) our 1.125% Notes due 2021 (the “notes due 2021”); (3) our 1.250% Notes due 2023 (the “notes due 2023”); (4) our 1.150% Notes due 2024 (the “notes due 2024”); (5) our 1.875% Notes due 2026 (the “notes due 2026”); (6) our 2.150% Notes due 2030 (the “notes due 2030”); and (7) our Floating Rate Notes due 2020 (the “floating rate notes”, and together with the notes due 2021, the notes due 2023, the notes due 2024, the notes due 2026, and the notes due 2030, the “Notes”).
Common Stock
The following briefly summarizes certain terms of UTC’s common stock. This summary does not describe every aspect of our common stock and is subject, and is qualified in its entirety by reference, to all the provisions of our restated certificate of incorporation and our restated bylaws.
UTC’s common stock is listed on the New York Stock Exchange under the symbol “UTX.”
Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. For the purpose of electing directors, holders of common stock do not have cumulative voting rights. At each annual meeting of stockholders, the entire board of directors is elected for a term of one year.
Holders of common stock are entitled to share equally in the dividends, if any, that may be declared by the board of directors out of funds that are legally available to pay dividends, but only after payment of any dividends required to be paid on outstanding preferred stock. Upon any voluntary or involuntary liquidation, dissolution or winding up of UTC, the holders of common stock will be entitled to share ratably in all assets of UTC remaining after we pay:
•all of our debts and other liabilities; and
•any amounts we may owe to the holders of our preferred stock.
Holders of common stock do not have any preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of any series of preferred stock that we have designated and issued or that we may designate and issue in the future.
Delaware law and our restated bylaws permit us to issue uncertificated shares of common stock. However, holders of uncertificated shares of our common stock may request certificates representing their ownership of common stock.
At each annual meeting of stockholders, the entire board of directors is elected for a term of one year. UTC’s restated bylaws provide that the board of directors may, from time to time, designate the number of directors; however, the number may not be less than 8 nor more than 19. Vacancies on the board resulting from an increase in the number of directors may generally be filled by a vote of the majority of the directors then in office, even if less than a quorum.
UTC’s restated certificate of incorporation includes provisions eliminating the personal liability of our directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by Delaware law. The restated bylaws include provisions indemnifying our directors and officers to the fullest extent permitted by Delaware law, including under circumstances in which indemnification is otherwise discretionary. The restated bylaws additionally include provisions permitting the Chief Executive Officer or the General Counsel and the Chief Financial Officer acting together to reimburse the expenses of our current and former employees, agents and fiduciaries in advance of the final disposition of any such proceeding.
UTC’s restated bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election of directors, other than nominations made by or at the direction of UTC’s board of directors. Eligible stockholders may include their own director nominees in UTC’s proxy materials under the circumstances set forth in the bylaws. Generally, a stockholder or a group of up to 20 stockholders, who has maintained continuous qualifying ownership of at least 3% of UTC’s outstanding common stock for at least three years, may include director nominees constituting up to 20% of the board of directors in the proxy materials for an annual meeting of stockholders if such stockholder or group of stockholders complies with the other requirements set forth in the proxy access provision. In addition, special meetings of stockholders may be called by the board of directors, the chairman of the board of directors, the Chief Executive Officer or by the Secretary at the valid written request of shareholders of record who own, or are acting on behalf of one or more beneficial owners, who own at least 15% of UTC’s outstanding common stock of and in accordance with the other specific requirements in the special meeting provisions of the bylaws..
UTC’s restated bylaws include an exclusive forum provision. This provision provides that, unless UTC consents in writing to the selection of an alternative forum, the sole and exclusive forum for various types of suits will be a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware). Such suits include (1) any derivative action or proceeding brought on behalf of UTC, (2) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of UTC to the company or to UTC’s stockholders, (3) any action asserting a claim against UTC or any director or officer or other employee of UTC arising pursuant to any provision of the DGCL or UTC’s certificate of incorporation or bylaws (as either may be amended from time to time) or (4) any action asserting a claim against UTC or any
director or officer or other employee of UTC governed by the internal affairs doctrine. Under UTC’s restated bylaws, to the fullest extent permitted by law, this exclusive forum provision applies to state and federal law claims, including claims under the federal securities laws, including the Securities Act and the Exchange Act, although stockholders will not be deemed to have waived UTC’s compliance with the federal securities laws and the rules and regulations thereunder. The enforceability of similar choice of forum provisions in other companies’ bylaws has been challenged in legal proceedings, and it is possible that, in connection with claims arising under federal securities laws or otherwise, a court could find the exclusive forum provision contained in UTC’s restated bylaws to be inapplicable or unenforceable.
The restated certificate of incorporation contains a “fair price” provision, providing that certain business combinations with any interested stockholder or affiliate of an interested stockholder may not be consummated without the affirmative vote of at least 80% of the votes entitled to be cast by the holders of the then-outstanding shares of capital stock of UTC entitled to vote generally in the election of directors, voting as a single class. The term “interested stockholder,” as defined in the restated certificate of incorporation, generally means a person who owns at least 10% of the voting power of UTC’s voting stock.
The business combinations to which the fair price provision applies include:
•a merger or consolidation with an interested stockholder;
•the sale or other disposition of assets having a fair market value of $25,000,000 or more to an interested stockholder;
•the issuance or transfer of securities having an aggregate fair market value of $25,000,000 or more by UTC or any subsidiary of UTC to an interested stockholder;
•the adoption of a plan of liquidation or dissolution proposed by or on behalf of an interested stockholder; and
•any reclassification of securities, recapitalization or other transaction which increases, directly or indirectly, the proportionate share holdings of an interested stockholder.
The affirmative vote of the holders of at least 80% of the voting power of voting stock of UTC is required to amend or repeal the fair price provision or adopt any provision inconsistent with it.
Under Delaware law, the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage.
Certain of the provisions of UTC’s restated certificate of incorporation and restated bylaws discussed above could discourage the acquisition of control of a substantial block of our stock or a proxy contest. These provisions could also have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of UTC, even though an attempt to obtain control of UTC might be beneficial to UTC and its stockholders.
Section 203 of the Delaware General Corporation Law (the “DGCL”), under certain circumstances, may make it more difficult for a person who is an “Interested Stockholder,” as defined in Section 203, to effect various business combinations with a corporation for a three-year period. Under Delaware law, a corporation’s certificate of incorporation or bylaws may exclude a corporation from the restrictions imposed by Section 203. However, UTC’s restated certificate of incorporation and restated bylaws do not exclude us from these restrictions, and these restrictions apply to us.
Description of Debt Securities
The following briefly summarizes certain general terms and provisions of the Notes, which are governed by the indenture, dated as of May 1, 2001, as amended and restated, between UTC and The Bank of New York Mellon Trust Company, N.A., successor to The Bank of New York, which acts as trustee, as it may be supplemented by an officers’ certificate issued pursuant thereto or a supplemental indenture entered into by UTC and the trustee pursuant thereto from time to time. This summary does not describe every aspect of our Notes and is subject, and is qualified in its entirety by reference, to the indenture as supplemented.
General
The Notes are debt securities. Each series of debt securities will constitute direct unsecured obligations of UTC. The debt securities indebtedness of UTC.
Indenture Provisions Relating to the Possible Issuance of One or More Series of Debt Securities
The debt securities are our direct unsecured general obligations. The indenture allows us to issue either unsubordinated or junior subordinated debt securities from time to time under the indenture or an indenture governing junior subordinated debt securities, as applicable, without limitation as to amount. We may issue debt securities in one or more series with the same or different terms (Section 301). There may be more than one trustee under the indenture, each with respect to one or more different series of debt securities. If there is more than one trustee under the indenture, the powers and trust obligations of each trustee will extend only to the one or more series of debt securities for which it is trustee. The effect of the provisions contemplating that at a particular time there might be more than one trustee acting is that, in that event, those debt securities (whether of one or more than one series) for which each trustee is acting would be treated as if issued under a separate indenture.
The Indenture Does Not Limit UTC’s Indebtedness, Prevent Dividends or
Generally Prevent Highly Leveraged Transactions
The indentures do not
•limit the amount of unsecured indebtedness which UTC or any subsidiary may incur; or
•limit the payment of dividends by UTC or its acquisition of any of its equity securities.
When we say “subsidiary,” we mean any corporation of which at the time of determination UTC, directly and/or indirectly through one or more subsidiaries, owns more than 50% of the shares of voting stock (Section 101).
Except as may be included in a supplemental indenture to the indenture covering a specific series of offered debt securities and described in the applicable prospectus supplement and except for the covenants described below under “—Liens,” “—Sales and Leasebacks” and “—Restriction
on Merger and Sales of Assets,” there are no covenants or any other provisions which may afford holders of debt securities protection in the event of a highly leveraged transaction which may or may not result in a change of control of UTC.
Restriction on Merger and Sales of Assets
Under the indenture, UTC may not consolidate with or merge into any other corporation, or convey, lease or transfer its properties and assets substantially as an entirety to any person, unless all three of the following conditions are satisfied:
•immediately after the transaction, no event of default (or event which with notice or lapse of time, or both, would be an event of default) with respect to the debt securities will have happened and be continuing;
•the corporation formed by the consolidation or into which UTC is merged or the person which will have received the transfer or lease of UTC’s properties and assets will assume UTC’s obligation for the due and punctual payment of the principal, premium, if any, and interest (including all additional amounts, if any, payable as contemplated by Section 1010 of the indenture) on the debt securities and the performance and observance of every covenant to be performed by UTC under the indenture, and will be organized under the laws of the United States of America, one of the States thereof or the District of Columbia; and
•UTC has delivered to the trustee an officer’s certificate and opinion of counsel, each stating that the transaction complies with these conditions (Section 801).
In addition, with respect to the debt securities, if any principal property of UTC or of any wholly-owned domestic manufacturing subsidiary, or any shares of stock or debt of any wholly-owned domestic manufacturing subsidiary, would become subject to any lien, the debt securities outstanding will be secured, as to that principal property, equally and ratably with or prior to, the debt which upon the transaction would become secured by the lien unless UTC or the wholly-owned domestic manufacturing subsidiary could create the lien under the indenture without equally and ratably securing the unsubordinated debt securities. For the purpose of providing the equal and ratable security referred to in the preceding sentence, the outstanding principal amount of original issue discount securities and indexed securities will mean that amount which would at the time of providing the security be due and payable pursuant to Section 502 of the indenture and the terms of the original issue discount securities and indexed securities upon their acceleration, and the extent of the equal and ratable security will be adjusted, to the extent permitted by law, as and when this amount changes over time pursuant to the terms of such original issue discount securities and indexed securities (Sections 502 and 803). See “-Events of Default” for further information about acceleration of original issue discount securities and indexed securities.
In the event of any transaction other than a lease described in and complying with the four conditions listed in the immediately preceding paragraph, UTC would be discharged from all obligations and covenants under the indenture and the debt securities, and could be dissolved and liquidated (Section 802).
Defeasance and Covenant Defeasance
The indenture provides that, if the provisions of Article Fourteen are made applicable without modification to the debt securities of or within any series and any related coupons pursuant to Section 301 of the indenture, UTC may elect either “defeasance” or “covenant defeasance” as described below:
•“defeasance” means that UTC may elect to defease and be discharged from any and all obligations with respect to the debt securities and any related coupons, except for the obligation to pay additional amounts, if any, upon the occurrence of specified events of tax, assessment or governmental charge with respect to payments on the debt securities and the obligations to register the transfer or exchange of the debt securities and any related coupons, to replace temporary or mutilated, destroyed, lost or stolen debt securities and any related coupons, to maintain an office or agency in respect of the debt securities and any related coupons and to hold moneys for payment in trust;
•“covenant defeasance” means that UTC may elect to be released from its obligations with respect to the debt securities and any related coupons that are described under “-Liens” and “-Sales and Leasebacks,” or, if provided pursuant to Section 301 of the indenture, its obligations with respect to any other covenant, and any omission to comply with these obligations will not constitute a default or an event of default with respect to the debt securities and any related coupons.
To elect either defeasance or covenant defeasance under either indenture, UTC must irrevocably deposit with the trustee or another qualifying trustee, in trust, an amount in such currency, currencies or currency units in which the applicable debt securities are payable, or government obligations (as defined below), which through the payment of principal and interest in accordance with the terms of the government obligations will provide money in an amount sufficient to pay the principal, premium, if any, and interest on the outstanding debt securities and any related coupons, and any mandatory sinking fund or analogous payments on them, on the scheduled due dates for them.
This amount must be deposited in the currency, currencies or currency unit in which the debt securities and any related coupons are then specified as payable at stated maturity, and/or government obligations applicable to the debt securities and any related coupons. This applicability will be determined on the basis of the currency or currency unit in which the debt securities are then specified as payable at stated maturity. If so specified in any applicable prospectus supplement, a trust of this kind may only be established if, among other things, UTC has delivered to the applicable trustee an opinion of counsel (as specified in the indenture) to the effect that the holders of the debt securities and any related coupons will not recognize income, gain or loss for United States federal income tax purposes as a result of the defeasance or covenant defeasance and will be subject to United States federal income tax on the same amounts, in the same manner and at the same times as would have been the case if the defeasance or covenant defeasance had not occurred. In the case of defeasance, the opinion of counsel must refer to and be based upon a ruling of the Internal Revenue Service or a change in
applicable United States federal income tax law occurring after April 1, 1990 pursuant to the indenture.
Unless otherwise specified in any applicable prospectus supplement, “government obligations” means securities which are:
•direct obligations of the government which issued the currency in which the debt securities are payable; or
•obligations of a person controlled or supervised by and acting as an agency or instrumentality of the government which issued the currency in which the debt securities of the applicable series are payable, the payment of which is unconditionally guaranteed by that government, which, in either case, are full faith and credit obligations of that government payable in that currency and are not callable or redeemable at the option of the issuer of the obligations and will also include specified depository receipts issued by a bank or trust company as custodian with respect to any government obligation of this kind (Section 101 and Article Fourteen).
Unless otherwise provided in any applicable prospectus supplement, if, after UTC has deposited funds and/or government obligations to effect defeasance with respect to any debt securities:
•the holder of a debt security is entitled to, and does, elect pursuant to the terms of the debt security to receive payment in a currency or currency unit other than that in which the deposit has been made in respect of the debt security; or
•the currency or currency unit in which the deposit has been made in respect of the debt security ceases to be used by its government of issuance;
then the indebtedness represented by the debt security and any related coupons will be deemed to have been, and will be, fully discharged and satisfied through the payment of the principal, premium, if any, and interest, if any, on the debt security as they become due out of the proceeds yielded by converting the amount so deposited in respect of the debt security into the currency or currency unit in which the debt security becomes payable as a result of the holder’s election or the government’s cessation of usage based on the applicable market exchange rate (as defined in the prospectus supplement relating to the debt security) for that currency or currency unit in effect on the second business day prior to each payment date, except that with respect to a cessation of usage of the currency or currency unit by its government of issuance which results in current exchange rates no longer being available, the conversion will be based on the applicable market exchange rate for the currency or currency unit (as nearly as possible) in effect at the time of cessation (Section 1405). Unless otherwise provided in any applicable prospectus supplement, all payments of principal, premium, if any, and interest, if any, on any debt security that is payable in a foreign currency or currency unit that ceases to be used by its government of issuance will be made in U.S. dollars (Section 312).
If UTC effects covenant defeasance with respect to any debt securities and any related coupons and the debt securities and any related coupons are declared due and payable because of the occurrence of any event of default other than the event of default described in the third bullet
point under “-Events of Default” with respect to Sections 1008 and 1009 of the indenture (which sections would no longer be applicable to the debt securities or any related coupons) or described in the third or fifth bullet point under “-Events of Default” with respect to any other covenant with respect to which there has been defeasance, the amount of cash and the amounts of principal and interest payable on the government obligations on deposit with the trustee will be sufficient to pay amounts due on the debt securities and any related coupons at the time of their stated maturity but may not be sufficient to pay amounts due on the debt securities and any related coupons at the time of the acceleration resulting from the event of default. However, UTC would remain liable to make payment of the amounts due at the time of acceleration.
The applicable prospectus supplement may further describe the provisions, if any, permitting defeasance or covenant defeasance, including any modifications to the provisions described above, with respect to the debt securities of or within a particular series and any related coupons.
Modification and Waiver
Under the indenture, modifications and amendments may be made by UTC and the trustee, with the consent of the holders of not less than a majority in aggregate principal amount of outstanding debt securities which are affected by the modification or amendment. However, the consent of the holder of each debt security affected by the modification or amendment is required for any modification or amendment that would, among other things:
•change the stated maturity of principal of, or any installment of interest or premium, if any, on, or change the obligation of UTC to pay any additional amounts as contemplated by Section 1010 of the indenture on, any security;
•reduce the principal amount of, or the rate of interest on, or any premium payable on redemption of, any security, or reduce the amount of principal of an original issue discount security that would be due and payable upon declaration of acceleration of the maturity of the original issue discount security or would be provable in bankruptcy;
•change the place of payment where, or the coin, currency, currencies, currency unit or composite currency in which payment of principal, premium, if any, or interest on any security is payable;
•impair the right to institute suit for the enforcement of any payment on or with respect to any security;
•reduce the above stated percentage of holders of debt securities necessary to modify or amend the indenture or to consent to any waiver under the indenture; or
•modify the foregoing requirements or the provisions of the indenture related to waiver of certain covenants or waiver of past defaults (Section 902).
The indenture permits the holders of at least a majority in aggregate principal amount of outstanding debt securities to waive compliance by UTC with some of the restrictions described under “-Restriction on Merger and Sales of Assets” and compliance with specified other covenants of UTC contained in the indenture (Section 1011), including, in the case of the indenture, the restrictions described under “-Liens” and “-Sales and Leasebacks.”
The indenture contains provisions for convening meetings of the holders of debt securities of a series if debt securities of that series are issuable as bearer securities (Section 1501). A meeting may be called at any time by the trustee, and also, upon request, by UTC or the holders of at least 10% in principal amount of the debt securities of that series outstanding. If a meeting is called, notice must be given as provided in the applicable indenture (Section 1502). Except for any consent which must be given by the holder of each debt security affected by a modification or amendment of the indenture, as described above, any resolution presented at a meeting or adjourned meeting at which a quorum is present may be adopted by the affirmative vote of the holders of a majority in principal amount of the debt securities of that series; provided, however, that any resolution with respect to any consent or waiver which may be given by the holders of not less than a specified percentage in principal amount of the debt securities of a series may be adopted at a meeting or adjourned meeting at which a quorum is present only by the affirmative vote of that specified percentage in principal amount of the debt securities of that series; and provided, further, that any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action which may be made, given or taken by the holders of a specified percentage, which is less than a majority in principal amount of debt securities of a series may be adopted at a meeting or adjourned meeting duly reconvened at which a quorum is present by the affirmative vote of the holders of that specified percentage in principal amount of the debt securities of that series. Any resolution passed or decision taken at any meeting of holders of debt securities of any series duly held in accordance with the indenture will be binding on all holders of debt securities of that series and the related coupons. The quorum at any meeting called to adopt a resolution, and at any reconvened meeting, will be persons holding or representing a majority in principal amount of the debt securities of a series. However, if any action is to be taken at the meeting with respect to a consent or waiver which may be given by the holders of not less than a specified percentage in principal amount of the debt securities of a series, the persons holding or representing that specified percentage in principal amount of the debt securities of the series will constitute a quorum (Section 1504).
Events of Default
The indenture defines an “event of default” with respect to any series of debt securities as being any one of the following events:
•default in the payment of any interest upon any debt security of the series and any related coupon when due, continued for 30 days;
•default in the payment of the principal of, or premium, if any, on a debt security of the series at its maturity;
•default in the performance of any other covenant of UTC in the indenture, continued for 60 days after written notice as provided in the indenture, other than a covenant included in the indenture solely for the benefit of series of debt securities other than the series in question or a covenant default the performance of which would be covered by the fifth bullet point below;
•certain specified events in bankruptcy, insolvency or reorganization; and
•any other event of default provided with respect to debt securities of the series.
No event of default provided with respect to a particular series of debt securities, except as to events described in the third and fourth bullet points above, necessarily constitutes an event of default with respect to any other series of debt securities (Section 501).
If an event of default described in the first, second or fifth bullet point above with respect to debt securities of any series at the time outstanding occurs and is continuing, then the trustee or the holders of not less than 25% in principal amount of the outstanding debt securities of that series may declare the principal amount of all of the debt securities of that series to be due and payable immediately, or, if the debt securities of that series are original issue discount securities or indexed securities, the trustee or the same minimum number of holders may declare the portion of the principal amount that is specified in the terms of that series to be due and payable immediately. If an event of default described in the third or fourth bullet point above occurs and is continuing, then the trustee or the holders of not less than 25% in principal amount of all the debt securities then outstanding may declare the principal amount of all of the outstanding debt securities to be due and payable immediately, or, if any indenture securities are original issue discount securities or indexed securities, the trustee or the same minimum number of holders may declare the portion of the principal amount that is specified in the terms of that series to be due and payable immediately. However, at any time after a declaration of acceleration with respect to outstanding debt securities of a series (or of all outstanding debt securities, as the case may be) has been made, but before a judgment or decree for payment of the money has been obtained by the trustee as provided in the indenture, the holders of a majority in principal amount of outstanding debt securities of that series or of all outstanding debt securities, as the case may be, may, subject to specified conditions, rescind and annul the acceleration if all events of default, other than the nonpayment of accelerated principal or specified portion of accelerated principal, with respect to outstanding debt securities of the series or of all outstanding debt securities, as the case may be, have been cured or waived as provided in the indenture (Section 502). The indenture also provides that the holders of not less than a majority in principal amount of the outstanding debt securities of a series or of all outstanding debt securities, as the case may be, may, subject to specified limitations, waive any past default and its consequences (Section 513). The prospectus supplement relating to any series of debt securities which are original issue discount securities or indexed securities will describe the particular provisions relating to acceleration of a portion of the principal amount of the original issue discount securities or indexed securities upon the occurrence and continuation of an event of default.
In case an event of default with respect to the debt securities of a series has occurred and is continuing, the trustee will be obligated to exercise those rights and powers vested in it by the indenture with respect to the series that a prudent person would exercise and to use the same degree of care and skill in their exercise as a prudent person would use under the circumstances in the conduct of his or her own affairs (Section 601).
Subject to the provisions of the indenture relating to the duties of the trustee in case an event of default occurs and is continuing, the trustee is under no obligation to exercise any of the rights or powers under the indenture at the request, order or direction of any of the holders unless the holders have offered to the trustee reasonable security or indemnity (Section 603). Subject to these provisions for the indemnification of the trustee and specified limitations contained in the
indenture, the holders of a majority in principal amount of the outstanding debt securities of a series or of all outstanding debt securities, as the case may be, will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee, or exercising any trust or power conferred on the trustee (Section 512).
UTC will be required to furnish to the applicable trustee annually a statement as to the fulfillment by UTC of all of its obligations under the indenture (Section 1004).
Governing Law
The indenture and the debt securities will be governed and construed in accordance with the law of the State of New York.
Trustee
Under the indenture, the trustee may resign or be removed with respect to one or more series of debt securities and a successor trustee may be appointed to act with respect to the series (Section 610). If two or more persons are acting as trustee with respect to different series of debt securities, each trustee will be a trustee of a trust under the indenture separate and apart from the trust administered by any other trustee (Section 611), and any action described herein to be taken by the “trustee” may then be taken by each trustee with respect to, and only with respect to, the one or more series of debt securities for which it is trustee.
Liens
Under the indenture, so long as any debt securities are outstanding:
•UTC will not itself, and will not permit any wholly-owned domestic manufacturing subsidiary to, create, incur, issue or assume any debt secured by any lien on any principal property owned by UTC or any wholly-owned domestic manufacturing subsidiary; and
•UTC will not itself, and will not permit any subsidiary to, create, incur, issue or assume any debt secured by any lien on any shares of stock or debt of any wholly-owned domestic manufacturing subsidiary.
When we say “wholly-owned domestic manufacturing subsidiary” we mean any subsidiary of which, at the time of determination, UTC directly and/or indirectly owns all of the outstanding capital stock (other than directors’ qualifying shares) and which, at the time of determination, is primarily engaged in manufacturing, except a subsidiary:
•which neither transacts any substantial portion of its business nor regularly maintains any substantial portion of its fixed assets within the United States; or
•which is engaged primarily in the finance business including, without limitation, financing the operations of, or the purchase of products which are products of or incorporate products of, UTC and/or its subsidiaries; or
•which is primarily engaged in ownership and development of real estate, construction of buildings, or related activities, or a combination of the foregoing (Section 101).
When we say “debt,” we mean notes, bonds, debentures or other similar evidence of indebtedness for money borrowed (Section 1008).
When we say “liens,” we mean pledges, mortgages, liens, encumbrances and other security interests (Section 1008).
When we say “principal property,” we mean any manufacturing plant or warehouse, together with the land upon which it is erected and fixtures constituting a part of the manufacturing plant or warehouse, owned by UTC or any wholly-owned domestic manufacturing subsidiary and located in the United States, the gross book value (without deduction of any reserve for depreciation) of which on the date as of which the determination is being made is an amount which exceeds 1% of consolidated net tangible assets, other than any manufacturing plant or warehouse or any portion of the manufacturing plant or warehouse or any fixture:
• which is financed by industrial development bonds; or
• which, in the opinion of the board of directors of UTC, is not of material importance to the total business conducted by UTC and its subsidiaries, taken as a whole (Section 101).
However, any of the actions described in the first two bullet points under “-Liens” above may be taken if
•the debt securities are equally and ratably secured; or
•the aggregate principal amount of the secured debt then outstanding plus the attributable debt of UTC and its wholly-owned domestic manufacturing subsidiaries in respect of sale and leaseback transactions described below involving principal properties entered into after the date when UTC first issues securities pursuant to the indenture, other than transactions that are permitted as described in the second bullet point under “-Sales and Leasebacks,” would not exceed 10% of consolidated net tangible assets.
When we say “attributable debt,” we mean, as to any particular lease under which any person is at the time liable for a term of more than 12 months, at any date as of which the amount of attributable debt is to be determined, the total net amount of rent required to be paid by the person under the lease during the remaining term of the lease (excluding any subsequent renewal or other extension options held by the lessee and excluding amounts on account of maintenance and repairs, services, taxes and similar charges, and contingent rents), discounted from the respective due dates of the payments under the lease to the date of determination at the rate of 15% per annum, compounded monthly (Section 101).
When we say “consolidated net tangible assets,” we mean the total amount of assets (less applicable reserves and other properly deductible items) after deducting:
•all current liabilities, excluding any current liabilities which are by their terms extendible or renewable at the option of the obligor on the liabilities to a time more than 12 months after the time as of which the amount of current liabilities is being computed; and
•all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set forth on the most recent balance sheet of UTC and its subsidiaries and computed in accordance with accounting principles generally accepted in the United States of America (Section 101).
This restriction on liens will not apply to debt secured by permitted liens. Therefore, for purposes of this restriction, debt secured by permitted liens will be excluded in computing secured debt. Permitted liens include:
•liens existing as of the date when UTC first issued securities pursuant to the indenture;
•liens existing on any property of or shares of stock or debt of any corporation at the time it became or becomes a wholly-owned domestic manufacturing subsidiary, or arising after that time (a) otherwise than in connection with the borrowing of money arranged after the corporation became a wholly-owned domestic manufacturing subsidiary and (b) pursuant to contractual commitments entered into before the corporation became a wholly-owned domestic manufacturing subsidiary;
•liens on property (including shares of stock or debt of a wholly-owned domestic manufacturing subsidiary) existing at the time of acquisition and certain purchase money or similar liens;
•liens to secure specified exploration, drilling, development, operation, construction, alteration, repair or improvement costs;
•liens securing debt owing by a subsidiary to UTC or to a wholly- owned domestic manufacturing subsidiary;
•liens in connection with government contracts, including the assignment of moneys due or to become due on government contracts;
•materialmen’s, carriers’, mechanics’, workmen’s, repairmen’s or other like liens arising in the ordinary course of business and which are not overdue or which are being contested in good faith in appropriate proceedings;
•liens arising from any judgment, decree or order of any court or in connection with legal proceedings or actions at law or in equity; and
•certain extensions, substitutions, replacements or renewals of the foregoing.
In addition, production payments and other financial arrangements with regard to oil, gas and mineral properties are not deemed to involve liens securing debt (Section 1008).
Sales and Leasebacks
So long as any debt securities are outstanding under the indenture, UTC will not, and will not permit any wholly-owned domestic manufacturing subsidiary to, enter into any sale and leaseback transaction after the date when UTC first issued securities pursuant to the indenture, covering any principal property, which was or is owned or leased by UTC or a wholly-owned domestic manufacturing subsidiary and which has been or is to be sold or transferred more than 120 days after the completion of construction and commencement of full operation of that principal property.
However, a sale and leaseback transaction of this kind will not be prohibited if:
•attributable debt of UTC and its wholly-owned domestic manufacturing subsidiaries in respect of the sale and leaseback transaction and all other sale and leaseback transactions entered into after the date when UTC first issued securities pursuant to the indenture (other than sale and leaseback transactions that are permitted as described in the next bullet point), plus the aggregate principal amount of debt secured by liens on principal properties then outstanding (not otherwise permitted or excepted) without equally and ratably securing the debt securities, would not exceed 10% of the consolidated net tangible assets;
•an amount equal to the greater of the net proceeds of the sale or transfer or the fair market value of the principal property sold or transferred (as determined by UTC) is applied within 120 days to the voluntary retirement of the debt securities or other indebtedness of UTC (other than indebtedness subordinated to the debt securities) or indebtedness of a wholly-owned domestic manufacturing subsidiary, for money borrowed, maturing more than 12 months after the voluntary retirement;
•the lease is for a temporary period not exceeding three years; or
•the lease is with UTC or another wholly-owned domestic manufacturing subsidiary (Section 1009).
Notes Due 2021
The following briefly summarizes certain terms of the notes due 2021. This summary does not describe every aspect of the notes due 2021 and is subject, and is qualified in its entirety by reference, to the prospectus supplement of UTC, dated as of February 17, 2016 and the definitive documents related to such notes.
General
We have issued the notes due 2021 in an initial aggregate principal amount of €950,000,000. The notes due 2021 will mature on December 15, 2021.
The notes due 2021 have been issued in book-entry form. See “Book-Entry, Delivery and Form.” We issued the notes due 2021 only in minimum denominations of €100,000 and integral multiples of €1,000 in excess thereof.
The notes due 2021 are listed on the New York Stock Exchange under the symbol “UTX 21D.” We have no obligation to maintain such listing, and we may delist the notes due 2021 at any time.
We may, without the consent of the holders of notes due 2021, issue additional notes of such series under the indenture having the same ranking and the same interest rate, maturity and other terms as the notes due 2021; provided that any such additional notes of such series that are not fungible with the notes due 2021 offered under the prospectus supplement dated as of February 17, 2016 for U.S. federal income tax purposes will have a separate CUSIP, ISIN and other identifying number than the notes due 2021 issued thereunder. Any such additional notes due 2021 will, together with the notes due 2021 offered by the same prospectus supplement, constitute a single series of notes under the indenture.
Interest
The notes due 2021 will bear interest at the annual rate of 1.125% and will accrue interest from February 22, 2016, or from the most recent date to which interest has been paid or duly provided for.
Interest will be payable on the notes due 2021 annually in arrears on December 15 of each year and on the maturity date, beginning on December 15, 2016 (each, a “fixed rate interest payment date”), to the persons in whose names such notes due 2021 are registered on the record date; provided, however, that interest payable on the maturity date or any relevant redemption date will be payable to the persons to whom the principal of such notes is payable. Interest on notes due 2021 will be computed on the basis of the actual number of days in the period for which interest is being calculated and the actual number of days from and including the last date on which interest was paid (or February 22, 2016 if no interest has been paid), to but excluding the next fixed rate interest payment date. This payment convention is referred to as ACTUAL/
ACTUAL (ICMA) as defined in the rulebook of the International Capital Market Association. If the date on which a payment of interest or principal on the notes due 2021 is scheduled to be paid is not a business day, then that interest or principal will be paid on the next succeeding business day, and no further interest will accrue as a result of such delay.
A “business day” is each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions are authorized or obligated by law or executive order to be closed in New York City or London and which is a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer system (the “TARGET2 system”), or any successor thereto, operates.
A “record date” is the close of business on the date that is fifteen calendar days prior to the date on which interest is scheduled to be paid, regardless of whether such date is a business day; provided that if any of the notes due 2021 are held by a securities depositary in book-entry form, the record date for such notes will be the close of business on the business day (for this purpose a day on which Clearstream and Euroclear are open for business) immediately preceding the date on which interest is scheduled to be paid.
Issuance in Euro
Payments of principal, interest and Additional Amounts, if any, in respect of the notes due 2021 will be payable in euro. If the euro is unavailable to us due to the imposition of exchange controls or other circumstances beyond our control (including the dissolution of the euro) or if the euro is no longer being used by the then member states of the European Monetary Union that have adopted the euro as their currency or for the settlement of transactions by public institutions of or within the international banking community, then all payments in respect of the applicable notes will be made in U.S. dollars until the euro is again available to us or so used. The amount payable on any date in euro will be converted into U.S. dollars at the rate mandated by the U.S. Federal Reserve Board as of the close of business on the second business day prior to the relevant payment date or, in the event the U.S. Federal Reserve Board has not mandated a rate of conversion, on the basis of the then most recent U.S. dollar/euro exchange rate available on or prior to the second business day prior to the relevant payment date as determined by us in our sole discretion. Any payment in respect of the notes so made in U.S. dollars will not constitute an event of default under the notes or the indenture governing the notes. Neither the trustee nor the paying agent shall have any responsibility for any calculation or conversion in connection with the foregoing.
Investors will be subject to foreign exchange risks as to payments of principal, interest and Additional Amounts, if any, that may have important economic and tax consequences to them.
Optional Redemption
The notes due 2021 will be redeemable, in whole or in part, at our option at any time. The Company may redeem the notes due 2021 on any date prior to September 15, 2021 at a redemption price in euro equal to the greater of:
(a) 100% of the principal amount of notes due 2021 to be redeemed; or
(b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes due 2021 to be redeemed as described below, discounted to the redemption date on an annual basis (ACTUAL/ACTUAL (ICMA)) at the applicable Comparable Government Bond Rate (as defined below), plus 25 basis points.
In every such case, the redemption price will also include interest accrued to, but excluding, the date of redemption on the principal balance of notes due 2021 being redeemed.
In addition, at any time on or after September 15, 2021, the Company may redeem some or all of the notes due 2021 at its option at a redemption price equal to 100% of the principal amount of the notes due 2021 to be redeemed, plus, in every such case, interest accrued to, but excluding, the date of redemption on the principal balance of notes due 2021 being redeemed.
In any case, the principal amount of a note remaining outstanding after a redemption in part shall be €100,000 or an integral multiple of €1,000 in excess thereof.
For purposes of the optional redemption provisions of notes due 2021, the following terms will be applicable:
“Comparable Government Bond” means, in relation to any Comparable Government Bond Rate calculation, at the discretion of an independent investment bank selected by us, a German federal government bond whose maturity is closest to the maturity of the notes due 2021 to be redeemed, or if such independent investment bank in its discretion determines that such similar bond is not in issue, such other German federal government bond as such independent investment bank may, with the advice of three brokers of, and/or market makers in, German federal government bonds selected by us, determine to be appropriate for determining the Comparable Government Bond Rate.
“Comparable Government Bond Rate” means, with respect to any redemption date, the price, expressed as a percentage (rounded to three decimal places, with 0.0005 being rounded upwards), at which the gross redemption yield on the notes due 2021 to be redeemed, if they were to be purchased at such price on the third business day prior to the redemption date, would be equal to the gross redemption yield on such business day of the Comparable Government Bond (as defined above) on the basis of the middle market price of the Comparable Government Bond prevailing at 11:00 a.m. (London time) on such business day as determined by an independent investment bank selected by us.
General Information Regarding Optional Redemption
We will mail or electronically deliver, according to the procedures of the applicable depositary, notice (with a copy to the trustee and the paying agent) of any optional redemption to the registered holder of the notes due 2021 being redeemed not less than 30 days and not more than 60 days before the redemption date. The notice of redemption will identify, among other things,
the redemption date, the redemption price (or if not then ascertainable, the manner of calculation thereof) and that on the redemption date, the redemption price will become due and payable and that notes called for redemption will cease to accrue interest on and after the redemption date (unless there is a default on payment of the redemption price). Prior to any redemption date, we will deposit with the paying agent or the trustee money sufficient to pay the redemption price of the notes to be redeemed on that date. If we redeem less than all of the notes due 2021, the trustee will choose notes due 2021 to be redeemed by any method that it deems fair and appropriate; provided that if the notes due 2021 are represented by one or more global notes, beneficial interests in the notes due 2021 will be selected for redemption by Euroclear and Clearstream in accordance with their respective standard procedures therefor.
The notes due 2021 are also subject to redemption if certain events occur involving United States taxation. See “—Redemption for Tax Reasons.”
Additional Amounts
All payments of principal and interest in respect of the notes due 2021 by us or a paying agent on our behalf will be made free and clear of, and without deduction or withholding for or on account of, any present or future taxes, duties, assessments or other similar governmental charges imposed or levied by the United States or any political subdivision or taxing authority of or in the United States (collectively, “Taxes”), unless such withholding or deduction is required by law.
In the event such withholding or deduction for Taxes is required by law, subject to the limitations described below, we will pay to any non-U.S. holder or any foreign partnership such additional amounts (“Additional Amounts”) as may be necessary to ensure that the net amount received by such person, after withholding or deduction for such Taxes, will be equal to the amount such person would have received in the absence of such withholding or deduction.
However, no Additional Amounts shall be payable with respect to any Taxes if such Taxes are imposed or levied for reasons unrelated to the holder’s or beneficial owner’s ownership or disposition of notes, nor shall Additional Amounts be payable for or on account of:
(a) any Taxes which would not have been so imposed, withheld or deducted but for:
(1) the existence of any present or former connection between the holder or beneficial owner (or between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner, if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity) and the United States, including, without limitation, such holder or beneficial owner (or such fiduciary, settlor, beneficiary, member, shareholder or other equity owner or person having such a power) being or having been a citizen or resident or treated as a resident of the United States, being or having been engaged in a trade or business in the United States, being or having been present in the United States, or having or having had a permanent establishment in the United States;
(2) the failure of the holder or beneficial owner to comply with any applicable certification, information, documentation or other reporting requirement, if compliance is
required under the tax laws and regulations of the United States or any political subdivision or taxing authority of or in the United States to establish entitlement to a partial or complete exemption from such Taxes (including, but not limited to, the requirement to provide Internal Revenue Service Form W-8BEN, Form W-8BEN-E, Form W-8ECI, Form W-8IMY (and related documentation) or any subsequent versions thereof or successor thereto); or
(3) the holder’s or beneficial owner’s present or former status as a personal holding company or a foreign personal holding company with respect to the United States, as a controlled foreign corporation with respect to the United States, as a passive foreign investment company with respect to the United States, as a foreign tax exempt organization with respect to the United States or as a corporation that accumulates earnings to avoid United States federal income tax;
(b) any Taxes which would not have been imposed, withheld or deducted but for the failure of the holder or beneficial owner to meet the requirements (including the certification requirements) of Section 871(h) or Section 881(c) of the Internal Revenue Code of 1986, as amended (the “Code”);
(c) any Taxes which would not have been imposed, withheld or deducted but for the presentation by the holder or beneficial owner of such note for payment on a date more than 30 days after the date on which such payment became due and payable or the date on which payment of the note due 2021 is duly provided for and notice is given to holders, whichever occurs later, except to the extent that the holder or beneficial owner would have been entitled to such Additional Amounts on presenting such note on any date during such 30-day period;
(d) any estate, inheritance, gift, sales, excise, transfer, personal property, wealth or similar Taxes;
(e) any Taxes which are payable other than by withholding or deduction from a payment on such note;
(f) any Taxes which are imposed, withheld or deducted with respect to, or payable by, a holder that is not the beneficial owner of the note, or a portion of the note, or that is a fiduciary, partnership, limited liability company or other similar entity, but only to the extent that a beneficial owner, a beneficiary or settlor with respect to such fiduciary or member of such partnership, limited liability company or similar entity would not have been entitled to the payment of an Additional Amount had such beneficial owner, settlor, beneficiary or member received directly its beneficial or distributive share of the payment;
(g) any Taxes required to be withheld or deducted by any paying agent from any payment on any note, if such payment can be made without such withholding or deduction by at least one other paying agent;
(h) any Taxes imposed, withheld or deducted under Sections 1471 through 1474 of the Code (or any amended or successor provisions), any current or future regulations or official interpretations thereof, any agreement entered into pursuant to Section 1471(b) of the Code or any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of such sections of the Code;
(i) any Taxes that would not have been imposed, withheld or deducted but for a change in any law, treaty, regulation, or administrative or judicial interpretation that becomes effective after the applicable payment becomes due or is duly provided for, whichever occurs later; or
(j) any combination of items (a), (b), (c), (d), (e), (f), (g), (h) and (i).
Any Additional Amounts paid on the notes due 2021 will be paid in euro.
For purposes of this section, the acquisition, ownership, enforcement, or holding of or the receipt of any payment with respect to a note alone will not constitute a connection (1) between the holder or beneficial owner and the United States or (2) between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity and the United States.
Except as specifically provided under this section “Additional Amounts,” we will not be required to make any payment with respect to any tax, duty, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority.
If we are required to pay Additional Amounts with respect to the notes due 2021, we will notify the trustee and paying agent pursuant to an officers’ certificate that specifies the Additional Amounts payable and when the Additional Amounts are payable. If the trustee and the paying agent do not receive such an officers’ certificate from us, the trustee and paying agent may rely on the absence of such an officers’ certificate in assuming that no such Additional Amounts are payable.
Redemption for Tax Reasons
We may redeem the notes due 2021 at our option, in whole but not in part, at a redemption price equal to 100% of the principal amount of the notes due 2021 to be redeemed, together with any accrued and unpaid interest on the notes to be redeemed to, but excluding, the redemption date, at any time, if:
(i) we have or will become obliged to pay Additional Amounts with respect to the notes due 2021 as a result of any change in, or amendment to, the laws, regulations, treaties, or rulings of the United States or any political subdivision of or in the United States or any taxing authority thereof or therein affecting taxation, or any change in, or amendment to, the application, official interpretation, administration or enforcement of such laws, regulations, treaties or rulings (including a holding by a court of competent jurisdiction in the United States), which change or amendment is enacted, adopted, announced or becomes effective on or after the date of the applicable prospectus supplement; or
(ii) on or after the date of the applicable prospectus supplement, any action is taken by a taxing authority of, or any action has been brought in a court of competent jurisdiction in, the United States or any political subdivision of or in the United States or any taxing authority thereof or therein, including any of those actions specified in clause (i) above, whether or not such action was taken or brought with respect to us, or there is any change, amendment, clarification, application or interpretation of such laws, regulations, treaties or rulings, which in any such case, will result in a material probability that we will be required to pay Additional Amounts with respect to the notes due 2021 (it being understood that such material probability will be deemed to result if the written opinion of independent tax counsel described in clause (b) below to such effect is delivered to the trustee and the paying agent).
Notice of any such redemption will be mailed, or delivered electronically if held by any depositary in accordance with such depositary’s customary procedures, at least 30 days but not more than 60 days before the redemption date to each registered holder of the notes due 2021 to be redeemed; provided, however, that the notice of redemption shall not be given earlier than 90 days before the earliest date on which we would be obligated to pay such Additional Amounts if a payment in respect of the notes to be redeemed was then due.
Prior to the mailing or delivery of any notice of redemption pursuant to this section “Redemption for Tax Reasons,” we will deliver to the trustee and the paying agent:
(a) a certificate signed by one of our officers stating that we are entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to our right to so redeem have occurred, and
(b) a written opinion of independent tax counsel of nationally recognized standing to the effect that we have or will become obligated to pay such Additional Amounts as a result of a change or amendment described in clause (i) above or that there is a material probability that we will be required to pay Additional Amounts as a result of an action, change, amendment, clarification, application or interpretation described in clause (ii) above, as the case may be.
Such notice, once delivered by us will be irrevocable.
Resignation and Removal of the Trustee
The trustee may resign at any time by giving written notice to us.
The trustee may also be removed with respect to the notes due 2021 by act of the holders of a majority in principal amount of the then outstanding notes due 2021.
No resignation or removal of the trustee and no appointment of a successor trustee will become effective until the acceptance of appointment by a successor trustee in accordance with the requirements of the indenture.
Under certain circumstances, we may appoint a successor trustee.
We will provide you with notice of any resignation, removal or appointment of the trustee.
Notices
Notices to holders of notes due 2021 are to be given by mail to the addresses of the holders as they may appear in the security register.
Title
UTC, the trustee, and any agent of either, may treat the person or entity in whose name the notes due 2021 are registered as the owner of those notes for the purpose of receiving payments on
such notes (subject to the provisions of the indenture) and for all other purposes whatsoever, whether or not such notes may be overdue, and irrespective of notice to the contrary.
Governing Law
The notes due 2021 are governed by and construed in accordance with the laws of the State of New York.
The Trustee, Securities Registrar, Paying Agent and Calculation Agent
The trustee and securities registrar under the indenture is The Bank of New York Mellon Trust Company, N.A. The Bank of New York Mellon (London Branch) has been appointed by the Company to act as paying agent. The trustee maintains various banking and trust relationships with us and some of our affiliates. We may vary or terminate the appointment of any paying agent, securities registrar or calculation agent, or appoint additional or other such agents or approve any change in the office through which any such agent acts.
The trustee is under no obligation to exercise any of the rights or powers vested in it by the indenture at the request or direction of any of the holders of the notes due 2021 pursuant to the indenture, unless such holders shall have offered to the trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.
Book-Entry, Delivery and Form
We issued the notes due 2021 in the form of one or more global notes (the “global notes”) in definitive, fully registered, book-entry form without coupons. The global notes will be deposited with a common depositary (and registered in the name of its nominee) for, and in respect of interests held through, Clearstream Banking, société anonyme, which we refer to as “Clearstream,” or Euroclear Bank S.A./N.V., which we refer to as “Euroclear.” Except as described herein, certificates will not be issued in exchange for beneficial interests in the global notes.
Except as set forth below, the global notes may be transferred, in whole and not in part, only to a common depositary for Clearstream and Euroclear or its nominee. No link is expected to be established among The Depository Trust Company and Clearstream or Euroclear in connection with the issuance of the notes.
Beneficial interests in the global notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in Clearstream or Euroclear. Those beneficial interests will be in minimum denominations of €100,000 and integral multiples of €1,000 in excess thereof. Should certificates be issued to individual holders of the notes due 2021, a holder of notes due 2021 who, as a result of trading or otherwise, holds a principal amount of notes due 2021 that is less than the minimum denomination would be required to purchase an additional principal amount of notes due 2021
such that its holding of notes due 2021 amounts to the minimum specified denomination. Investors may hold interests in the global notes through Clearstream or Euroclear either directly if they are participants in such systems or indirectly through organizations that are participants in such systems.
Except as set forth in the indenture, owners of beneficial interests in the global notes will not be entitled to have notes registered in their names, and will not receive or be entitled to receive physical delivery of notes in definitive form. Except as provided below, beneficial owners will not be considered the owners or holders of the notes under the indenture. Accordingly, each beneficial owner must rely on the procedures of the clearing systems and, if such person is not a participant of the clearing systems, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the indenture. Under existing industry practices, if we request any action of holders or a beneficial owner desires to give or take any action which a holder is entitled to give or take under the indenture, the clearing systems would authorize their participants holding the relevant beneficial interests to give or take action and the participants would authorize beneficial owners owning through the participants to give or take such action or would otherwise act upon the instructions of beneficial owners. Conveyance of notices and other communications by the clearing systems to their participants, by the participants to indirect participants and by the participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Persons who are not Euroclear or Clearstream participants may beneficially own notes held by the common depositary for Euroclear and Clearstream only through direct or indirect participants in Euroclear and Clearstream.
We understand that Clearstream is incorporated under the laws of Luxembourg as a professional depositary. Clearstream holds securities for its participants and facilitates the clearance and settlement of securities transactions between its participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Clearstream provides to its participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. As a professional depositary, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of the Financial Sector. Clearstream participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and other organizations and may include the underwriters. Indirect access to Clearstream is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream participant either directly or indirectly.
We understand that Euroclear was created in 1968 to hold securities for participants of Euroclear and to clear and settle transactions between Euroclear participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Euroclear provides various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries. Euroclear is operated by Euroclear Bank S.A./N.V., which we refer to as the “Euroclear Operator,” under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation, which we refer to as the “Cooperative.” All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative establishes policy for Euroclear on behalf of Euroclear participants. Euroclear participants include banks (including central banks), securities brokers and dealers, and other professional financial intermediaries and may include the underwriters. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly.
We understand that the Euroclear Operator is licensed by the Belgian Banking and Finance Commission to carry out banking activities on a global basis. As a Belgian bank, it is regulated and examined by the Belgian Banking and Finance Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively, the “Terms and Conditions”). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear participants and has no record of or relationship with persons holding through Euroclear participants.
We have provided the descriptions of the operations and procedures of Clearstream and Euroclear in this prospectus supplement solely as a matter of convenience, and we make no representation or warranty of any kind with respect to these operations and procedures. These operations and procedures are solely within the control of those organizations and are subject to change by them from time to time. None of us, the underwriters, the trustee or the paying agent takes any responsibility for these operations or procedures, and you are urged to contact Clearstream and Euroclear or their participants directly to discuss these matters.
We, the trustee, the paying agent and the registrar will not have any responsibility or liability for any aspect of the records relating to or payments made on account of notes by Clearstream or Euroclear, or for maintaining, supervising or reviewing any records of those organizations relating to the notes.
So long as Euroclear or Clearstream or their nominee or their common depositary is the registered holder of the global notes, Euroclear, Clearstream or such nominee, as the case may be, will be considered the sole owner or holder of the notes represented by such global notes for all purposes under the indenture and the notes. Payments of principal, interest and Additional Amounts, if any, in respect of the global notes will be made to Euroclear, Clearstream or such nominee, as the case may be, as registered holder thereof.
Distributions of principal, interest and Additional Amounts, if any, with respect to the global notes will be credited in euro to the extent received by Euroclear or Clearstream to the cash
accounts of Euroclear or Clearstream customers in accordance with the relevant system’s rules and procedures.
Because Euroclear and Clearstream can only act on behalf of participants, who in turn act on behalf of indirect participants, the ability of a person having an interest in the global notes to pledge such interest to persons or entities which do not participate in the relevant clearing system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate in respect of such interest.
Initial settlement for the notes will be made in immediately available funds. Secondary market trading between Clearstream and/or Euroclear participants will occur in the ordinary way in accordance with the applicable rules and operating procedures of Clearstream and Euroclear, as applicable, and will be settled using the procedures applicable to conventional Eurobonds in immediately available funds.
You should be aware that investors will only be able to make and receive deliveries, payments and other communications involving the notes through the Clearstream and Euroclear systems on days when those systems are open for business. Those systems may not be open for business on days when banks, brokers and other institutions are open for business in the United States.
In addition, because of time-zone differences, there may be problems with completing transactions involving the Clearstream and Euroclear systems on the same business day as in the United States. U.S. investors who wish to transfer their interests in the notes, or to make or receive a payment or delivery of the notes, on a particular day, may find that the transactions will not be performed until the next business day in Luxembourg or Brussels, depending on whether the Clearstream or Euroclear system is used.
Because the purchaser determines the place of delivery, it is important to establish at the time of trading of any notes where both the purchaser’s and seller’s accounts are located to ensure that settlement can be made on the desired date.
Secondary market sales of book-entry interests in the notes held through Clearstream or Euroclear to purchasers of book-entry interests in a global note through Clearstream or Euroclear will be conducted in accordance with the normal rules and operating procedures of Clearstream and Euroclear and will be settled using the procedures applicable to conventional eurobonds in same-day funds.
We have obtained the information in this section concerning Clearstream and Euroclear and the book-entry system and procedures from sources that we believe to be reliable, but neither we nor the underwriters take any responsibility for the accuracy of this information.
In a few special situations described below, the book-entry system for the notes will terminate and interests in the global notes will be exchanged for definitive notes in registered form. You must consult your bank, broker or other financial institution to find out how to have your interests in the notes transferred to your name, so that you will be a direct holder.
The special situations for termination of the book-entry system for the notes due 2021 are:
•the depositary for any of the notes represented by a registered global note notifies us that it is unwilling or unable to continue as depositary and we are unable to find a qualified replacement for such depositary within 90 days;
•we in our sole discretion determine to allow that global note to be exchangeable for definitive notes in registered form; or
•any event has occurred and is continuing, which after notice or lapse of time, would become an event of default with respect to the notes.
Notes due 2023
The following briefly summarizes certain terms of the notes due 2023. This summary does not describe every aspect of the notes due 2023 and is subject, and is qualified in its entirety by reference, to the prospectus supplement of UTC, dated as of May 22, 2015 and the definitive documents related to such notes.
General
We have issued the notes due 2023 in an initial aggregate principal amount of €750,000,000. The notes due 2023 will mature on May 22, 2023. We issued the notes due 2023 only in book-entry form, in denominations of €100,000 and integral multiples of €1,000 in excess thereof.
The notes due 2023 are listed on the New York Stock Exchange under the symbol “UTX 23.” We have no obligation to maintain such listing, and we may delist the notes due 2023 at any time.
The notes due 2023 will bear interest at the annual rate of 1.250% and will accrue interest from May 22, 2015, or from the most recent date to which interest has been paid or duly provided for.
Interest will be payable annually in arrears on May 22 of each year, beginning on May 22, 2016, to persons in whose names the notes due 2023 are registered at, if the notes due 2023 are in definitive form, the close of business on the preceding May 7 (whether or not a business day), or, if the notes due 2023 are represented by one or more global securities, the close of business on the business day (for this purpose a day on which Clearstream and Euroclear are open for business) immediately preceding the interest payment date. Interest on the notes due 2023 will be computed on the basis of the actual number of days in the period for which interest is being calculated and the actual number of days from and including the last date on which interest was paid on the notes due 2023 (or May 22, 2015 if no interest has been paid on the notes due 2023), to but excluding the next scheduled interest payment date. This payment convention is referred to as ACTUAL/ACTUAL (ICMA) as defined in the rulebook of the International Capital Market Association. If the date on which a payment of interest or principal on the notes due 2023 is scheduled to be paid is not a business day, then that interest or principal will be paid on the next succeeding business day, and no further interest will accrue as a result of such delay.
A “business day” is each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions are authorized or obligated by law or executive order to be closed in New York City or London and, for any place of payment outside of New York City or London, in such place of payment, and which is a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer system (the TARGET2 system), or any successor thereto, operates.
Payments of principal, interest and Additional Amounts, if any, in respect of the notes due 2023 will be payable in euro. If the euro is unavailable to us due to the imposition of exchange controls or other circumstances beyond our control (including the dissolution of the euro) or if the euro is no longer being used by the then member states of the European Monetary Union that have adopted the euro as their currency or for the settlement of transactions by public institutions of or within the international banking community, then all payments in respect of the applicable notes due 2023 will be made in U.S. dollars until the euro is again available to us or so used. The amount payable on any date in euro will be converted into U.S. dollars at the rate mandated by the U.S. Federal Reserve Board as of the close of business on the second business day prior to the relevant payment date or, in the event the U.S. Federal Reserve Board has not mandated a rate of conversion, on the basis of the then most recent U.S. dollar/euro exchange rate available on or prior to the second business day prior to the relevant payment date as determined by us in our sole discretion. Any payment in respect of the notes due 2023 so made in U.S. dollars will not constitute an event of default under the notes due 2023 or the indenture governing the notes due 2023. Neither the trustee nor the paying agent shall have any responsibility for any calculation or conversion in connection with the foregoing.
Investors will be subject to foreign exchange risks as to payments of principal, interest and Additional Amounts, if any, that may have important economic and tax consequences to them.
We may redeem some or all of the notes due 2023 at any time, at the redemption prices discussed below.
In some circumstances, we may elect to discharge our obligations on the notes due 2023 through defeasance or covenant defeasance. See “Description of Debt Securities—Defeasance and Covenant Defeasance” for more information about how we may do this.
We may, without the consent of the holders of the notes due 2023, issue additional notes due 2023 under the indenture having the same ranking and the same interest rate, maturity and other terms as the notes due 2023; provided that any such additional notes due 2023 that are not fungible with the notes due 2023 issued under the prospectus supplement dated as of May 22, 2015 for U.S. federal income tax purposes will have a separate CUSIP, ISIN and other identifying number than the notes due 2023 offered thereunder. Any such additional notes due 2023 will, together with the notes due 2023 offered by same the prospectus supplement, constitute a single series of notes due 2023 under the indenture.
Notices or demands to or upon UTC in respect of the notes due 2023 may be addressed to our principal executive offices.
Optional Redemption of the Notes due 2023
The notes due 2023 will be redeemable, in whole or in part, at our option at any time. The Company may redeem the notes due 2023 on any date prior to February 22, 2023 (three months prior to the maturity date of the notes due 2023) at a redemption price in euro equal to the greater of:
(a) 100% of the principal amount of the notes due 2023 to be redeemed; or
(b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes due 2023 to be redeemed as described below, discounted to the redemption date on an annual basis (ACTUAL/ACTUAL (ICMA)) at the applicable Comparable Government Bond Rate (as defined below), plus 15 basis points.
In every such case, the redemption price will also include interest accrued to, but excluding, the date of redemption on the principal balance of the notes due 2023 being redeemed.
In addition, at any time on or after February 22, 2023 (three months prior to the maturity date of the notes due 2023), the Company may redeem some or all of the notes due 2023 at its option at a redemption price equal to 100% of the principal amount of the notes due 2023 to be redeemed, plus, in every such case, interest accrued to, but excluding, the date of redemption on the principal balance of the notes due 2023 being redeemed.
In any case, the principal amount of a note remaining outstanding after a redemption in part shall be €100,000 or an integral multiple of €1,000 in excess thereof.
For purposes of the optional redemption provisions of the notes due 2023, the following terms will be applicable:
“Comparable Government Bond” means, in relation to any Comparable Government Bond Rate calculation, at the discretion of an independent investment bank selected by us, a German federal government bond whose maturity is closest to the maturity of the notes due 2023 to be redeemed, or if such independent investment bank in its discretion determines that such similar bond is not in issue, such other German federal government bond as such independent investment bank may, with the advice of three brokers of, and/or market makers in, German federal government bonds selected by us, determine to be appropriate for determining the Comparable Government Bond Rate.
“Comparable Government Bond Rate” means, with respect to any redemption date, the price, expressed as a percentage (rounded to three decimal places, with 0.0005 being rounded upwards), at which the gross redemption yield on the notes due 2023 to be redeemed, if they were to be purchased at such price on the third business day prior to the redemption date, would be equal to the gross redemption yield on such business day of the Comparable Government Bond (as defined above) on the basis of the middle market price of the Comparable Government Bond prevailing at 11:00 a.m. (London time) on such business day as determined by an independent investment bank selected by us.
General Information Regarding Optional Redemption
We will mail or electronically deliver, according to the procedures of the applicable depositary, notice (with a copy to the trustee and the paying agent) of any optional redemption to the registered holder of notes due 2023 being redeemed not less than 30 days and not more than 60 days before the redemption date. The notice of redemption will identify, among other things, the
redemption date, the redemption price (or if not then ascertainable, the manner of calculation thereof) and that on the redemption date, the redemption price will become due and payable and that notes due 2023 called for redemption will cease to accrue interest on and after the redemption date (unless there is a default on payment of the redemption price). Prior to any redemption date, we will deposit with The Bank of New York Mellon, London branch (or its successor), in its capacity as paying agent (the “paying agent”), or the trustee, money sufficient to pay the redemption price of the notes due 2023 to be redeemed on that date. If we redeem less than all of the notes due 2023, the trustee will choose the notes due 2023 to be redeemed by any method that it deems fair and appropriate; provided that if the notes due 2023 are represented by one or more global notes due 2023, beneficial interests in the notes due 2023 will be selected for redemption by Euroclear and Clearstream in accordance with their respective standard procedures therefor.
The notes due 2023 are also subject to redemption if certain events occur involving United States taxation. See “—Redemption for Tax Reasons.”
Additional Amounts
All payments of principal and interest in respect of the notes due 2023 by us or a paying agent on our behalf will be made free and clear of, and without deduction or withholding for or on account of, any present or future taxes, duties, assessments or other similar governmental charges imposed or levied by the United States or any political subdivision or taxing authority of or in the United States (collectively, “Taxes”), unless such withholding or deduction is required by law.
In the event such withholding or deduction for Taxes is required by law, subject to the limitations described below, we will pay to any non-U.S. holder or any foreign partnership such additional amounts (“Additional Amounts”) as may be necessary to ensure that the net amount received by such person, after withholding or deduction for such Taxes, will be equal to the amount such person would have received in the absence of such withholding or deduction.
However, no Additional Amounts shall be payable with respect to any Taxes if such Taxes are imposed or levied for reasons unrelated to the holder’s or beneficial owner’s ownership or disposition of notes due 2023, nor shall Additional Amounts be payable for or on account of:
(a) any Taxes which would not have been so imposed, withheld or deducted but for:
(1) the existence of any present or former connection between the holder or beneficial owner (or between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner, if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity) and the United States, including, without limitation, such holder or beneficial owner (or such fiduciary, settlor, beneficiary, member, shareholder or other equity owner or person having such a power) being or having been a citizen or resident or treated as a resident of the United States, being or having been engaged in a trade or business in the United States, being or having been present in the United States, or having or having had a permanent establishment in the United States;
(2) the failure of the holder or beneficial owner to comply with any applicable certification, information, documentation or other reporting requirement, if compliance is required under the tax laws and regulations of the United States or any political subdivision or taxing authority of or in the United States to establish entitlement to a partial or complete exemption from such Taxes (including, but not limited to, the requirement to provide Internal Revenue Service Form W-8BEN, Form W-8BEN-E, Form W-8ECI, Form W-8IMY (and related documentation) or any subsequent versions thereof or successor thereto);
(3) the holder’s or beneficial owner’s present or former status as a personal holding company or a foreign personal holding company with respect to the United States, as a controlled foreign corporation with respect to the United States, as a passive foreign investment company with respect to the United States, as a foreign tax exempt organization with respect to the United States or as a corporation that accumulates earnings to avoid United States federal income tax;
(b) any Taxes which would not have been imposed, withheld or deducted but for the failure of the holder or beneficial owner to meet the requirements (including the certification requirements) of Section 871(h) or Section 881(c) of the Internal Revenue Code of 1986, as amended (the “Code”);
(c) any Taxes which would not have been imposed, withheld or deducted but for the presentation by the holder or beneficial owner of such note for payment on a date more than 30 days after the date on which such payment became due and payable or the date on which payment of the note due 2023 is duly provided for and notice is given to holders, whichever occurs later, except to the extent that the holder or beneficial owner would have been entitled to such Additional Amounts on presenting such note on any date during such 30-day period;
(d) any estate, inheritance, gift, sales, excise, transfer, personal property, wealth or similar Taxes;
(e) any Taxes which are payable otherwise than by withholding or deduction from a payment on such note;
(f) any Taxes which are imposed, withheld or deducted with respect to, or payable by, a holder that is not the beneficial owner of the note, or a portion of the note, or that is a fiduciary, partnership, limited liability company or other similar entity, but only to the extent that a beneficial owner, a beneficiary or settlor with respect to such fiduciary or member of such partnership, limited liability company or similar entity would not have been entitled to the payment of an Additional Amount had such beneficial owner, settlor, beneficiary or member received directly its beneficial or distributive share of the payment;
(g) any Taxes required to be withheld or deducted by any paying agent from any payment on any note, if such payment can be made without such withholding or deduction by at least one other paying agent;
(h) any Taxes required to be withheld or deducted where such withholding or deduction is imposed pursuant to European Council Directive 2003/48/EC on the taxation of savings income, or any law implementing or complying with, or introduced in order to conform to, such European Council Directive;
(i) any Taxes imposed, withheld or deducted under Sections 1471 through 1474 of the Code (or any amended or successor provisions), any current or future regulations or official interpretations thereof, any agreement entered into pursuant to Section 1471(b) of the Code or any fiscal or
regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of such sections of the Code;
(j) any Taxes that would not have been imposed, withheld or deducted but for a change in any law, treaty, regulation, or administrative or judicial interpretation that becomes effective more than 15 days after the applicable payment becomes due or is duly provided for, whichever occurs later; or
(k) any combination of items (a), (b), (c), (d), (e), (f), (g), (h), (i) and (j).
Any Additional Amounts paid on the notes due 2023 will be paid in euro.
For purposes of this section, the acquisition, ownership, enforcement, or holding of or the receipt of any payment with respect to a note will not constitute a connection (1) between the holder or beneficial owner and the United States or (2) between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity and the United States.
Except as specifically provided under this section “Additional Amounts,” we will not be required to make any payment with respect to any tax, duty, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority.
If we are required to pay Additional Amounts with respect to the notes due 2023, we will notify the trustee and paying agent pursuant to an officers’ certificate that specifies the Additional Amounts payable and when the Additional Amounts are payable. If the trustee and the paying agent do not receive such an officers’ certificate from us, the trustee and paying agent may rely on the absence of such an officers’ certificate in assuming that no such Additional Amounts are payable.
We will initially appoint the trustee at its corporate trust office as transfer agent and registrar for the notes due 2023. The Bank of New York Mellon, London Branch, will initially act as paying agent for the notes due 2023. We may vary or terminate the appointment of any paying agent or transfer agent, or appoint additional or other such agents or approve any change in the office through which any such agent acts, provided, however, that, to the extent permitted by law, we will maintain a paying agent that will not require withholding or deduction of tax pursuant to European Council Directive 2003/48/EC on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such European Council Directive.
Redemption for Tax Reasons
We may redeem the notes due 2023 at our option, in whole but not in part, at a redemption price equal to 100% of the principal amount of the notes due 2023 to be redeemed, together with any accrued and unpaid interest on the notes due 2023 to be redeemed to, but excluding, the redemption date, at any time, if:
(i) we have or will become obliged to pay Additional Amounts with respect to the notes due 2023 as a result of any change in, or amendment to, the laws, regulations, treaties, or rulings of the United States or any political subdivision of or in the United States or any taxing authority thereof or therein affecting taxation, or any change in, or amendment to, the application, official interpretation, administration or enforcement of such laws, regulations, treaties or rulings (including a holding by a court of competent jurisdiction in the United States), which change or amendment is enacted, adopted, announced or becomes effective on or after the date of the applicable prospectus supplement; or
(ii) on or after the date of the applicable prospectus supplement, any action is taken by a taxing authority of, or any action has been brought in a court of competent jurisdiction in, the United States or any political subdivision of or in the United States or any taxing authority thereof or therein, including any of those actions specified in clause (i) above, whether or not such action was taken or brought with respect to us, or there is any change, amendment, clarification, application or interpretation of such laws, regulations, treaties or rulings, which in any such case, will result in a material probability that we will be required to pay Additional Amounts with respect to the notes due 2023 (it being understood that such material probability will be deemed to result if the written opinion of independent tax counsel described in clause (b) below to such effect is delivered to the trustee and the paying agent).
Notice of any such redemption will be mailed, or delivered electronically if held by any depositary in accordance with such depositary’s customary procedures, at least 30 days but not more than 60 days before the redemption date to each registered holder of the notes due 2023 to be redeemed; provided, however, that the notice of redemption shall not be given earlier than 90 days before the earliest date on which we would be obligated to pay such Additional Amounts if a payment in respect of the notes due 2023 was then due.
Prior to the mailing or delivery of any notice of redemption pursuant to this section “Redemption for Tax Reasons,” we will deliver to the trustee and the paying agent:
(a) a certificate signed by one of our officers stating that we are entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to our right to so redeem have occurred, and
(b) a written opinion of independent tax counsel of nationally recognized standing to the effect that we have or will become obligated to pay such Additional Amounts as a result of such change or amendment or that there is a material probability that we will be required to pay Additional Amounts as a result of such action, change, amendment, clarification, application or interpretation, as the case may be.
Such notice, once delivered by us will be irrevocable.
Resignation and Removal of the Trustee; Deemed Resignation
The trustee may resign at any time by giving written notice to us.
The trustee may also be removed with respect to the notes due 2023 by act of the holders of a majority in principal amount of the then outstanding notes due 2023 .
No resignation or removal of the trustee and no appointment of a successor trustee will become effective until the acceptance of appointment by a successor trustee in accordance with the requirements of the indenture.
Under certain circumstances, we may appoint a successor trustee.
We will provide you with notice of any resignation, termination or appointment of the trustee or any paying agent or transfer agent, and of any change in the office through which any such agent will act.
Notices
Notices to holders of notes due 2023 are to be given by mail to the addresses of the holders as they may appear in the security register.
Title
UTC, the trustee, and any agent of either, may treat the person or entity in whose name indenture securities are registered as the owner of those indenture securities for the purpose of receiving payments on such indenture securities (subject to the provisions of the indenture) and for all other purposes whatsoever, whether or not such indenture securities may be overdue, and irrespective of notice to the contrary.
Governing Law
The notes due 2023 provide that they are governed by and construed in accordance with the laws of the State of New York.
The Trustee, Registrar and Paying Agent
The trustee, registrar and transfer agent under the indenture is The Bank of New York Mellon Trust Company, N.A. The Bank of New York Mellon, London Branch has been appointed by the Company to act as paying agent. The trustee maintains various banking and trust relationships with us and some of our affiliates.
The trustee is under no obligation to exercise any of the rights or powers vested in it by the indenture at the request or direction of any of the holders of notes due 2023 pursuant to the indenture, unless such holders shall have offered to the trustee security or indemnity reasonably satisfactory to the trustee against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.
Book-Entry, Delivery and Form
We issued the notes due 2023 in the form of one or more global notes (the “global notes”) in definitive, fully registered, book-entry form without coupons. The global notes will be deposited with a common depositary (and registered in the name of its nominee) for, and in respect of interests held through, Clearstream Banking, société anonyme, which we refer to as “Clearstream,” or Euroclear Bank S.A./N.V., which we refer to as “Euroclear.” Except as described herein, certificates will not be issued in exchange for beneficial interests in the global notes.
Except as set forth below, the global notes may be transferred, in whole and not in part, only to a common depository for Clearstream and Euroclear or its nominee. No link is expected to be established among The Depository Trust Company and Clearstream or Euroclear in connection with the issuance of the notes.
Beneficial interests in the global notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in Clearstream or Euroclear. Those beneficial interests will be in denominations of €100,000 and integral multiples of €1,000 in excess thereof. Should certificates be issued to individual holders of the notes due 2023, a holder of notes due 2023 who, as a result of trading or otherwise, holds a principal amount of notes due 2023 that is less than the minimum denomination of the notes due 2023 would be required to purchase an additional principal amount of notes due 2023 such that its holding of notes due 2023 amounts to the minimum specified denomination. Investors may hold interests in the global notes through Clearstream or Euroclear either directly if they are participants in such systems or indirectly through organizations that are participants in such systems.
Except as set forth in the indenture, owners of beneficial interests in the global notes will not be entitled to have notes registered in their names, and will not receive or be entitled to receive physical delivery of notes in definitive form. Except as provided below, beneficial owners will not be considered the owners or holders of the notes under the indenture. Accordingly, each beneficial owner must rely on the procedures of the clearing systems and, if such person is not a participant of the clearing systems, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the indenture. Under existing industry practices, if we request any action of holders or a beneficial owner desires to give or take any action which a holder is entitled to give or take under the indenture, the clearing systems would authorize their participants holding the relevant beneficial interests to give or take action and the participants would authorize beneficial owners owning through the participants to give or take such action or would otherwise act upon the instructions of beneficial owners. Conveyance of notices and other communications by the clearing systems to their participants, by the participants to indirect participants and by the participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Persons who are not Euroclear or Clearstream participants may beneficially own notes held by the common depositary for Euroclear and Clearstream only through direct or indirect participants in Euroclear and Clearstream.
We understand that Clearstream is incorporated under the laws of Luxembourg as a professional depositary. Clearstream holds securities for its participants and facilitates the clearance and settlement of securities transactions between its participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Clearstream provides to its participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. As a professional depositary, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of the Financial Sector. Clearstream participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and other organizations and may include the underwriters. Indirect access to Clearstream is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream participant either directly or indirectly.
We understand that Euroclear was created in 1968 to hold securities for participants of Euroclear and to clear and settle transactions between Euroclear participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Euroclear provides various other services, including securities lending and borrowing and interfaces with domestic markets in several countries. Euroclear is operated by Euroclear Bank S.A./N.V., which we refer to as the “Euroclear Operator,” under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation, which we refer to as the “Cooperative.” All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative establishes policy for Euroclear on behalf of Euroclear participants. Euroclear participants include banks (including central banks), securities brokers and dealers, and other professional financial intermediaries and may include the underwriters. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly.
We understand that the Euroclear Operator is licensed by the Belgian Banking and Finance Commission to carry out banking activities on a global basis. As a Belgian bank, it is regulated and examined by the Belgian Banking and Finance Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively, the “Terms and Conditions”). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear participants and has no record of or relationship with persons holding through Euroclear participants.
We have provided the descriptions of the operations and procedures of Clearstream and Euroclear in this prospectus supplement solely as a matter of convenience, and we make no representation or warranty of any kind with respect to these operations and procedures. These operations and procedures are solely within the control of those organizations and are subject to change by them from time to time. None of us, the underwriters, the trustee or the paying agent takes any responsibility for these operations or procedures, and you are urged to contact Clearstream and Euroclear or their participants directly to discuss these matters.
We, the trustee, the paying agent and the registrar will not have any responsibility or liability for any aspect of the records relating to or payments made on account of notes by Clearstream or Euroclear, or for maintaining, supervising or reviewing any records of those organizations relating to the notes.
So long as Euroclear or Clearstream or their nominee or their common depositary is the registered holder of the global notes, Euroclear, Clearstream or such nominee, as the case may be, will be considered the sole owner or holder of the notes represented by such global notes for all purposes under the indenture and the notes. Payments of principal, interest and Additional Amounts, if any, in respect of the global notes will be made to Euroclear, Clearstream or such nominee, as the case may be, as registered holder thereof.
Distributions of principal, interest and Additional Amounts, if any, with respect to the global notes will be credited in euro to the extent received by Euroclear or Clearstream to the cash accounts of Euroclear or Clearstream customers in accordance with the relevant system’s rules and procedures.
Because Euroclear and Clearstream can only act on behalf of participants, who in turn act on behalf of indirect participants, the ability of a person having an interest in the global notes to pledge such interest to persons or entities which do not participate in the relevant clearing system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate in respect of such interest.
Initial settlement for the notes will be made in immediately available funds. Secondary market trading between Clearstream and/or Euroclear participants will occur in the ordinary way in accordance with the applicable rules and operating procedures of Clearstream and Euroclear, as applicable, and will be settled using the procedures applicable to conventional Eurobonds in immediately available funds.
You should be aware that investors will only be able to make and receive deliveries, payments and other communications involving the notes through the Clearstream and Euroclear systems on days when those systems are open for business. Those systems may not be open for business on days when banks, brokers and other institutions are open for business in the United States.
In addition, because of time-zone differences, there may be problems with completing transactions involving the Clearstream and Euroclear systems on the same business day as in the
United States. U.S. investors who wish to transfer their interests in the notes, or to make or receive a payment or delivery of the notes, on a particular day, may find that the transactions will not be performed until the next business day in Luxembourg or Brussels, depending on whether the Clearstream or Euroclear system is used.
Because the purchaser determines the place of delivery, it is important to establish at the time of trading of any notes where both the purchaser’s and seller’s accounts are located to ensure that settlement can be made on the desired date.
Secondary market sales of book-entry interests in the notes held through Clearstream or Euroclear to purchasers of book-entry interests in a global note through Clearstream or Euroclear will be conducted in accordance with the normal rules and operating procedures of Clearstream and Euroclear and will be settled using the procedures applicable to conventional eurobonds in same-day funds.
We have obtained the information in this section concerning Clearstream and Euroclear and the book-entry system and procedures from sources that we believe to be reliable, but neither we nor the underwriters take any responsibility for the accuracy of this information.
In a few special situations described below, the book-entry system for the notes will terminate and interests in the global notes will be exchanged for physical certificates representing the notes. After that exchange, the choice of whether to hold notes directly or in street name will be up to you. You must consult your bank, broker or other financial institution to find out how to have your interests in the notes transferred to your name, so that you will be a direct holder.
The special situations for termination of the book-entry system for the notes due 2023 are:
•the depositary for any of the notes represented by a registered global note notifies us that it is unwilling or unable to continue as depositary and we are unable to find a qualified replacement for such depositary within 90 days;
•we in our sole discretion determine to allow that global note to be exchangeable for definitive notes in registered form; or
•any event has occurred and is continuing, which after notice or lapse of time, would become an event of default with respect to the notes.
Notes due 2024
The following briefly summarizes certain terms of the notes due 2024. This summary does not describe every aspect of the notes due 2024 and is subject, and is qualified in its entirety by reference, to the prospectus supplement of UTC, dated as of May 18, 2018 and the definitive documents related to such notes.
General
We have issued the notes due 2024 in an initial aggregate principal amount of €750,000,000. The notes due 2024 will mature on May 18, 2024.
The notes due 2024 have been issued in book-entry form. See “Book-Entry, Delivery and Form.” We issued the notes due 2024 only in minimum denominations of €100,000 and integral multiples of €1,000 in excess thereof.
The notes due 2024 are listed on the New York Stock Exchange under the symbol “UTX 24A.” We have no obligation to maintain such listing, and we may delist the notes due 2024 at any time.
We may, without the consent of the holders of the notes due 2024, issue additional notes due 2024 under the indenture having the same ranking and the same interest rate, maturity and other terms as the notes due 2024; provided that any such additional notes due 2024 that are not fungible with the notes due 2024 offered under the prospectus supplement dated as of May 18, 2018 for U.S. federal income tax purposes will have a separate CUSIP, ISIN and other identifying number than the notes due 2024 offered thereunder. Any such additional notes due 2024 will, together with the notes due 2024 offered by the same prospectus supplement, constitute a single series of notes under the indenture.
Interest
The notes due 2024 will bear interest at the annual rate of 1.150% and will accrue interest from the most recent date to which interest has been paid or duly provided for.
Interest will be payable on the notes due 2024 annually in arrears on May 18 of each year, and on the relevant maturity date, beginning on May 18, 2019 (each, a “fixed rate interest payment date”), to the persons in whose names the notes due 2024 are registered on the record date; provided, however, that interest payable on the relevant maturity date or any relevant redemption date will be payable to the persons to whom the principal of the notes due 2024 is payable. Interest on the notes due 2024 will be computed on the basis of the actual number of days in the period for which interest is being calculated and the actual number of days from and including the last date on which interest was paid on the notes due 2024 (or May 18, 2018 if no interest has been paid on the notes due 2024), to, but excluding, the next fixed rate interest payment date. This payment convention is referred to as ACTUAL/ACTUAL (ICMA) as defined in the
rulebook of the International Capital Market Association. If the date on which a payment of interest or principal on the notes due 2024 is scheduled to be paid is not a business day, then that interest or principal will be paid on the next succeeding business day, and no further interest will accrue as a result of such delay.
A “business day” is each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions are authorized or obligated by law or executive order to be closed in New York City or London and which is a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer system (the “TARGET2 system”), or any successor thereto, operates.
A “record date” is the close of business on the date that is fifteen calendar days prior to the date on which interest is scheduled to be paid, regardless of whether such date is a business day; provided that if any of the notes due 2024 are held by a securities depositary in book-entry form, the record date for such notes will be the close of business on the business day (for this purpose a day on which Clearstream and Euroclear are open for business) immediately preceding the date on which interest is scheduled to be paid.
Issuance in Euro
Payments of principal, interest and Additional Amounts, if any, in respect of the notes due 2024 will be payable in euro. If the euro is unavailable to us due to the imposition of exchange controls or other circumstances beyond our control (including the dissolution of the euro) or if the euro is no longer being used by the then member states of the European Monetary Union that have adopted the euro as their currency or for the settlement of transactions by public institutions of or within the international banking community, then all payments in respect of the applicable notes will be made in U.S. dollars until the euro is again available to us or so used. The amount payable on any date in euro will be converted into U.S. dollars at the rate mandated by the U.S. Federal Reserve Board as of the close of business on the second business day prior to the relevant payment date or, in the event the U.S. Federal Reserve Board has not mandated a rate of conversion, on the basis of the then most recent U.S. dollar/euro exchange rate available on or prior to the second business day prior to the relevant payment date as determined by us in our sole discretion. Any payment in respect of the notes so made in U.S. dollars will not constitute an event of default under the notes or the indenture governing the notes. Neither the trustee nor the paying agent shall have any responsibility for any calculation or conversion in connection with the foregoing.
Investors will be subject to foreign exchange risks as to payments of principal, interest and Additional Amounts, if any, that may have important economic and tax consequences to them.
Optional Redemption
The notes due 2024 will be redeemable, in whole or in part, at our option at any time. The Company may redeem the notes due 2024 on any date prior to February 18, 2024 at a redemption price in euro equal to the greater of:
(a) 100% of the principal amount of the notes due 2024 to be redeemed; or
(b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes due 2024 to be redeemed as described below, discounted to the redemption date on an annual basis (ACTUAL/ACTUAL (ICMA)) at the applicable Comparable Government Bond Rate (as defined below), plus 20 basis points.
In every such case, the redemption price will also include interest accrued to, but excluding, the date of redemption on the principal balance of the notes due 2024 being redeemed.
In addition, at any time on or after February 18, 2024, the Company may redeem some or all of the notes due 2024 at its option at a redemption price equal to 100% of the principal amount of the notes due 2024 to be redeemed, plus, in every such case, interest accrued to, but excluding, the date of redemption on the principal balance of the notes due 2024 being redeemed.
In any case, the principal amount of a note remaining outstanding after a redemption in part shall be €100,000 or an integral multiple of €1,000 in excess thereof.
For purposes of the optional redemption provisions of the notes due 2024, the following terms will be applicable:
“Comparable Government Bond” means, in relation to any Comparable Government Bond Rate calculation, at the discretion of an independent investment bank selected by us, a German federal government bond whose maturity is closest to the maturity of the notes due 2024 to be redeemed, or if such independent investment bank in its discretion determines that such similar bond is not in issue, such other German federal government bond as such independent investment bank may, with the advice of three brokers of, and/or market makers in, German federal government bonds selected by us, determine to be appropriate for determining the Comparable Government Bond Rate.
“Comparable Government Bond Rate” means, with respect to any redemption date, the price, expressed as a percentage (rounded to three decimal places, with 0.0005 being rounded upwards), at which the gross redemption yield on the notes due 2024 to be redeemed, if they were to be purchased at such price on the third business day prior to the redemption date, would be equal to the gross redemption yield on such business day of the Comparable Government Bond (as defined above) on the basis of the middle market price of the Comparable Government Bond prevailing at 11:00 a.m. (London time) on such business day as determined by an independent investment bank selected by us.
General Information Regarding Optional Redemption
We will mail or electronically deliver, according to the procedures of the applicable depositary, notice (with a copy to the trustee and the paying agent) of any optional redemption to the registered holder of the notes due 2024 being redeemed not less than 15 days and not more than 60 days before the redemption date. The notice of redemption will identify, among other things,
the redemption date, the redemption price (or if not then ascertainable, the manner of calculation thereof) and that on the redemption date, the redemption price will become due and payable and that the notes called for redemption will cease to accrue interest on and after the redemption date (unless there is a default on payment of the redemption price). Prior to any redemption date, we will deposit with the paying agent or the trustee money sufficient to pay the redemption price of the notes to be redeemed on that date. If we redeem less than all of any series of fixed rate notes, the trustee will choose the notes due 2024 to be redeemed by any method that it deems fair and appropriate; provided that if the notes due 2024 are represented by one or more global notes, beneficial interests in the notes due 2024 will be selected for redemption by Euroclear and Clearstream in accordance with their respective standard procedures therefor.
The notes due 2024 are also subject to redemption if certain events occur involving United States taxation. See “—Redemption for Tax Reasons.”
Additional Amounts
All payments of principal and interest in respect of the notes due 2024 by us or a paying agent on our behalf will be made free and clear of, and without deduction or withholding for or on account of, any present or future taxes, duties, assessments or other similar governmental charges imposed or levied by the United States or any political subdivision or taxing authority of or in the United States (collectively, “Taxes”), unless such withholding or deduction is required by law.
In the event such withholding or deduction for Taxes is required by law, subject to the limitations described below, we will pay to any non-U.S. holder or any foreign partnership such additional amounts (“Additional Amounts”) as may be necessary to ensure that the net amount received by such person, after withholding or deduction for such Taxes, will be equal to the amount such person would have received in the absence of such withholding or deduction.
However, no Additional Amounts shall be payable with respect to any Taxes if such Taxes are imposed, withheld, deducted or levied for reasons unrelated to the holder’s or beneficial owner’s ownership or disposition of notes, nor shall Additional Amounts be payable for or on account of:
(a) any Taxes which would not have been so imposed, withheld, deducted or levied but for:
(1) the existence of any present or former connection between the holder or beneficial owner (or between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner, if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity) and the United States, including, without limitation, such holder or beneficial owner (or such fiduciary, settlor, beneficiary, member, shareholder or other equity owner or person having such a power) being or having been a citizen or resident or treated as a resident of the United States, being or having been engaged in a trade or business in the United States, being or having been present in the United States, or having or having had a permanent establishment in the United States;
(2) the failure of the holder or beneficial owner to comply with any applicable certification, information, documentation or other reporting requirement, if compliance is
required under the tax laws and regulations of the United States or any political subdivision or taxing authority of or in the United States to establish entitlement to a partial or complete exemption from such Taxes (including, but not limited to, the requirement to provide Internal Revenue Service Form W-8BEN, Form W-8BEN-E, Form W-8ECI, Form W-8IMY (and related documentation) or any subsequent versions thereof or successor thereto); or
(3) the holder’s or beneficial owner’s present or former status as a personal holding company or a foreign personal holding company with respect to the United States, as a controlled foreign corporation with respect to the United States, as a passive foreign investment company with respect to the United States, as a foreign tax-exempt organization with respect to the United States or as a corporation that accumulates earnings to avoid United States federal income tax;
(b) any Taxes which would not have been imposed, withheld, deducted or levied but for the failure of the holder or beneficial owner to meet the requirements (including the certification requirements) of Section 871(h) or Section 881(c) of the Internal Revenue Code of 1986, as amended (the “Code”);
(c) any Taxes which would not have been imposed, withheld, deducted or levied but for the presentation by the holder or beneficial owner of such note for payment on a date more than 30 days after the date on which such payment became due and payable or the date on which payment of the note due 2024 is duly provided for and notice is given to holders, whichever occurs later, except to the extent that the holder or beneficial owner would have been entitled to such Additional Amounts on presenting such note on any date during such 30-day period;
(d) any estate, inheritance, gift, sales, excise, transfer, personal property, wealth or similar Taxes;
(e) any Taxes which are payable other than by withholding or deduction from a payment on such note;
(f) any Taxes which are imposed, withheld, deducted or levied with respect to, or payable by, a holder that is not the beneficial owner of the note, or a portion of the note, or that is a fiduciary, partnership, limited liability company or other similar entity, but only to the extent that a beneficial owner, a beneficiary or settlor with respect to such fiduciary or member of such partnership, limited liability company or similar entity would not have been entitled to the payment of an Additional Amount had such beneficial owner, settlor, beneficiary or member received directly its beneficial or distributive share of the payment;
(g) any Taxes required to be withheld or deducted by any paying agent from any payment on any note, if such payment can be made without such withholding or deduction by at least one other paying agent;
(h) any Taxes imposed, withheld, deducted or levied under Sections 1471 through 1474 of the Code (or any amended or successor provisions), any current or future regulations or official interpretations thereof, any agreement entered into pursuant to Section 1471(b) of the Code or any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of such sections of the Code;
(i) any Taxes that would not have been imposed, withheld, deducted or levied but for a change in any law, treaty, regulation, or administrative or judicial interpretation that becomes effective after the applicable payment becomes due or is duly provided for, whichever occurs later; or
(j) any combination of items (a), (b), (c), (d), (e), (f), (g), (h) and (i).
Any Additional Amounts paid on the notes due 2024 will be paid in euro.
For purposes of this section, the acquisition, ownership, enforcement, or holding of or the receipt of any payment with respect to a note alone will not constitute a connection (1) between the holder or beneficial owner and the United States or (2) between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity and the United States.
Except as specifically provided under this section “Additional Amounts,” we will not be required to make any payment with respect to any tax, duty, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority.
If we are required to pay Additional Amounts with respect to the notes due 2024, we will notify the trustee and paying agent pursuant to an officers’ certificate that specifies the Additional Amounts payable and when the Additional Amounts are payable. If the trustee and the paying agent do not receive such an officers’ certificate from us, the trustee and paying agent may rely on the absence of such an officers’ certificate in assuming that no such Additional Amounts are payable.
Redemption for Tax Reasons
We may redeem the notes due 2024 at our option, in whole but not in part, at a redemption price equal to 100% of the principal amount of the notes due 2024 to be redeemed, together with any accrued and unpaid interest on the notes to be redeemed to, but excluding, the redemption date, at any time, if:
(i) we have or will become obliged to pay Additional Amounts with respect to such series of the notes as a result of any change in, or amendment to, the laws, regulations, treaties, or rulings of the United States or any political subdivision of or in the United States or any taxing authority thereof or therein affecting taxation, or any change in, or amendment to, the application, official interpretation, administration or enforcement of such laws, regulations, treaties or rulings (including a holding by a court of competent jurisdiction in the United States), which change or amendment is enacted, adopted, announced or becomes effective on or after the date of the applicable prospectus supplement; or
(ii) on or after the date of the applicable prospectus supplement, any action is taken by a taxing authority of, or any action has been brought in a court of competent jurisdiction in, the United States or any political subdivision of or in the United States or any taxing authority thereof or therein, including any of those actions specified in clause (i) above, whether or not such action was taken or brought with respect to us, or there is any change, amendment, clarification, application or interpretation of such laws, regulations, treaties or rulings, which in any such case, will result in a material probability that we will be required to pay Additional Amounts with respect to the notes due 2024 (it being understood that such material probability will be deemed to result if the written opinion of independent tax counsel described in clause (b) below to such effect is delivered to the trustee and the paying agent).
Notice of any such redemption will be mailed, or delivered electronically if held by any depositary in accordance with such depositary’s customary procedures, at least 15 days but not more than 60 days before the redemption date to each registered holder of the notes due 2024 to be redeemed; provided, however, that the notice of redemption shall not be given earlier than 90 days before the earliest date on which we would be obligated to pay such Additional Amounts if a payment in respect of the notes to be redeemed was then due.
Prior to the mailing or delivery of any notice of redemption pursuant to this section “Redemption for Tax Reasons,” we will deliver to the trustee and the paying agent:
(a) a certificate signed by one of our officers stating that we are entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to our right to so redeem have occurred, and
(b) a written opinion of independent tax counsel of nationally recognized standing to the effect that we have or will become obligated to pay such Additional Amounts as a result of a change or amendment described in clause (i) above or that there is a material probability that we will be required to pay Additional Amounts as a result of an action, change, amendment, clarification, application or interpretation described in clause (ii) above, as the case may be.
Such notice, once delivered by us will be irrevocable.
Resignation and Removal of the Trustee
The trustee may resign at any time by giving written notice to us.
The trustee may also be removed with respect to the notes due 2024 by an act of the holders of a majority in principal amount of the then outstanding the notes due 2024.
No resignation or removal of the trustee and no appointment of a successor trustee will become effective until the acceptance of appointment by a successor trustee in accordance with the requirements of the indenture.
Under certain circumstances, we may appoint a successor trustee.
We will provide you with notice of any resignation, removal or appointment of the trustee.
Notices
Notices to holders of the notes due 2024 are to be given by mail to the addresses of the holders as they may appear in the security register. If it is impractical to mail notice of any event to holders when such notice is required to be given pursuant to the indenture, then any manner of giving such notice as shall be satisfactory to the trustee shall be deemed to be sufficient giving of such notice.
Title
UTC, the trustee, and any agent of either, may treat the person or entity in whose name the notes due 2024 are registered as the owner of those notes for the purpose of receiving payments on such notes (subject to the provisions of the indenture) and for all other purposes whatsoever, whether or not such notes may be overdue, and irrespective of notice to the contrary.
Governing Law
The notes due 2024 are governed by and construed in accordance with the laws of the State of New York.
The Trustee, Securities Registrar, Paying Agent and Calculation Agent
The trustee and securities registrar under the indenture is The Bank of New York Mellon Trust Company, N.A. The Bank of New York Mellon, London Branch has been appointed by the Company to act as paying agent. The trustee maintains various banking and trust relationships with us and some of our affiliates. We may vary or terminate the appointment of any paying agent, securities registrar or calculation agent, or appoint additional or other such agents or approve any change in the office through which any such agent acts.
The trustee is under no obligation to exercise any of the rights or powers vested in it by the indenture at the request or direction of any of the holders of the notes due 2024 pursuant to the indenture, unless such holders shall have offered to the trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.
Book-Entry, Delivery and Form
We issued the notes due 2024 in the form of global notes (the “global notes”) in definitive, fully registered, book-entry form without coupons. The global notes will be deposited with a common depositary (and registered in the name of its nominee) for, and in respect of interests held through, Clearstream Banking S.A., which we refer to as “Clearstream,” or Euroclear Bank SA/NV, which we refer to as “Euroclear.” Except as described herein, definitive notes in registered form will not be issued in exchange for beneficial interests in the global notes.
Except as set forth below, the global notes may be transferred, in whole and not in part, only to a common depositary for Clearstream and Euroclear or its nominee. No link is expected to be established among The Depository Trust Company and Clearstream or Euroclear in connection with the issuance of the notes.
Beneficial interests in the global notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in Clearstream or Euroclear. Those beneficial interests will be in minimum denominations of €100,000 and integral multiples of €1,000 in excess thereof. Should definitive notes in registered
form be issued to individual holders of the notes due 2024, a holder of notes due 2024 who, as a result of trading or otherwise, holds a principal amount of the notes due 2024 that is less than the minimum denomination would be required to purchase an additional principal amount of the notes due 2024 such that its holding of the notes due 2024 amounts to the minimum specified denomination. Investors may hold interests in the global notes through Clearstream or Euroclear either directly if they are participants in such systems or indirectly through organizations that are participants in such systems.
Except as set forth in the indenture or related officers’ certificate, owners of beneficial interests in the global notes will not be entitled to have notes registered in their names, and will not receive or be entitled to receive physical delivery of notes in definitive form. Except as provided below, beneficial owners will not be considered the owners or holders of the notes under the indenture. Accordingly, each beneficial owner must rely on the procedures of the clearing systems and, if such person is not a participant of the clearing systems, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the indenture. Under existing industry practices, if we request any action of holders or a beneficial owner desires to give or take any action which a holder is entitled to give or take under the indenture, the clearing systems would authorize their participants holding the relevant beneficial interests to give or take action and the participants would authorize beneficial owners owning through the participants to give or take such action or would otherwise act upon the instructions of beneficial owners. Conveyance of notices and other communications by the clearing systems to their participants, by the participants to indirect participants and by the participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Persons who are not Euroclear or Clearstream participants may beneficially own notes held by the common depositary for Euroclear and Clearstream only through direct or indirect participants in Euroclear and Clearstream.
We understand that Clearstream is incorporated under the laws of Luxembourg as a professional depositary. Clearstream holds securities for its participants and facilitates the clearance and settlement of securities transactions between its participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Clearstream provides to its participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. As a professional depositary, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of the Financial Sector. Clearstream participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and other organizations and may include the underwriters. Indirect access to Clearstream is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream participant either directly or indirectly.
We understand that Euroclear was created in 1968 to hold securities for participants of Euroclear and to clear and settle transactions between Euroclear participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Euroclear provides various other services, including securities lending and borrowing and interfaces with domestic markets in several countries. Euroclear is operated by Euroclear Bank SA/NV, which we refer to as the “Euroclear Operator,” under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation, which we refer to as the “Cooperative.” All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative establishes policy for Euroclear on behalf of Euroclear participants. Euroclear participants include banks (including central banks), securities brokers and dealers, and other professional financial intermediaries and may include the underwriters. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly.
We understand that the Euroclear Operator is licensed by the Belgian Banking and Finance Commission to carry out banking activities on a global basis. As a Belgian bank, it is regulated and examined by the Belgian Banking and Finance Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively, the “Terms and Conditions”). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear participants and has no record of or relationship with persons holding through Euroclear participants.
We have provided the descriptions of the operations and procedures of Clearstream and Euroclear in this prospectus supplement solely as a matter of convenience, and we make no representation or warranty of any kind with respect to these operations and procedures. These operations and procedures are solely within the control of those organizations and are subject to change by them from time to time. None of us, the underwriters, the trustee or the paying agent takes any responsibility for these operations or procedures, and you are urged to contact Clearstream and Euroclear or their participants directly to discuss these matters.
We, the trustee, the paying agent and the registrar will not have any responsibility or liability for any aspect of the records relating to or payments made on account of notes by Clearstream or Euroclear, or for maintaining, supervising or reviewing any records of those organizations relating to the notes.
So long as Euroclear or Clearstream or their nominee or their common depositary is the registered holder of the global notes, Euroclear, Clearstream or such nominee, as the case may be, will be considered the sole owner or holder of the notes represented by such global notes for all purposes under the indenture and the notes. Payments of principal, interest and Additional
Amounts, if any, in respect of the global notes will be made to Euroclear, Clearstream or such nominee, as the case may be, as registered holder thereof.
Distributions of principal, interest and Additional Amounts, if any, with respect to the global notes will be credited in euro to the extent received by Euroclear or Clearstream to the cash accounts of Euroclear or Clearstream customers in accordance with the relevant system’s rules and procedures.
Because Euroclear and Clearstream can only act on behalf of participants, who in turn act on behalf of indirect participants, the ability of a person having an interest in the global notes to pledge such interest to persons or entities which do not participate in the relevant clearing system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate in respect of such interest.
Initial settlement for the notes will be made in immediately available funds. Secondary market trading between Clearstream and/or Euroclear participants will occur in the ordinary way in accordance with the applicable rules and operating procedures of Clearstream and Euroclear, as applicable, and will be settled using the procedures applicable to conventional Eurobonds in immediately available funds.
You should be aware that investors will only be able to make and receive deliveries, payments and other communications involving the notes through the Clearstream and Euroclear systems on days when those systems are open for business. Those systems may not be open for business on days when banks, brokers and other institutions are open for business in the United States.
In addition, because of time-zone differences, there may be problems with completing transactions involving the Clearstream and Euroclear systems on the same business day as in the United States. U.S. investors who wish to transfer their interests in the notes, or to make or receive a payment or delivery of the notes, on a particular day, may find that the transactions will not be performed until the next business day in Luxembourg or Brussels, depending on whether the Clearstream or Euroclear system is used.
Because the purchaser determines the place of delivery, it is important to establish at the time of trading of any notes where both the purchaser’s and seller’s accounts are located to ensure that settlement can be made on the desired date.
Secondary market sales of book-entry interests in the notes held through Clearstream or Euroclear to purchasers of book-entry interests in a global note through Clearstream or Euroclear will be conducted in accordance with the normal rules and operating procedures of Clearstream and Euroclear and will be settled using the procedures applicable to conventional eurobonds in same-day funds.
We have obtained the information in this section concerning Clearstream and Euroclear and the book-entry system and procedures from sources that we believe to be reliable, but neither we nor the underwriters take any responsibility for the accuracy of this information.
In a few special situations described below, the book-entry system for the notes will terminate and interests in the global notes will be exchanged for definitive notes in registered form. You must consult your bank, broker or other financial institution to find out how to have your interests in the notes transferred to your name, so that you will be a direct holder.
The special situations for termination of the book-entry system for the notes due 2024 are:
•the depositary for any of the notes represented by a registered global note (a) notifies us that it is unwilling or unable to continue as depositary or clearing system for the global notes or (b) ceases to be a “clearing agency” registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in either event we are unable to find a qualified replacement for such depositary within 90 days;
•we in our sole discretion determine to allow global notes to be exchangeable for definitive notes in registered form; or
•there has occurred and is continuing an event of default with respect to the notes and the depositary notifies the trustee of its decision to exchange the global notes for definitive notes in registered form.
Notes due 2026
The following briefly summarizes certain terms of the notes due 2026. This summary does not describe every aspect of the notes due 2026 and is subject, and is qualified in its entirety by reference, to the prospectus supplement of UTC, dated as of February 17, 2016 and the definitive documents related to such notes.
General
We have issued the notes due 2026 in an initial aggregate principal amount of €500,000,000. The notes due 2026 will mature on February 22, 2026.
The notes due 2026 have been issued in book-entry form. See “Book-Entry, Delivery and Form.” We issued the notes due 2026 only in minimum denominations of €100,000 and integral multiples of €1,000 in excess thereof.
The notes due 2026 are listed on the New York Stock Exchange under the symbol “UTX 26.” We have no obligation to maintain such listing, and we may delist the notes due 2026 at any time.
We may, without the consent of the holders of notes due 2026, issue additional notes of such series under the indenture having the same ranking and the same interest rate, maturity and other terms as the notes of such series; provided that any such additional notes of such series that are not fungible with the notes due 2026 offered under the prospectus supplement dated as of February 17, 2016 for U.S. federal income tax purposes will have a separate CUSIP, ISIN and other identifying number than the notes due 2026 offered thereunder. Any such additional notes due 206 will, together with the notes due 2026 offered by the same prospectus supplement, constitute a single series of notes under the indenture.
Interest
The notes due 2026 will bear interest at the annual rate of 1.875% and will accrue interest from the most recent date to which interest has been paid or duly provided for.
Interest will be payable on the notes due 2026 annually in arrears on February 22 of each year with respect to the notes due 2026 and on the maturity date, beginning on February 22, 2017 for the notes due 2026 (each, a “fixed rate interest payment date”), to the persons in whose names the notes due 2026 are registered on the record date; provided, however, that interest payable on the relevant maturity date or any relevant redemption date will be payable to the persons to whom the principal of such notes is payable. Interest on notes due 2026 will be computed on the basis of the actual number of days in the period for which interest is being calculated and the actual number of days from and including the last date on which interest was paid on notes due 2026 (or February 22, 2016 if no interest has been paid on notes due 2026), to but excluding the next fixed rate interest payment date. This payment convention is referred to as ACTUAL/
ACTUAL (ICMA) as defined in the rulebook of the International Capital Market Association. If the date on which a payment of interest or principal on notes due 2026 is scheduled to be paid is not a business day, then that interest or principal will be paid on the next succeeding business day, and no further interest will accrue as a result of such delay.
A “business day” is each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions are authorized or obligated by law or executive order to be closed in New York City or London and which is a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer system (the “TARGET2 system”), or any successor thereto, operates.
A “record date” is the close of business on the date that is fifteen calendar days prior to the date on which interest is scheduled to be paid, regardless of whether such date is a business day; provided that if any of the notes due 2026 are held by a securities depositary in book-entry form, the record date for such notes will be the close of business on the business day (for this purpose a day on which Clearstream and Euroclear are open for business) immediately preceding the date on which interest is scheduled to be paid.
Issuance in Euro
Payments of principal, interest and Additional Amounts, if any, in respect of the notes due 2026 will be payable in euro. If the euro is unavailable to us due to the imposition of exchange controls or other circumstances beyond our control (including the dissolution of the euro) or if the euro is no longer being used by the then member states of the European Monetary Union that have adopted the euro as their currency or for the settlement of transactions by public institutions of or within the international banking community, then all payments in respect of the applicable notes will be made in U.S. dollars until the euro is again available to us or so used. The amount payable on any date in euro will be converted into U.S. dollars at the rate mandated by the U.S. Federal Reserve Board as of the close of business on the second business day prior to the relevant payment date or, in the event the U.S. Federal Reserve Board has not mandated a rate of conversion, on the basis of the then most recent U.S. dollar/euro exchange rate available on or prior to the second business day prior to the relevant payment date as determined by us in our sole discretion. Any payment in respect of the notes so made in U.S. dollars will not constitute an event of default under the notes or the indenture governing the notes. Neither the trustee nor the paying agent shall have any responsibility for any calculation or conversion in connection with the foregoing.
Investors will be subject to foreign exchange risks as to payments of principal, interest and Additional Amounts, if any, that may have important economic and tax consequences to them.
Optional Redemption
The notes due 2026 will be redeemable, in whole or in part, at our option at any time. The Company may redeem the notes due 2026 on any date prior to November 22, 2025 at a redemption price in euro equal to the greater of:
(a) 100% of the principal amount of notes due 2026 to be redeemed; or
(b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes due 2026 to be redeemed as described below, discounted to the redemption date on an annual basis (ACTUAL/ACTUAL (ICMA)) at the applicable Comparable Government Bond Rate (as defined below), plus 30 basis points.
In every such case, the redemption price will also include interest accrued to, but excluding, the date of redemption on the principal balance of notes due 2026 being redeemed.
In addition, at any time on or after November 22, 2025, the Company may redeem some or all of the notes due 2026, in each case, at its option at a redemption price equal to 100% of the principal amount of the notes due 2026 to be redeemed, plus, in every such case, interest accrued to, but excluding, the date of redemption on the principal balance of notes due 2026 being redeemed.
In any case, the principal amount of a note remaining outstanding after a redemption in part shall be €100,000 or an integral multiple of €1,000 in excess thereof.
For purposes of the optional redemption provisions of notes due 2026, the following terms will be applicable:
“Comparable Government Bond” means, in relation to any Comparable Government Bond Rate calculation, at the discretion of an independent investment bank selected by us, a German federal government bond whose maturity is closest to the maturity of the notes due 2026 to be redeemed, or if such independent investment bank in its discretion determines that such similar bond is not in issue, such other German federal government bond as such independent investment bank may, with the advice of three brokers of, and/or market makers in, German federal government bonds selected by us, determine to be appropriate for determining the Comparable Government Bond Rate.
“Comparable Government Bond Rate” means, with respect to any redemption date, the price, expressed as a percentage (rounded to three decimal places, with 0.0005 being rounded upwards), at which the gross redemption yield on the notes due 2026 to be redeemed, if they were to be purchased at such price on the third business day prior to the redemption date, would be equal to the gross redemption yield on such business day of the Comparable Government Bond (as defined above) on the basis of the middle market price of the Comparable Government Bond prevailing at 11:00 a.m. (London time) on such business day as determined by an independent investment bank selected by us.
General Information Regarding Optional Redemption
We will mail or electronically deliver, according to the procedures of the applicable depositary, notice (with a copy to the trustee and the paying agent) of any optional redemption to the registered holder of notes due 2026 being redeemed not less than 30 days and not more than 60
days before the redemption date. The notice of redemption will identify, among other things, the redemption date, the redemption price (or if not then ascertainable, the manner of calculation thereof) and that on the redemption date, the redemption price will become due and payable and that notes called for redemption will cease to accrue interest on and after the redemption date (unless there is a default on payment of the redemption price). Prior to any redemption date, we will deposit with the paying agent or the trustee money sufficient to pay the redemption price of the notes to be redeemed on that date. If we redeem less than all of the series of notes due 2026, the trustee will choose notes due 2026 to be redeemed by any method that it deems fair and appropriate; provided that if the notes due 2026 are represented by one or more global notes, beneficial interests in the notes due 2026 will be selected for redemption by Euroclear and Clearstream in accordance with their respective standard procedures therefor.
The notes due 2026 are also subject to redemption if certain events occur involving United States taxation. See “—Redemption for Tax Reasons.”
Additional Amounts
All payments of principal and interest in respect of the notes due 2026 by us or a paying agent on our behalf will be made free and clear of, and without deduction or withholding for or on account of, any present or future taxes, duties, assessments or other similar governmental charges imposed or levied by the United States or any political subdivision or taxing authority of or in the United States (collectively, “Taxes”), unless such withholding or deduction is required by law.
In the event such withholding or deduction for Taxes is required by law, subject to the limitations described below, we will pay to any non-U.S. holder or any foreign partnership such additional amounts (“Additional Amounts”) as may be necessary to ensure that the net amount received by such person, after withholding or deduction for such Taxes, will be equal to the amount such person would have received in the absence of such withholding or deduction.
However, no Additional Amounts shall be payable with respect to any Taxes if such Taxes are imposed or levied for reasons unrelated to the holder’s or beneficial owner’s ownership or disposition of notes, nor shall Additional Amounts be payable for or on account of:
(a) any Taxes which would not have been so imposed, withheld or deducted but for:
(1) the existence of any present or former connection between the holder or beneficial owner (or between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner, if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity) and the United States, including, without limitation, such holder or beneficial owner (or such fiduciary, settlor, beneficiary, member, shareholder or other equity owner or person having such a power) being or having been a citizen or resident or treated as a resident of the United States, being or having been engaged in a trade or business in the United States, being or having been present in the United States, or having or having had a permanent establishment in the United States;
(2) the failure of the holder or beneficial owner to comply with any applicable certification, information, documentation or other reporting requirement, if compliance is required under the tax laws and regulations of the United States or any political subdivision or taxing authority of or in the United States to establish entitlement to a partial or complete exemption from such Taxes (including, but not limited to, the requirement to provide Internal Revenue Service Form W-8BEN, Form W-8BEN-E, Form W-8ECI, Form W-8IMY (and related documentation) or any subsequent versions thereof or successor thereto); or
(3) the holder’s or beneficial owner’s present or former status as a personal holding company or a foreign personal holding company with respect to the United States, as a controlled foreign corporation with respect to the United States, as a passive foreign investment company with respect to the United States, as a foreign tax exempt organization with respect to the United States or as a corporation that accumulates earnings to avoid United States federal income tax;
(b) any Taxes which would not have been imposed, withheld or deducted but for the failure of the holder or beneficial owner to meet the requirements (including the certification requirements) of Section 871(h) or Section 881(c) of the Internal Revenue Code of 1986, as amended (the “Code”);
(c) any Taxes which would not have been imposed, withheld or deducted but for the presentation by the holder or beneficial owner of such note for payment on a date more than 30 days after the date on which such payment became due and payable or the date on which payment of the note due 2026 is duly provided for and notice is given to holders, whichever occurs later, except to the extent that the holder or beneficial owner would have been entitled to such Additional Amounts on presenting such note on any date during such 30-day period;
(d) any estate, inheritance, gift, sales, excise, transfer, personal property, wealth or similar Taxes;
(e) any Taxes which are payable other than by withholding or deduction from a payment on such note;
(f) any Taxes which are imposed, withheld or deducted with respect to, or payable by, a holder that is not the beneficial owner of the note, or a portion of the note, or that is a fiduciary, partnership, limited liability company or other similar entity, but only to the extent that a beneficial owner, a beneficiary or settlor with respect to such fiduciary or member of such partnership, limited liability company or similar entity would not have been entitled to the payment of an Additional Amount had such beneficial owner, settlor, beneficiary or member received directly its beneficial or distributive share of the payment;
(g) any Taxes required to be withheld or deducted by any paying agent from any payment on any note, if such payment can be made without such withholding or deduction by at least one other paying agent;
(h) any Taxes imposed, withheld or deducted under Sections 1471 through 1474 of the Code (or any amended or successor provisions), any current or future regulations or official interpretations thereof, any agreement entered into pursuant to Section 1471(b) of the Code or any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of such sections of the Code;
(i) any Taxes that would not have been imposed, withheld or deducted but for a change in any law, treaty, regulation, or administrative or judicial interpretation that becomes effective after the applicable payment becomes due or is duly provided for, whichever occurs later; or
(j) any combination of items (a), (b), (c), (d), (e), (f), (g), (h) and (i).
Any Additional Amounts paid on the notes due 2026 will be paid in euro.
For purposes of this section, the acquisition, ownership, enforcement, or holding of or the receipt of any payment with respect to a note alone will not constitute a connection (1) between the holder or beneficial owner and the United States or (2) between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity and the United States.
Except as specifically provided under this section “Additional Amounts,” we will not be required to make any payment with respect to any tax, duty, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority.
If we are required to pay Additional Amounts with respect to the notes due 2026, we will notify the trustee and paying agent pursuant to an officers’ certificate that specifies the Additional Amounts payable and when the Additional Amounts are payable. If the trustee and the paying agent do not receive such an officers’ certificate from us, the trustee and paying agent may rely on the absence of such an officers’ certificate in assuming that no such Additional Amounts are payable.
Redemption for Tax Reasons
We may redeem the notes due 2026 at our option, in whole but not in part, at a redemption price equal to 100% of the principal amount of the notes due 2026 to be redeemed, together with any accrued and unpaid interest on the notes to be redeemed to, but excluding, the redemption date, at any time, if:
(i) we have or will become obliged to pay Additional Amounts with respect to the notes due 2026 as a result of any change in, or amendment to, the laws, regulations, treaties, or rulings of the United States or any political subdivision of or in the United States or any taxing authority thereof or therein affecting taxation, or any change in, or amendment to, the application, official interpretation, administration or enforcement of such laws, regulations, treaties or rulings (including a holding by a court of competent jurisdiction in the United States), which change or amendment is enacted, adopted, announced or becomes effective on or after the date of the applicable prospectus supplement; or
(ii) on or after the date of the applicable prospectus supplement, any action is taken by a taxing authority of, or any action has been brought in a court of competent jurisdiction in, the United States or any political subdivision of or in the United States or any taxing authority thereof or therein, including any of those actions specified in clause (i) above, whether or not such action was taken or brought with respect to us, or there is any change, amendment, clarification, application or interpretation of such laws, regulations, treaties or rulings, which in any such case, will result in a material probability that we will be required to pay Additional Amounts with respect to the notes due 2026 (it being understood that such material probability will be deemed
to result if the written opinion of independent tax counsel described in clause (b) below to such effect is delivered to the trustee and the paying agent).
Notice of any such redemption will be mailed, or delivered electronically if held by any depositary in accordance with such depositary’s customary procedures, at least 30 days but not more than 60 days before the redemption date to each registered holder of the notes due 2026 to be redeemed; provided, however, that the notice of redemption shall not be given earlier than 90 days before the earliest date on which we would be obligated to pay such Additional Amounts if a payment in respect of the notes to be redeemed was then due.
Prior to the mailing or delivery of any notice of redemption pursuant to this section “Redemption for Tax Reasons,” we will deliver to the trustee and the paying agent:
(a) a certificate signed by one of our officers stating that we are entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to our right to so redeem have occurred, and
(b) a written opinion of independent tax counsel of nationally recognized standing to the effect that we have or will become obligated to pay such Additional Amounts as a result of a change or amendment described in clause (i) above or that there is a material probability that we will be required to pay Additional Amounts as a result of an action, change, amendment, clarification, application or interpretation described in clause (ii) above, as the case may be.
Such notice, once delivered by us will be irrevocable.
Resignation and Removal of the Trustee
The trustee may resign at any time by giving written notice to us.
The trustee may also be removed with respect to the notes due 2026 by act of the holders of a majority in principal amount of the then outstanding notes due 2026.
No resignation or removal of the trustee and no appointment of a successor trustee will become effective until the acceptance of appointment by a successor trustee in accordance with the requirements of the indenture.
Under certain circumstances, we may appoint a successor trustee.
We will provide you with notice of any resignation, removal or appointment of the trustee.
Notices
Notices to holders of notes due 2026 are to be given by mail to the addresses of the holders as they may appear in the security register.
Title
UTC, the trustee, and any agent of either, may treat the person or entity in whose name the notes due 2026 are registered as the owner of those notes for the purpose of receiving payments on such notes (subject to the provisions of the indenture) and for all other purposes whatsoever, whether or not such notes may be overdue, and irrespective of notice to the contrary.
Governing Law
The notes due 2026 are governed by and construed in accordance with the laws of the State of New York.
The Trustee, Securities Registrar, Paying Agent and Calculation Agent
The trustee and securities registrar under the indenture is The Bank of New York Mellon Trust Company, N.A. The Bank of New York Mellon (London Branch) has been appointed by the Company to act as paying agent. The trustee maintains various banking and trust relationships with us and some of our affiliates. We may vary or terminate the appointment of any paying agent, securities registrar or calculation agent, or appoint additional or other such agents or approve any change in the office through which any such agent acts.
The trustee is under no obligation to exercise any of the rights or powers vested in it by the indenture at the request or direction of any of the holders of the notes due 2026 pursuant to the indenture, unless such holders shall have offered to the trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.
Book-Entry, Delivery and Form
We issued the notes due 2026 in the form of one or more global notes (the “global notes”) in definitive, fully registered, book-entry form without coupons. The global notes will be deposited with a common depositary (and registered in the name of its nominee) for, and in respect of interests held through, Clearstream Banking, société anonyme, which we refer to as “Clearstream,” or Euroclear Bank S.A./N.V., which we refer to as “Euroclear.” Except as described herein, certificates will not be issued in exchange for beneficial interests in the global notes.
Except as set forth below, the global notes may be transferred, in whole and not in part, only to a common depositary for Clearstream and Euroclear or its nominee. No link is expected to be established among The Depository Trust Company and Clearstream or Euroclear in connection with the issuance of the notes.
Beneficial interests in the global notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in Clearstream or Euroclear. Those beneficial interests will be in minimum denominations of €100,000 and integral multiples of €1,000 in excess thereof. Should certificates be issued to individual holders of the notes due 2026, a holder of notes due 2026 who, as a result of trading or
otherwise, holds a principal amount of notes due 2026 that is less than the minimum denomination would be required to purchase an additional principal amount of notes due 2026 such that its holding of notes due 2026 amounts to the minimum specified denomination. Investors may hold interests in the global notes through Clearstream or Euroclear either directly if they are participants in such systems or indirectly through organizations that are participants in such systems.
Except as set forth in the indenture, owners of beneficial interests in the global notes will not be entitled to have notes registered in their names, and will not receive or be entitled to receive physical delivery of notes in definitive form. Except as provided below, beneficial owners will not be considered the owners or holders of the notes under the indenture. Accordingly, each beneficial owner must rely on the procedures of the clearing systems and, if such person is not a participant of the clearing systems, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the indenture. Under existing industry practices, if we request any action of holders or a beneficial owner desires to give or take any action which a holder is entitled to give or take under the indenture, the clearing systems would authorize their participants holding the relevant beneficial interests to give or take action and the participants would authorize beneficial owners owning through the participants to give or take such action or would otherwise act upon the instructions of beneficial owners. Conveyance of notices and other communications by the clearing systems to their participants, by the participants to indirect participants and by the participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Persons who are not Euroclear or Clearstream participants may beneficially own notes held by the common depositary for Euroclear and Clearstream only through direct or indirect participants in Euroclear and Clearstream.
We understand that Clearstream is incorporated under the laws of Luxembourg as a professional depositary. Clearstream holds securities for its participants and facilitates the clearance and settlement of securities transactions between its participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Clearstream provides to its participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. As a professional depositary, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of the Financial Sector. Clearstream participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and other organizations and may include the underwriters. Indirect access to Clearstream is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream participant either directly or indirectly.
We understand that Euroclear was created in 1968 to hold securities for participants of Euroclear and to clear and settle transactions between Euroclear participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Euroclear provides various other services, including securities lending and borrowing and interfaces with domestic markets in several countries. Euroclear is operated by Euroclear Bank S.A./N.V., which we refer to as the “Euroclear Operator,” under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation, which we refer to as the “Cooperative.” All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative establishes policy for Euroclear on behalf of Euroclear participants. Euroclear participants include banks (including central banks), securities brokers and dealers, and other professional financial intermediaries and may include the underwriters. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly.
We understand that the Euroclear Operator is licensed by the Belgian Banking and Finance Commission to carry out banking activities on a global basis. As a Belgian bank, it is regulated and examined by the Belgian Banking and Finance Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively, the “Terms and Conditions”). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear participants and has no record of or relationship with persons holding through Euroclear participants.
We have provided the descriptions of the operations and procedures of Clearstream and Euroclear in this prospectus supplement solely as a matter of convenience, and we make no representation or warranty of any kind with respect to these operations and procedures. These operations and procedures are solely within the control of those organizations and are subject to change by them from time to time. None of us, the underwriters, the trustee or the paying agent takes any responsibility for these operations or procedures, and you are urged to contact Clearstream and Euroclear or their participants directly to discuss these matters.
We, the trustee, the paying agent and the registrar will not have any responsibility or liability for any aspect of the records relating to or payments made on account of notes by Clearstream or Euroclear, or for maintaining, supervising or reviewing any records of those organizations relating to the notes.
So long as Euroclear or Clearstream or their nominee or their common depositary is the registered holder of the global notes, Euroclear, Clearstream or such nominee, as the case may be, will be considered the sole owner or holder of the notes represented by such global notes for all purposes under the indenture and the notes. Payments of principal, interest and Additional Amounts, if any, in respect of the global notes will be made to Euroclear, Clearstream or such nominee, as the case may be, as registered holder thereof.
Distributions of principal, interest and Additional Amounts, if any, with respect to the global notes will be credited in euro to the extent received by Euroclear or Clearstream to the cash accounts of Euroclear or Clearstream customers in accordance with the relevant system’s rules and procedures.
Because Euroclear and Clearstream can only act on behalf of participants, who in turn act on behalf of indirect participants, the ability of a person having an interest in the global notes to pledge such interest to persons or entities which do not participate in the relevant clearing system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate in respect of such interest.
Initial settlement for the notes will be made in immediately available funds. Secondary market trading between Clearstream and/or Euroclear participants will occur in the ordinary way in accordance with the applicable rules and operating procedures of Clearstream and Euroclear, as applicable, and will be settled using the procedures applicable to conventional Eurobonds in immediately available funds.
You should be aware that investors will only be able to make and receive deliveries, payments and other communications involving the notes through the Clearstream and Euroclear systems on days when those systems are open for business. Those systems may not be open for business on days when banks, brokers and other institutions are open for business in the United States.
In addition, because of time-zone differences, there may be problems with completing transactions involving the Clearstream and Euroclear systems on the same business day as in the United States. U.S. investors who wish to transfer their interests in the notes, or to make or receive a payment or delivery of the notes, on a particular day, may find that the transactions will not be performed until the next business day in Luxembourg or Brussels, depending on whether the Clearstream or Euroclear system is used.
Because the purchaser determines the place of delivery, it is important to establish at the time of trading of any notes where both the purchaser’s and seller’s accounts are located to ensure that settlement can be made on the desired date.
Secondary market sales of book-entry interests in the notes held through Clearstream or Euroclear to purchasers of book-entry interests in a global note through Clearstream or Euroclear will be conducted in accordance with the normal rules and operating procedures of Clearstream and Euroclear and will be settled using the procedures applicable to conventional eurobonds in same-day funds.
We have obtained the information in this section concerning Clearstream and Euroclear and the book-entry system and procedures from sources that we believe to be reliable, but neither we nor the underwriters take any responsibility for the accuracy of this information.
In a few special situations described below, the book-entry system for the notes will terminate and interests in the global notes will be exchanged for definitive notes in registered form. You must consult your bank, broker or other financial institution to find out how to have your interests in the notes transferred to your name, so that you will be a direct holder.
The special situations for termination of the book-entry system for the notes due 2026 are:
•the depositary for any of the notes represented by a registered global note notifies us that it is unwilling or unable to continue as depositary and we are unable to find a qualified replacement for such depositary within 90 days;
•we in our sole discretion determine to allow that global note to be exchangeable for definitive notes in registered form; or
•any event has occurred and is continuing, which after notice or lapse of time, would become an event of default with respect to the notes.
Notes due 2030
The following briefly summarizes certain terms of the notes due 2030. This summary does not describe every aspect of the notes due 2030 and is subject, and is qualified in its entirety by reference, to the prospectus supplement of UTC, dated as of May 18, 2018 and the definitive documents related to such notes.
General
We have issued the notes due 2030 in an initial aggregate principal amount of €500,000,000. The notes due 2030 will mature on May 18, 2030 and .
The notes due 2030 have been issued in book-entry form. See “Book-Entry, Delivery and Form.” We issued the notes due 2030 only in minimum denominations of €100,000 and integral multiples of €1,000 in excess thereof.
The notes due 2030 are listed on the New York Stock Exchange under the symbol “UTX 30.” We have no obligation to maintain such listing, and we may delist the notes due 2030 at any time.
We may, without the consent of the holders of the notes due 2030, issue additional notes due 2030 under the indenture having the same ranking and the same interest rate, maturity and other terms as the notes due 2030; provided that any such additional notes due 2030 that are not fungible with the notes due 2030 offered under the prospectus supplement dated as of May 18, 2018 for U.S. federal income tax purposes will have a separate CUSIP, ISIN and other identifying number than the notes due 2030 offered thereunder. Any such additional notes due 2030 will, together with the notes due 2030 offered by the same prospectus supplement, constitute a single series of notes under the indenture.
Interest
The notes due 2030 will bear interest at the annual rate of 2.150% and will accrue interest from the most recent date to which interest has been paid or duly provided for.
Interest will be payable on the notes due 2030 annually in arrears on May 18 of each year, and on the relevant maturity date, beginning on May 18, 2019 (each, a “fixed rate interest payment date”), to the persons in whose names the notes due 2030 are registered on the record date; provided, however, that interest payable on the relevant maturity date or any relevant redemption date will be payable to the persons to whom the principal of the notes due 2030 is payable. Interest on the notes due 2030 will be computed on the basis of the actual number of days in the period for which interest is being calculated and the actual number of days from and including the last date on which interest was paid on the notes due 2030 (or May 18, 2018 if no interest has been paid on the notes due 2030), to, but excluding, the next fixed rate interest payment date. This payment convention is referred to as ACTUAL/ACTUAL (ICMA) as defined in the
rulebook of the International Capital Market Association. If the date on which a payment of interest or principal on the notes due 2030 is scheduled to be paid is not a business day, then that interest or principal will be paid on the next succeeding business day, and no further interest will accrue as a result of such delay.
A “business day” is each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions are authorized or obligated by law or executive order to be closed in New York City or London and which is a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer system (the “TARGET2 system”), or any successor thereto, operates.
A “record date” is the close of business on the date that is fifteen calendar days prior to the date on which interest is scheduled to be paid, regardless of whether such date is a business day; provided that if any of the notes due 2030 are held by a securities depositary in book-entry form, the record date for such notes will be the close of business on the business day (for this purpose a day on which Clearstream and Euroclear are open for business) immediately preceding the date on which interest is scheduled to be paid.
Issuance in Euro
Payments of principal, interest and Additional Amounts, if any, in respect of the notes due 2030 will be payable in euro. If the euro is unavailable to us due to the imposition of exchange controls or other circumstances beyond our control (including the dissolution of the euro) or if the euro is no longer being used by the then member states of the European Monetary Union that have adopted the euro as their currency or for the settlement of transactions by public institutions of or within the international banking community, then all payments in respect of the applicable notes will be made in U.S. dollars until the euro is again available to us or so used. The amount payable on any date in euro will be converted into U.S. dollars at the rate mandated by the U.S. Federal Reserve Board as of the close of business on the second business day prior to the relevant payment date or, in the event the U.S. Federal Reserve Board has not mandated a rate of conversion, on the basis of the then most recent U.S. dollar/euro exchange rate available on or prior to the second business day prior to the relevant payment date as determined by us in our sole discretion. Any payment in respect of the notes so made in U.S. dollars will not constitute an event of default under the notes or the indenture governing the notes. Neither the trustee nor the paying agent shall have any responsibility for any calculation or conversion in connection with the foregoing.
Investors will be subject to foreign exchange risks as to payments of principal, interest and Additional Amounts, if any, that may have important economic and tax consequences to them.
Optional Redemption
The notes due 2030 will be redeemable, in whole or in part, at our option at any time. The Company may redeem the notes due 2030 on any date prior to February 18, 2030 at a redemption price in euro equal to the greater of:
(a) 100% of the principal amount of the notes due 2030 to be redeemed; or
(b) the sum of the present values of the remaining scheduled payments of principal and interest on the notes due 2030 to be redeemed as described below, discounted to the redemption date on an annual basis (ACTUAL/ACTUAL (ICMA)) at the applicable Comparable Government Bond Rate (as defined below), plus 25 basis points.
In every such case, the redemption price will also include interest accrued to, but excluding, the date of redemption on the principal balance of the notes due 2030 being redeemed.
In addition, at any time on or after February 18, 2030, the Company may redeem some or all of the notes due 2030, in each case, at its option at a redemption price equal to 100% of the principal amount of the notes due 2030 to be redeemed, plus, in every such case, interest accrued to, but excluding, the date of redemption on the principal balance of the notes due 2030 being redeemed.
In any case, the principal amount of a note remaining outstanding after a redemption in part shall be €100,000 or an integral multiple of €1,000 in excess thereof.
For purposes of the optional redemption provisions of the notes due 2030, the following terms will be applicable:
“Comparable Government Bond” means, in relation to any Comparable Government Bond Rate calculation, at the discretion of an independent investment bank selected by us, a German federal government bond whose maturity is closest to the maturity of the notes due 2030 to be redeemed, or if such independent investment bank in its discretion determines that such similar bond is not in issue, such other German federal government bond as such independent investment bank may, with the advice of three brokers of, and/or market makers in, German federal government bonds selected by us, determine to be appropriate for determining the Comparable Government Bond Rate.
“Comparable Government Bond Rate” means, with respect to any redemption date, the price, expressed as a percentage (rounded to three decimal places, with 0.0005 being rounded upwards), at which the gross redemption yield on the notes due 2030 to be redeemed, if they were to be purchased at such price on the third business day prior to the redemption date, would be equal to the gross redemption yield on such business day of the Comparable Government Bond (as defined above) on the basis of the middle market price of the Comparable Government Bond prevailing at 11:00 a.m. (London time) on such business day as determined by an independent investment bank selected by us.
General Information Regarding Optional Redemption
We will mail or electronically deliver, according to the procedures of the applicable depositary, notice (with a copy to the trustee and the paying agent) of any optional redemption to the registered holder of the notes due 2030 being redeemed not less than 15 days and not more than
60 days before the redemption date. The notice of redemption will identify, among other things, the redemption date, the redemption price (or if not then ascertainable, the manner of calculation thereof) and that on the redemption date, the redemption price will become due and payable and that the notes called for redemption will cease to accrue interest on and after the redemption date (unless there is a default on payment of the redemption price). Prior to any redemption date, we will deposit with the paying agent or the trustee money sufficient to pay the redemption price of the notes to be redeemed on that date. If we redeem less than all of any series of fixed rate notes, the trustee will choose the notes due 2030 to be redeemed by any method that it deems fair and appropriate; provided that if the notes due 2030 are represented by one or more global notes, beneficial interests in the notes due 2030 will be selected for redemption by Euroclear and Clearstream in accordance with their respective standard procedures therefor.
The notes due 2030 are also subject to redemption if certain events occur involving United States taxation. See “—Redemption for Tax Reasons.”
Additional Amounts
All payments of principal and interest in respect of the notes due 2030 by us or a paying agent on our behalf will be made free and clear of, and without deduction or withholding for or on account of, any present or future taxes, duties, assessments or other similar governmental charges imposed or levied by the United States or any political subdivision or taxing authority of or in the United States (collectively, “Taxes”), unless such withholding or deduction is required by law.
In the event such withholding or deduction for Taxes is required by law, subject to the limitations described below, we will pay to any non-U.S. holder or any foreign partnership such additional amounts (“Additional Amounts”) as may be necessary to ensure that the net amount received by such person, after withholding or deduction for such Taxes, will be equal to the amount such person would have received in the absence of such withholding or deduction.
However, no Additional Amounts shall be payable with respect to any Taxes if such Taxes are imposed, withheld, deducted or levied for reasons unrelated to the holder’s or beneficial owner’s ownership or disposition of notes, nor shall Additional Amounts be payable for or on account of:
(a) any Taxes which would not have been so imposed, withheld, deducted or levied but for:
(1) the existence of any present or former connection between the holder or beneficial owner (or between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner, if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity) and the United States, including, without limitation, such holder or beneficial owner (or such fiduciary, settlor, beneficiary, member, shareholder or other equity owner or person having such a power) being or having been a citizen or resident or treated as a resident of the United States, being or having been engaged in a trade or business in the United States, being or having been present in the United States, or having or having had a permanent establishment in the United States;
(2) the failure of the holder or beneficial owner to comply with any applicable certification, information, documentation or other reporting requirement, if compliance is required under the tax laws and regulations of the United States or any political subdivision or taxing authority of or in the United States to establish entitlement to a partial or complete exemption from such Taxes (including, but not limited to, the requirement to provide Internal Revenue Service Form W-8BEN, Form W-8BEN-E, Form W-8ECI, Form W-8IMY (and related documentation) or any subsequent versions thereof or successor thereto); or
(3) the holder’s or beneficial owner’s present or former status as a personal holding company or a foreign personal holding company with respect to the United States, as a controlled foreign corporation with respect to the United States, as a passive foreign investment company with respect to the United States, as a foreign tax-exempt organization with respect to the United States or as a corporation that accumulates earnings to avoid United States federal income tax;
(b) any Taxes which would not have been imposed, withheld, deducted or levied but for the failure of the holder or beneficial owner to meet the requirements (including the certification requirements) of Section 871(h) or Section 881(c) of the Internal Revenue Code of 1986, as amended (the “Code”);
(c) any Taxes which would not have been imposed, withheld, deducted or levied but for the presentation by the holder or beneficial owner of such note for payment on a date more than 30 days after the date on which such payment became due and payable or the date on which payment of the note due 2030 is duly provided for and notice is given to holders, whichever occurs later, except to the extent that the holder or beneficial owner would have been entitled to such Additional Amounts on presenting such note on any date during such 30-day period;
(d) any estate, inheritance, gift, sales, excise, transfer, personal property, wealth or similar Taxes;
(e) any Taxes which are payable other than by withholding or deduction from a payment on such note;
(f) any Taxes which are imposed, withheld, deducted or levied with respect to, or payable by, a holder that is not the beneficial owner of the note, or a portion of the note, or that is a fiduciary, partnership, limited liability company or other similar entity, but only to the extent that a beneficial owner, a beneficiary or settlor with respect to such fiduciary or member of such partnership, limited liability company or similar entity would not have been entitled to the payment of an Additional Amount had such beneficial owner, settlor, beneficiary or member received directly its beneficial or distributive share of the payment;
(g) any Taxes required to be withheld or deducted by any paying agent from any payment on any note, if such payment can be made without such withholding or deduction by at least one other paying agent;
(h) any Taxes imposed, withheld, deducted or levied under Sections 1471 through 1474 of the Code (or any amended or successor provisions), any current or future regulations or official interpretations thereof, any agreement entered into pursuant to Section 1471(b) of the Code or any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of such sections of the Code;
(i) any Taxes that would not have been imposed, withheld, deducted or levied but for a change in any law, treaty, regulation, or administrative or judicial interpretation that becomes effective after the applicable payment becomes due or is duly provided for, whichever occurs later; or
(j) any combination of items (a), (b), (c), (d), (e), (f), (g), (h) and (i).
Any Additional Amounts paid on the notes due 2030 will be paid in euro.
For purposes of this section, the acquisition, ownership, enforcement, or holding of or the receipt of any payment with respect to a note alone will not constitute a connection (1) between the holder or beneficial owner and the United States or (2) between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity and the United States.
Except as specifically provided under this section “Additional Amounts,” we will not be required to make any payment with respect to any tax, duty, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority.
If we are required to pay Additional Amounts with respect to the notes due 2030, we will notify the trustee and paying agent pursuant to an officers’ certificate that specifies the Additional Amounts payable and when the Additional Amounts are payable. If the trustee and the paying agent do not receive such an officers’ certificate from us, the trustee and paying agent may rely on the absence of such an officers’ certificate in assuming that no such Additional Amounts are payable.
Redemption for Tax Reasons
We may redeem the notes due 2030 at our option, in whole but not in part, at a redemption price equal to 100% of the principal amount of the notes due 2030 to be redeemed, together with any accrued and unpaid interest on the notes to be redeemed to, but excluding, the redemption date, at any time, if:
(i) we have or will become obliged to pay Additional Amounts with respect to such series of the notes as a result of any change in, or amendment to, the laws, regulations, treaties, or rulings of the United States or any political subdivision of or in the United States or any taxing authority thereof or therein affecting taxation, or any change in, or amendment to, the application, official interpretation, administration or enforcement of such laws, regulations, treaties or rulings (including a holding by a court of competent jurisdiction in the United States), which change or amendment is enacted, adopted, announced or becomes effective on or after the date of the applicable prospectus supplement; or
(ii) on or after the date of the applicable prospectus supplement, any action is taken by a taxing authority of, or any action has been brought in a court of competent jurisdiction in, the United States or any political subdivision of or in the United States or any taxing authority thereof or therein, including any of those actions specified in clause (i) above, whether or not such action was taken or brought with respect to us, or there is any change, amendment, clarification, application or interpretation of such laws, regulations, treaties or rulings, which in any such case, will result in a material probability that we will be required to pay Additional Amounts with respect to the notes due 2030 (it being understood that such material probability will be deemed
to result if the written opinion of independent tax counsel described in clause (b) below to such effect is delivered to the trustee and the paying agent).
Notice of any such redemption will be mailed, or delivered electronically if held by any depositary in accordance with such depositary’s customary procedures, at least 15 days but not more than 60 days before the redemption date to each registered holder of the notes due 2030 to be redeemed; provided, however, that the notice of redemption shall not be given earlier than 90 days before the earliest date on which we would be obligated to pay such Additional Amounts if a payment in respect of the notes to be redeemed was then due.
Prior to the mailing or delivery of any notice of redemption pursuant to this section “Redemption for Tax Reasons,” we will deliver to the trustee and the paying agent:
(a) a certificate signed by one of our officers stating that we are entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to our right to so redeem have occurred, and
(b) a written opinion of independent tax counsel of nationally recognized standing to the effect that we have or will become obligated to pay such Additional Amounts as a result of a change or amendment described in clause (i) above or that there is a material probability that we will be required to pay Additional Amounts as a result of an action, change, amendment, clarification, application or interpretation described in clause (ii) above, as the case may be.
Such notice, once delivered by us will be irrevocable.
Resignation and Removal of the Trustee
The trustee may resign at any time by giving written notice to us.
The trustee may also be removed with respect to the notes due 2030 by an act of the holders of a majority in principal amount of the then outstanding the notes due 2030.
No resignation or removal of the trustee and no appointment of a successor trustee will become effective until the acceptance of appointment by a successor trustee in accordance with the requirements of the indenture.
Under certain circumstances, we may appoint a successor trustee.
We will provide you with notice of any resignation, removal or appointment of the trustee.
Notices
Notices to holders of the notes due 2030 are to be given by mail to the addresses of the holders as they may appear in the security register. If it is impractical to mail notice of any event to holders when such notice is required to be given pursuant to the indenture, then any manner of giving
such notice as shall be satisfactory to the trustee shall be deemed to be sufficient giving of such notice.
Title
UTC, the trustee, and any agent of either, may treat the person or entity in whose name the notes due 2030 are registered as the owner of those notes for the purpose of receiving payments on such notes (subject to the provisions of the indenture) and for all other purposes whatsoever, whether or not such notes may be overdue, and irrespective of notice to the contrary.
Governing Law
The notes due 2030 are governed by and construed in accordance with the laws of the State of New York.
The Trustee, Securities Registrar, Paying Agent and Calculation Agent
The trustee and securities registrar under the indenture is The Bank of New York Mellon Trust Company, N.A. The Bank of New York Mellon, London Branch has been appointed by the Company to act as paying agent. The trustee maintains various banking and trust relationships with us and some of our affiliates. We may vary or terminate the appointment of any paying agent, securities registrar or calculation agent, or appoint additional or other such agents or approve any change in the office through which any such agent acts.
The trustee is under no obligation to exercise any of the rights or powers vested in it by the indenture at the request or direction of any of the holders of the notes due 2030 pursuant to the indenture, unless such holders shall have offered to the trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.
Book-Entry, Delivery and Form
We issued the notes due 2030 in the form of global notes (the “global notes”) in definitive, fully registered, book-entry form without coupons. The global notes will be deposited with a common depositary (and registered in the name of its nominee) for, and in respect of interests held through, Clearstream Banking S.A., which we refer to as “Clearstream,” or Euroclear Bank SA/NV, which we refer to as “Euroclear.” Except as described herein, definitive notes in registered form will not be issued in exchange for beneficial interests in the global notes.
Except as set forth below, the global notes may be transferred, in whole and not in part, only to a common depositary for Clearstream and Euroclear or its nominee. No link is expected to be established among The Depository Trust Company and Clearstream or Euroclear in connection with the issuance of the notes.
Beneficial interests in the global notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in Clearstream or Euroclear. Those beneficial interests will be in minimum denominations of €100,000 and integral multiples of €1,000 in excess thereof. Should definitive notes in registered form be issued to individual holders of the notes due 2030, a holder of notes due 2030 who, as a result of trading or otherwise, holds a principal amount of the notes due 2030 that is less than the minimum denomination would be required to purchase an additional principal amount of the notes due 2030 such that its holding of the notes due 2030 amounts to the minimum specified denomination. Investors may hold interests in the global notes through Clearstream or Euroclear either directly if they are participants in such systems or indirectly through organizations that are participants in such systems.
Except as set forth in the indenture or related officers’ certificate, owners of beneficial interests in the global notes will not be entitled to have notes registered in their names, and will not receive or be entitled to receive physical delivery of notes in definitive form. Except as provided below, beneficial owners will not be considered the owners or holders of the notes under the indenture. Accordingly, each beneficial owner must rely on the procedures of the clearing systems and, if such person is not a participant of the clearing systems, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the indenture. Under existing industry practices, if we request any action of holders or a beneficial owner desires to give or take any action which a holder is entitled to give or take under the indenture, the clearing systems would authorize their participants holding the relevant beneficial interests to give or take action and the participants would authorize beneficial owners owning through the participants to give or take such action or would otherwise act upon the instructions of beneficial owners. Conveyance of notices and other communications by the clearing systems to their participants, by the participants to indirect participants and by the participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Persons who are not Euroclear or Clearstream participants may beneficially own notes held by the common depositary for Euroclear and Clearstream only through direct or indirect participants in Euroclear and Clearstream.
We understand that Clearstream is incorporated under the laws of Luxembourg as a professional depositary. Clearstream holds securities for its participants and facilitates the clearance and settlement of securities transactions between its participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Clearstream provides to its participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. As a professional depositary, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of the Financial Sector. Clearstream participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and other organizations and may include the underwriters. Indirect access to Clearstream is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream participant either directly or indirectly.
We understand that Euroclear was created in 1968 to hold securities for participants of Euroclear and to clear and settle transactions between Euroclear participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Euroclear provides various other services, including securities lending and borrowing and interfaces with domestic markets in several countries. Euroclear is operated by Euroclear Bank SA/NV, which we refer to as the “Euroclear Operator,” under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation, which we refer to as the “Cooperative.” All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative establishes policy for Euroclear on behalf of Euroclear participants. Euroclear participants include banks (including central banks), securities brokers and dealers, and other professional financial intermediaries and may include the underwriters. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly.
We understand that the Euroclear Operator is licensed by the Belgian Banking and Finance Commission to carry out banking activities on a global basis. As a Belgian bank, it is regulated and examined by the Belgian Banking and Finance Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively, the “Terms and Conditions”). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear participants and has no record of or relationship with persons holding through Euroclear participants.
We have provided the descriptions of the operations and procedures of Clearstream and Euroclear in this prospectus supplement solely as a matter of convenience, and we make no representation or warranty of any kind with respect to these operations and procedures. These operations and procedures are solely within the control of those organizations and are subject to change by them from time to time. None of us, the underwriters, the trustee or the paying agent takes any responsibility for these operations or procedures, and you are urged to contact Clearstream and Euroclear or their participants directly to discuss these matters.
We, the trustee, the paying agent and the registrar will not have any responsibility or liability for any aspect of the records relating to or payments made on account of notes by Clearstream or Euroclear, or for maintaining, supervising or reviewing any records of those organizations relating to the notes.
So long as Euroclear or Clearstream or their nominee or their common depositary is the registered holder of the global notes, Euroclear, Clearstream or such nominee, as the case may be, will be considered the sole owner or holder of the notes represented by such global notes for all purposes under the indenture and the notes. Payments of principal, interest and Additional Amounts, if any, in respect of the global notes will be made to Euroclear, Clearstream or such nominee, as the case may be, as registered holder thereof.
Distributions of principal, interest and Additional Amounts, if any, with respect to the global notes will be credited in euro to the extent received by Euroclear or Clearstream to the cash accounts of Euroclear or Clearstream customers in accordance with the relevant system’s rules and procedures.
Because Euroclear and Clearstream can only act on behalf of participants, who in turn act on behalf of indirect participants, the ability of a person having an interest in the global notes to pledge such interest to persons or entities which do not participate in the relevant clearing system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate in respect of such interest.
Initial settlement for the notes will be made in immediately available funds. Secondary market trading between Clearstream and/or Euroclear participants will occur in the ordinary way in accordance with the applicable rules and operating procedures of Clearstream and Euroclear, as applicable, and will be settled using the procedures applicable to conventional Eurobonds in immediately available funds.
You should be aware that investors will only be able to make and receive deliveries, payments and other communications involving the notes through the Clearstream and Euroclear systems on days when those systems are open for business. Those systems may not be open for business on days when banks, brokers and other institutions are open for business in the United States.
In addition, because of time-zone differences, there may be problems with completing transactions involving the Clearstream and Euroclear systems on the same business day as in the United States. U.S. investors who wish to transfer their interests in the notes, or to make or receive a payment or delivery of the notes, on a particular day, may find that the transactions will not be performed until the next business day in Luxembourg or Brussels, depending on whether the Clearstream or Euroclear system is used.
Because the purchaser determines the place of delivery, it is important to establish at the time of trading of any notes where both the purchaser’s and seller’s accounts are located to ensure that settlement can be made on the desired date.
Secondary market sales of book-entry interests in the notes held through Clearstream or Euroclear to purchasers of book-entry interests in a global note through Clearstream or Euroclear will be conducted in accordance with the normal rules and operating procedures of Clearstream
and Euroclear and will be settled using the procedures applicable to conventional eurobonds in same-day funds.
We have obtained the information in this section concerning Clearstream and Euroclear and the book-entry system and procedures from sources that we believe to be reliable, but neither we nor the underwriters take any responsibility for the accuracy of this information.
In a few special situations described below, the book-entry system for the notes will terminate and interests in the global notes will be exchanged for definitive notes in registered form. You must consult your bank, broker or other financial institution to find out how to have your interests in the notes transferred to your name, so that you will be a direct holder.
The special situations for termination of the book-entry system for the notes due 2030 are:
•the depositary for any of the notes represented by a registered global note (a) notifies us that it is unwilling or unable to continue as depositary or clearing system for the global notes or (b) ceases to be a “clearing agency” registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in either event we are unable to find a qualified replacement for such depositary within 90 days;
•we in our sole discretion determine to allow global notes to be exchangeable for definitive notes in registered form; or
•there has occurred and is continuing an event of default with respect to the notes and the depositary notifies the trustee of its decision to exchange the global notes for definitive notes in registered form.
Floating Rate Notes
The following briefly summarizes certain terms of the floating rate notes. This summary does not describe every aspect of the floating rate notes and is subject, and is qualified in its entirety by reference, to the prospectus supplement of UTC, dated as of May 18, 2018 and the definitive documents related to such notes.
General
We have issued the floating rate notes in an initial aggregate principal amount of €750,000,000. The floating rate notes will mature on May 18, 2020.
The floating rate notes have been issued in book-entry form. See “Book-Entry, Delivery and Form.” We issued the floating rate notes only in minimum denominations of €100,000 and integral multiples of €1,000 in excess thereof.
The floating rate notes are listed on the New York Stock Exchange under the symbol “UTX 20B.” We have no obligation to maintain such listing, and we may delist the floating rate notes at any time.
We may, without the consent of the holders of the floating rate notes, issue additional floating rate notes under the indenture having the same ranking and the same interest rate, maturity and other terms as the floating rate notes; provided that any such additional floating rate notes that are not fungible with the floating rate notes offered under the prospectus supplement dated as of May, 18, 2018 for U.S. federal income tax purposes will have a separate CUSIP, ISIN and other identifying number than the floating rate notes offered thereunder. Any such additional floating rate notes will, together with the floating rate notes offered by the same prospectus supplement, constitute a single series of notes under the indenture.
Interest on the Floating Rate Notes
Interest will be payable on the floating rate notes quarterly in arrears on February 18, May 18, August 18 and November 18 of each year, and on the maturity date, commencing on August 18, 2018 (each, a “floating rate interest payment date”), to the persons in whose names such floating rate notes are registered on the record date; provided, however, that interest payable on the maturity date or any redemption date will be payable to the persons to whom the principal of such floating rate notes is payable. If a floating rate interest payment date (other than the maturity date or any earlier redemption date) is not a business day, then such floating rate interest payment date shall be the next succeeding business day, unless the next succeeding business day is in the next succeeding calendar month, in which case such floating rate interest payment date shall be the immediately preceding business day. If the maturity date or any earlier redemption date of the floating rate notes falls on a day that is not a business day, the payment of principal and interest, if any, otherwise payable on such date will be postponed to the next succeeding
business day, and no interest on such payment will accrue from and after the maturity date or earlier redemption date, as applicable.
The floating rate notes will bear interest for each interest period at a rate determined by The Bank of New York Mellon, London Branch, acting as calculation agent. The interest rate for each day of an interest period will be a rate equal to EURIBOR as determined on the interest determination date plus 0.20% per year, provided, however, that in no event shall the interest rate be less than zero.
The interest rate for each interest period will be reset on February 18, May 18, August 18 and November 18 of each year (each such date, an “interest reset date”), and will be set for the initial interest period on May 18, 2018. If any interest reset date would otherwise be a day that is not a business day, such interest reset date shall be the next succeeding business day, unless the next succeeding business day is in the next succeeding calendar month, in which case such interest reset date shall be the immediately preceding business day.
The initial interest period for the floating rate notes will be the period from and including May 18, 2018 to, but excluding, the first interest reset date. Thereafter, an “interest period” shall mean the period from and including an interest reset date to, but excluding, the next succeeding interest reset date and, in the case of the last such period, from and including the interest reset date immediately preceding the maturity date or any earlier redemption date, as the case may be, to, but excluding, such maturity date or earlier redemption date.
The interest determination date for the initial interest period is May 16, 2018 and for any other interest period will be the second TARGET2 system day preceding the relevant interest reset date. A “TARGET2 system day” is any day on which the TARGET2 system, or any successor thereto, operates. Promptly upon determination, the calculation agent will inform us of the interest rate for the next interest period. Absent manifest error, the determination of the interest rate by the calculation agent shall be binding and conclusive on the holders of the floating rate notes, the trustee and us. So long as EURIBOR is required to be determined with respect to the floating rate notes, there will at all times be a calculation agent. In the event that any then acting calculation agent shall be unable or unwilling to act, or that such calculation agent shall fail duly to establish EURIBOR for any interest period, or that we propose to remove such calculation agent, we shall appoint another person which is a bank, trust company, investment banking firm or other financial institution to act as the calculation agent.
On any interest determination date, EURIBOR will be equal to the offered rate for deposits in euro having an index maturity of three months as such rate appears on the Reuters screen EURIBOR01 page at approximately 11:00 a.m., Brussels time, on such interest determination date. “Reuters screen EURIBOR01 page” means the display designated on page “EURIBOR01” on Reuters (or such other page as may replace the EURIBOR01 page on that service or any successor service for the purpose of displaying euro-zone interbank offered rates for euro-denominated deposits of major banks).
Subject to the immediately following paragraph, if no offered rate appears on the Reuters screen EURIBOR01 page on an interest determination date at approximately 11:00 a.m., Brussels time, then we will select four major banks in the euro-zone interbank market and shall request each of their principal euro-zone offices to provide to the calculation agent a quotation of the rate at which three-month deposits in euros in amounts of at least €1,000,000 are offered by it to prime banks in the euro-zone interbank market, on that date and at that time, that is representative of single transactions at that time. If at least two quotations are provided, EURIBOR will be the arithmetic average of the quotations provided. Otherwise, we will select three major banks in the euro-zone and shall request each of them to provide to the calculation agent a quotation of the rate offered by them at approximately 11:00 a.m., Brussels time, on the interest determination date for loans in euros to leading European banks having an index maturity of three months for the applicable interest period in an amount of at least €1,000,000 that is representative of single transactions at that time. If three quotations are provided, EURIBOR will be the arithmetic average of the quotations provided. Otherwise, the rate of EURIBOR for the next interest period will be set equal to the rate of EURIBOR for the then current interest period.
Notwithstanding the paragraph immediately above, if UTC in its sole discretion determines that EURIBOR has been permanently discontinued and UTC has notified the calculation agent of such determination (a “EURIBOR Event”), the calculation agent will use, as a substitute for EURIBOR (the “Alternative Rate”) for each future interest determination date, the alternative reference rate selected by the central bank, reserve bank, monetary authority or any similar institution (including any committee or working group thereof) that is consistent with market practice regarding a substitute for EURIBOR. As part of such substitution, the calculation agent will, after consultation with us, make such adjustments to the Alternative Rate or the spread thereon, as well as the business day convention, interest determination dates and related provisions and definitions, in each case that are consistent with market practice for the use of such Alternative Rate. If a EURIBOR Event has occurred, but for any reason an Alternative Rate has not been determined, the rate of EURIBOR for the next interest period will be set equal to the rate of EURIBOR for the then current interest period.
The amount of interest for each day that the floating rate notes are outstanding (the “daily interest amount”) will be calculated by dividing the floating interest rate in effect for such day by 360 and multiplying the result by the principal amount of the floating rate notes (known as the “Actual/360” day count). The amount of interest to be paid on the floating rate notes for any interest period will be calculated by adding the daily interest amounts for each day in such interest period.
The interest rate on the floating rate notes will be limited to the maximum rate permitted by New York law, as the same may be modified by United States law of general application.
All percentages resulting from any calculation of any interest rate for the floating rate notes will be rounded, if necessary, to the nearest one hundred thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all euro amounts will be rounded to the nearest cent, with one-half cent being rounded upward.
Upon prior written request from any holder of the floating rate notes, the calculation agent will provide the interest rate in effect on such floating rate notes for the current interest period and, if it has been determined, the interest rate to be in effect for the next interest period.
Issuance in Euro
Payments of principal, interest and Additional Amounts, if any, in respect of the floating rate notes will be payable in euro. If the euro is unavailable to us due to the imposition of exchange controls or other circumstances beyond our control (including the dissolution of the euro) or if the euro is no longer being used by the then member states of the European Monetary Union that have adopted the euro as their currency or for the settlement of transactions by public institutions of or within the international banking community, then all payments in respect of the applicable notes will be made in U.S. dollars until the euro is again available to us or so used. The amount payable on any date in euro will be converted into U.S. dollars at the rate mandated by the U.S. Federal Reserve Board as of the close of business on the second business day prior to the relevant payment date or, in the event the U.S. Federal Reserve Board has not mandated a rate of conversion, on the basis of the then most recent U.S. dollar/euro exchange rate available on or prior to the second business day prior to the relevant payment date as determined by us in our sole discretion. Any payment in respect of the notes so made in U.S. dollars will not constitute an event of default under the notes or the indenture governing the notes. Neither the trustee nor the paying agent shall have any responsibility for any calculation or conversion in connection with the foregoing.
Investors will be subject to foreign exchange risks as to payments of principal, interest and Additional Amounts, if any, that may have important economic and tax consequences to them.
Additional Amounts
All payments of principal and interest in respect of the floating rate notes by us or a paying agent on our behalf will be made free and clear of, and without deduction or withholding for or on account of, any present or future taxes, duties, assessments or other similar governmental charges imposed or levied by the United States or any political subdivision or taxing authority of or in the United States (collectively, “Taxes”), unless such withholding or deduction is required by law.
In the event such withholding or deduction for Taxes is required by law, subject to the limitations described below, we will pay to any non-U.S. holder or any foreign partnership such additional amounts (“Additional Amounts”) as may be necessary to ensure that the net amount received by such person, after withholding or deduction for such Taxes, will be equal to the amount such person would have received in the absence of such withholding or deduction.
However, no Additional Amounts shall be payable with respect to any Taxes if such Taxes are imposed, withheld, deducted or levied for reasons unrelated to the holder’s or beneficial owner’s ownership or disposition of notes, nor shall Additional Amounts be payable for or on account of:
(a) any Taxes which would not have been so imposed, withheld, deducted or levied but for:
(1) the existence of any present or former connection between the holder or beneficial owner (or between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner, if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity) and the United States, including, without limitation, such holder or beneficial owner (or such fiduciary, settlor, beneficiary, member, shareholder or other equity owner or person having such a power) being or having been a citizen or resident or treated as a resident of the United States, being or having been engaged in a trade or business in the United States, being or having been present in the United States, or having or having had a permanent establishment in the United States;
(2) the failure of the holder or beneficial owner to comply with any applicable certification, information, documentation or other reporting requirement, if compliance is required under the tax laws and regulations of the United States or any political subdivision or taxing authority of or in the United States to establish entitlement to a partial or complete exemption from such Taxes (including, but not limited to, the requirement to provide Internal Revenue Service Form W-8BEN, Form W-8BEN-E, Form W-8ECI, Form W-8IMY (and related documentation) or any subsequent versions thereof or successor thereto); or
(3) the holder’s or beneficial owner’s present or former status as a personal holding company or a foreign personal holding company with respect to the United States, as a controlled foreign corporation with respect to the United States, as a passive foreign investment company with respect to the United States, as a foreign tax-exempt organization with respect to the United States or as a corporation that accumulates earnings to avoid United States federal income tax;
(b) any Taxes which would not have been imposed, withheld, deducted or levied but for the failure of the holder or beneficial owner to meet the requirements (including the certification requirements) of Section 871(h) or Section 881(c) of the Internal Revenue Code of 1986, as amended (the “Code”);
(c) any Taxes which would not have been imposed, withheld, deducted or levied but for the presentation by the holder or beneficial owner of such note for payment on a date more than 30 days after the date on which such payment became due and payable or the date on which payment of the floating rate note is duly provided for and notice is given to holders, whichever occurs later, except to the extent that the holder or beneficial owner would have been entitled to such Additional Amounts on presenting such note on any date during such 30-day period;
(d) any estate, inheritance, gift, sales, excise, transfer, personal property, wealth or similar Taxes;
(e) any Taxes which are payable other than by withholding or deduction from a payment on such note;
(f) any Taxes which are imposed, withheld, deducted or levied with respect to, or payable by, a holder that is not the beneficial owner of the note, or a portion of the note, or that is a fiduciary, partnership, limited liability company or other similar entity, but only to the extent that a beneficial owner, a beneficiary or settlor with respect to such fiduciary or member of such partnership, limited liability company or similar entity would not have been entitled to the payment of an Additional Amount had such beneficial owner, settlor, beneficiary or member received directly its beneficial or distributive share of the payment;
(g) any Taxes required to be withheld or deducted by any paying agent from any payment on any note, if such payment can be made without such withholding or deduction by at least one other paying agent;
(h) any Taxes imposed, withheld, deducted or levied under Sections 1471 through 1474 of the Code (or any amended or successor provisions), any current or future regulations or official interpretations thereof, any agreement entered into pursuant to Section 1471(b) of the Code or any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of such sections of the Code;
(i) any Taxes that would not have been imposed, withheld, deducted or levied but for a change in any law, treaty, regulation, or administrative or judicial interpretation that becomes effective after the applicable payment becomes due or is duly provided for, whichever occurs later; or
(j) any combination of items (a), (b), (c), (d), (e), (f), (g), (h) and (i).
Any Additional Amounts paid on the floating rate notes will be paid in euro.
For purposes of this section, the acquisition, ownership, enforcement, or holding of or the receipt of any payment with respect to a note alone will not constitute a connection (1) between the holder or beneficial owner and the United States or (2) between a fiduciary, settlor, beneficiary, member or shareholder or other equity owner of, or a person having a power over, such holder or beneficial owner if such holder or beneficial owner is an estate, a trust, a limited liability company, a partnership, a corporation or other entity and the United States.
Except as specifically provided under this section “Additional Amounts,” we will not be required to make any payment with respect to any tax, duty, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority.
If we are required to pay Additional Amounts with respect to the floating rate notes, we will notify the trustee and paying agent pursuant to an officers’ certificate that specifies the Additional Amounts payable and when the Additional Amounts are payable. If the trustee and the paying agent do not receive such an officers’ certificate from us, the trustee and paying agent may rely on the absence of such an officers’ certificate in assuming that no such Additional Amounts are payable.
Redemption for Tax Reasons
We may redeem the floating rate notes at our option, in whole but not in part, at a redemption price equal to 100% of the principal amount of the floating rate notes to be redeemed, together with any accrued and unpaid interest on the notes to be redeemed to, but excluding, the redemption date, at any time, if:
(i) we have or will become obliged to pay Additional Amounts with respect to such series of the notes as a result of any change in, or amendment to, the laws, regulations, treaties, or rulings of the United States or any political subdivision of or in the United States or any taxing authority thereof or therein affecting taxation, or any change in, or amendment to, the application, official interpretation, administration or enforcement of such laws, regulations, treaties or rulings
(including a holding by a court of competent jurisdiction in the United States), which change or amendment is enacted, adopted, announced or becomes effective on or after the date of the applicable prospectus supplement; or
(ii) on or after the date of the applicable prospectus supplement, any action is taken by a taxing authority of, or any action has been brought in a court of competent jurisdiction in, the United States or any political subdivision of or in the United States or any taxing authority thereof or therein, including any of those actions specified in clause (i) above, whether or not such action was taken or brought with respect to us, or there is any change, amendment, clarification, application or interpretation of such laws, regulations, treaties or rulings, which in any such case, will result in a material probability that we will be required to pay Additional Amounts with respect to the floating rate notes (it being understood that such material probability will be deemed to result if the written opinion of independent tax counsel described in clause (b) below to such effect is delivered to the trustee and the paying agent).
Notice of any such redemption will be mailed, or delivered electronically if held by any depositary in accordance with such depositary’s customary procedures, at least 15 days but not more than 60 days before the redemption date to each registered holder of the floating rate notes to be redeemed; provided, however, that the notice of redemption shall not be given earlier than 90 days before the earliest date on which we would be obligated to pay such Additional Amounts if a payment in respect of the notes to be redeemed was then due.
Prior to the mailing or delivery of any notice of redemption pursuant to this section “Redemption for Tax Reasons,” we will deliver to the trustee and the paying agent:
(a) a certificate signed by one of our officers stating that we are entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to our right to so redeem have occurred, and
(b) a written opinion of independent tax counsel of nationally recognized standing to the effect that we have or will become obligated to pay such Additional Amounts as a result of a change or amendment described in clause (i) above or that there is a material probability that we will be required to pay Additional Amounts as a result of an action, change, amendment, clarification, application or interpretation described in clause (ii) above, as the case may be.
Such notice, once delivered by us will be irrevocable.
Resignation and Removal of the Trustee
The trustee may resign at any time by giving written notice to us.
The trustee may also be removed with respect to the floating rate notes by an act of the holders of a majority in principal amount of the then outstanding the floating rate notes.
No resignation or removal of the trustee and no appointment of a successor trustee will become effective until the acceptance of appointment by a successor trustee in accordance with the requirements of the indenture.
Under certain circumstances, we may appoint a successor trustee.
We will provide you with notice of any resignation, removal or appointment of the trustee.
Notices
Notices to holders of the floating rate notes are to be given by mail to the addresses of the holders as they may appear in the security register. If it is impractical to mail notice of any event to holders when such notice is required to be given pursuant to the indenture, then any manner of giving such notice as shall be satisfactory to the trustee shall be deemed to be sufficient giving of such notice.
Title
UTC, the trustee, and any agent of either, may treat the person or entity in whose name the floating rate notes are registered as the owner of those notes for the purpose of receiving payments on such notes (subject to the provisions of the indenture) and for all other purposes whatsoever, whether or not such notes may be overdue, and irrespective of notice to the contrary.
Governing Law
The floating rate notes are governed by and construed in accordance with the laws of the State of New York.
The Trustee, Securities Registrar, Paying Agent and Calculation Agent
The trustee and securities registrar under the indenture is The Bank of New York Mellon Trust Company, N.A. The Bank of New York Mellon, London Branch has been appointed by the Company to act as paying agent and calculation agent. The trustee maintains various banking and trust relationships with us and some of our affiliates. We may vary or terminate the appointment of any paying agent, securities registrar or calculation agent, or appoint additional or other such agents or approve any change in the office through which any such agent acts.
The trustee is under no obligation to exercise any of the rights or powers vested in it by the indenture at the request or direction of any of the holders of the floating rate notes pursuant to the indenture, unless such holders shall have offered to the trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.
Book-Entry, Delivery and Form
We issued the floating rate notes in the form of global notes (the “global notes”) in definitive, fully registered, book-entry form without coupons. The global notes will be deposited with a common depositary (and registered in the name of its nominee) for, and in respect of interests
held through, Clearstream Banking S.A., which we refer to as “Clearstream,” or Euroclear Bank SA/NV, which we refer to as “Euroclear.” Except as described herein, definitive notes in registered form will not be issued in exchange for beneficial interests in the global notes.
Except as set forth below, the global notes may be transferred, in whole and not in part, only to a common depositary for Clearstream and Euroclear or its nominee. No link is expected to be established among The Depository Trust Company and Clearstream or Euroclear in connection with the issuance of the notes.
Beneficial interests in the global notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in Clearstream or Euroclear. Those beneficial interests will be in minimum denominations of €100,000 and integral multiples of €1,000 in excess thereof. Should definitive notes in registered form be issued to individual holders of the floating rate notes, a holder of floating rate notes who, as a result of trading or otherwise, holds a principal amount of the floating rate notes that is less than the minimum denomination would be required to purchase an additional principal amount of the floating rate notes such that its holding of the floating rate notes amounts to the minimum specified denomination. Investors may hold interests in the global notes through Clearstream or Euroclear either directly if they are participants in such systems or indirectly through organizations that are participants in such systems.
Except as set forth in the indenture or related officers’ certificate, owners of beneficial interests in the global notes will not be entitled to have notes registered in their names, and will not receive or be entitled to receive physical delivery of notes in definitive form. Except as provided below, beneficial owners will not be considered the owners or holders of the notes under the indenture. Accordingly, each beneficial owner must rely on the procedures of the clearing systems and, if such person is not a participant of the clearing systems, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the indenture. Under existing industry practices, if we request any action of holders or a beneficial owner desires to give or take any action which a holder is entitled to give or take under the indenture, the clearing systems would authorize their participants holding the relevant beneficial interests to give or take action and the participants would authorize beneficial owners owning through the participants to give or take such action or would otherwise act upon the instructions of beneficial owners. Conveyance of notices and other communications by the clearing systems to their participants, by the participants to indirect participants and by the participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Persons who are not Euroclear or Clearstream participants may beneficially own notes held by the common depositary for Euroclear and Clearstream only through direct or indirect participants in Euroclear and Clearstream.
We understand that Clearstream is incorporated under the laws of Luxembourg as a professional depositary. Clearstream holds securities for its participants and facilitates the clearance and settlement of securities transactions between its participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of
certificates. Clearstream provides to its participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic markets in several countries. As a professional depositary, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of the Financial Sector. Clearstream participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and other organizations and may include the underwriters. Indirect access to Clearstream is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream participant either directly or indirectly.
We understand that Euroclear was created in 1968 to hold securities for participants of Euroclear and to clear and settle transactions between Euroclear participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Euroclear provides various other services, including securities lending and borrowing and interfaces with domestic markets in several countries. Euroclear is operated by Euroclear Bank SA/NV, which we refer to as the “Euroclear Operator,” under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation, which we refer to as the “Cooperative.” All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative establishes policy for Euroclear on behalf of Euroclear participants. Euroclear participants include banks (including central banks), securities brokers and dealers, and other professional financial intermediaries and may include the underwriters. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear participant, either directly or indirectly.
We understand that the Euroclear Operator is licensed by the Belgian Banking and Finance Commission to carry out banking activities on a global basis. As a Belgian bank, it is regulated and examined by the Belgian Banking and Finance Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively, the “Terms and Conditions”). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear participants and has no record of or relationship with persons holding through Euroclear participants.
We have provided the descriptions of the operations and procedures of Clearstream and Euroclear in this prospectus supplement solely as a matter of convenience, and we make no representation or warranty of any kind with respect to these operations and procedures. These operations and procedures are solely within the control of those organizations and are subject to
change by them from time to time. None of us, the underwriters, the trustee or the paying agent takes any responsibility for these operations or procedures, and you are urged to contact Clearstream and Euroclear or their participants directly to discuss these matters.
We, the trustee, the paying agent and the registrar will not have any responsibility or liability for any aspect of the records relating to or payments made on account of notes by Clearstream or Euroclear, or for maintaining, supervising or reviewing any records of those organizations relating to the notes.
So long as Euroclear or Clearstream or their nominee or their common depositary is the registered holder of the global notes, Euroclear, Clearstream or such nominee, as the case may be, will be considered the sole owner or holder of the notes represented by such global notes for all purposes under the indenture and the notes. Payments of principal, interest and Additional Amounts, if any, in respect of the global notes will be made to Euroclear, Clearstream or such nominee, as the case may be, as registered holder thereof.
Distributions of principal, interest and Additional Amounts, if any, with respect to the global notes will be credited in euro to the extent received by Euroclear or Clearstream to the cash accounts of Euroclear or Clearstream customers in accordance with the relevant system’s rules and procedures.
Because Euroclear and Clearstream can only act on behalf of participants, who in turn act on behalf of indirect participants, the ability of a person having an interest in the global notes to pledge such interest to persons or entities which do not participate in the relevant clearing system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate in respect of such interest.
Initial settlement for the notes will be made in immediately available funds. Secondary market trading between Clearstream and/or Euroclear participants will occur in the ordinary way in accordance with the applicable rules and operating procedures of Clearstream and Euroclear, as applicable, and will be settled using the procedures applicable to conventional Eurobonds in immediately available funds.
You should be aware that investors will only be able to make and receive deliveries, payments and other communications involving the notes through the Clearstream and Euroclear systems on days when those systems are open for business. Those systems may not be open for business on days when banks, brokers and other institutions are open for business in the United States.
In addition, because of time-zone differences, there may be problems with completing transactions involving the Clearstream and Euroclear systems on the same business day as in the United States. U.S. investors who wish to transfer their interests in the notes, or to make or receive a payment or delivery of the notes, on a particular day, may find that the transactions will not be performed until the next business day in Luxembourg or Brussels, depending on whether the Clearstream or Euroclear system is used.
Because the purchaser determines the place of delivery, it is important to establish at the time of trading of any notes where both the purchaser’s and seller’s accounts are located to ensure that settlement can be made on the desired date.
Secondary market sales of book-entry interests in the notes held through Clearstream or Euroclear to purchasers of book-entry interests in a global note through Clearstream or Euroclear will be conducted in accordance with the normal rules and operating procedures of Clearstream and Euroclear and will be settled using the procedures applicable to conventional eurobonds in same-day funds.
We have obtained the information in this section concerning Clearstream and Euroclear and the book-entry system and procedures from sources that we believe to be reliable, but neither we nor the underwriters take any responsibility for the accuracy of this information.
In a few special situations described below, the book-entry system for the notes will terminate and interests in the global notes will be exchanged for definitive notes in registered form. You must consult your bank, broker or other financial institution to find out how to have your interests in the notes transferred to your name, so that you will be a direct holder.
The special situations for termination of the book-entry system for the floating rate notes are:
•the depositary for any of the notes represented by a registered global note (a) notifies us that it is unwilling or unable to continue as depositary or clearing system for the global notes or (b) ceases to be a “clearing agency” registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in either event we are unable to find a qualified replacement for such depositary within 90 days;
•we in our sole discretion determine to allow global notes to be exchangeable for definitive notes in registered form; or
•there has occurred and is continuing an event of default with respect to the notes and the depositary notifies the trustee of its decision to exchange the global notes for definitive notes in registered form.
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Exhibit 13
Five-Year Summary
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|
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(dollars in millions, except per share amounts; shares in millions)
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015
|
|
For The Year
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
77,046
|
|
|
$
|
66,501
|
|
|
$
|
59,837
|
|
|
$
|
57,244
|
|
|
$
|
56,098
|
|
|
Research and development
|
3,015
|
|
|
2,462
|
|
|
2,427
|
|
|
2,376
|
|
|
2,262
|
|
|
Restructuring costs
|
425
|
|
|
307
|
|
|
253
|
|
|
290
|
|
|
396
|
|
|
Net income from continuing operations 1
|
5,948
|
|
|
5,654
|
|
|
4,920
|
|
|
5,436
|
|
|
4,356
|
|
|
Net income from continuing operations attributable to common shareowners 1
|
5,537
|
|
|
5,269
|
|
|
4,552
|
|
|
5,065
|
|
|
3,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share—Net income from continuing operations attributable to common shareowners
|
6.48
|
|
|
6.58
|
|
|
5.76
|
|
|
6.19
|
|
|
4.58
|
|
|
Diluted earnings per share—Net income from continuing operations attributable to common shareowners
|
6.41
|
|
|
6.50
|
|
|
5.70
|
|
|
6.13
|
|
|
4.53
|
|
|
Cash dividends per common share
|
2.94
|
|
|
2.84
|
|
|
2.72
|
|
|
2.62
|
|
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of shares of Common Stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic 2
|
855
|
|
|
800
|
|
|
790
|
|
|
818
|
|
|
873
|
|
|
Diluted 2
|
864
|
|
|
810
|
|
|
799
|
|
|
826
|
|
|
883
|
|
|
Cash flows provided by operating activities of continuing operations
|
8,883
|
|
|
6,322
|
|
|
5,631
|
|
|
6,412
|
|
|
6,755
|
|
|
Capital expenditures 3
|
2,256
|
|
|
1,902
|
|
|
2,014
|
|
|
1,699
|
|
|
1,652
|
|
|
Acquisitions, including debt assumed & equity issued
|
56
|
|
|
31,142
|
|
|
231
|
|
|
712
|
|
|
556
|
|
|
Repurchases of Common Stock 3
|
151
|
|
|
325
|
|
|
1,453
|
|
|
2,254
|
|
|
10,000
|
|
|
Dividends paid on Common Stock (excluding ESOP)
|
2,442
|
|
|
2,170
|
|
|
2,074
|
|
|
2,069
|
|
|
2,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Year End
|
|
|
|
|
|
|
|
|
|
|
Working capital 4
|
$
|
2,911
|
|
|
$
|
4,135
|
|
|
$
|
8,467
|
|
|
$
|
6,644
|
|
|
$
|
4,088
|
|
|
Total assets
|
139,716
|
|
|
134,211
|
|
|
96,920
|
|
|
89,706
|
|
|
87,484
|
|
|
Long-term debt, including current portion 5
|
41,284
|
|
|
44,068
|
|
|
27,093
|
|
|
23,300
|
|
|
19,499
|
|
|
Total debt 5
|
43,648
|
|
|
45,537
|
|
|
27,485
|
|
|
23,901
|
|
|
20,425
|
|
|
Total debt to total capitalization 5
|
50
|
%
|
|
53
|
%
|
|
47
|
%
|
|
45
|
%
|
|
41
|
%
|
|
Total equity 5, 6
|
44,231
|
|
|
40,610
|
|
|
31,421
|
|
|
29,169
|
|
|
28,844
|
|
|
Number of employees 7
|
243,200
|
|
|
240,200
|
|
|
204,700
|
|
|
201,600
|
|
|
197,200
|
|
Note 1 2019 amounts include pre-tax charges associated with the Company's intention to separate its commercial business of approximately $600 million and tax charges of approximately $730 million. 2018 amounts include unfavorable tax charges of approximately $744 million primarily related to non U.S. taxes that will become due when earnings of certain international subsidiaries are remitted, a $300 million pre-tax charge resulting from customer contract matters, partially offset by a $799 million pre-tax gain on the sale of Taylor. 2017 amounts include unfavorable tax charges of approximately $690 million related to U.S. tax reform legislation enacted in December, 2017, commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA) and a $196 million pre-tax charge resulting from customer contract matters, partially offset by pre-tax gains of approximately $500 million on sales of available for sale securities. 2016 amounts include a $423 million pre-tax pension settlement charge resulting from defined benefit plan de-risking actions. 2015 amounts include pre-tax charges of: $867 million as a result of a settlement with the Canadian government, $295 million from customer contract negotiations at Collins Aerospace Systems, and $237 million related to pending and future asbestos claims.
Note 2 Increase in average number of Common Stock outstanding is due to additional shares issued in connection with the Rockwell Collins acquisition.
Note 3 The decrease in 2019 is due to restrictions arising from the pending merger transaction with Raytheon. The decrease in share repurchases in 2018 is due to the temporary suspension of activity in connection with the acquisition of Rockwell Collins announced on September 4, 2017, excluding activity relating to our employee savings plans. Share repurchases in 2015 include share repurchases under accelerated repurchase agreements of $2.6 billion in the first quarter of 2015 and $6.0 billion in the fourth quarter of 2015.
Note 4 Working capital in 2019 includes tax costs accrued associated with the Company's intention to separate its commercial business of $634 million and Operating lease liabilities, current of $544 million. Working capital in 2018 includes the addition of contract assets and liabilities of $3.5B and $5.7B, respectively in accordance with the New Revenue Standard as well as an increase in current borrowings of $1.8 billion. Working capital in 2015 includes approximately $2.4 billion of taxes payable related to the gain on the sale of Sikorsky, which were paid in 2016. 2015 working capital also reflects the reclassification of current deferred tax assets and liabilities to non-current assets and liabilities in connection with the adoption of Accounting Standards Update 2015-17.
Note 5 The decrease in debt to total capitalization ratio primarily reflects debt repayments in 2019. The increase in the 2018 debt to total capitalization ratio primarily reflects additional borrowings in 2018 used to finance the acquisition of Rockwell Collins. The increase in the 2017 and 2016 debt to total capitalization ratio primarily reflects additional borrowings to fund share repurchases, the 2017 discretionary pension contributions, and for general corporate purposes.
Note 6 The increase in total equity in 2018 is due to UTC common stock issued as Merger Consideration for Rockwell Collins.
Note 7 The increase in employees in 2018 is due to the addition of approximately 30,000 of Rockwell Collins employees.
Management's Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEW
We are a global provider of high technology products and services to the building systems and aerospace industries. Our operations for the periods presented herein are classified into four principal business segments: Otis, Carrier, Pratt & Whitney, and Collins Aerospace Systems. Otis and Carrier are referred to as the "commercial businesses," while Pratt & Whitney and Collins Aerospace Systems are referred to as the "aerospace businesses."
On June 9, 2019, UTC entered into a merger agreement with Raytheon Company (Raytheon) providing for an all-stock merger of equals transaction. The Raytheon merger agreement provides, among other things, that each share of Raytheon common stock issued and outstanding immediately prior to the closing of the Raytheon merger (except for shares held by Raytheon as treasury stock) will be converted into the right to receive 2.3348 shares of UTC common stock. Upon the closing of the Raytheon merger, Raytheon will become a wholly-owned subsidiary of UTC, and UTC will change its name to Raytheon Technologies Corporation. On October 11, 2019, the shareowners of each of UTC and Raytheon approved the proposals necessary to complete the Raytheon merger. The Raytheon merger is expected to close early in the second quarter of 2020 and is subject to customary closing conditions, including receipt of required regulatory approvals, as well as the completion of UTC's separation of its Otis and Carrier businesses.
As has been previously disclosed, in November 2018, the Company announced its intention to separate into three independent companies. The separation will result in three global, industry-leading companies:
United Technologies, comprised of Collins Aerospace Systems and Pratt & Whitney, will be the preeminent systems supplier to the aerospace and defense industry;
•Otis, the world's leading manufacturer of elevators, escalators and moving walkways; and
•Carrier, a global provider of HVAC, refrigeration, building automation, fire safety and security products with leadership positions across its portfolio.
The proposed separations are expected to be effected through spin-offs of Otis and Carrier that are intended to be tax-free for the Company’s shareowners for U.S. federal income tax purposes, and are expected to be completed early in the second quarter of 2020. Separation of Otis and Carrier from UTC via spin-off transactions will be subject to the satisfaction of customary conditions, including, among others, final approval by the Company’s Board of Directors, receipt of tax rulings and a tax opinion from external counsel, the filing with the Securities and Exchange Commission (SEC) and effectiveness of Form 10 registration statements, and satisfactory completion of financing (subject to UTC’s agreement to consummate the distributions pursuant to, and subject to the terms and conditions of, the Raytheon merger agreement discussed below).
On November 26, 2018, we completed the acquisition of Rockwell Collins (the "Rockwell Acquisition"), a leader in aviation and high-integrity solutions for commercial and military customers as well as leading-edge avionics, flight controls, aircraft interior and data connectivity solutions. The total aggregate consideration payable in the Rockwell Acquisition was $15.5 billion in cash ($14.9 billion net of cash acquired) and 62.2 million shares of Company common stock. In addition, $7.8 billion of Rockwell Collins debt was outstanding at the time of the Rockwell Acquisition. Refer to Note 2 of the Consolidated Financial Statements for additional discussion on the Rockwell Acquisition.
The commercial businesses generally serve customers in the worldwide commercial and residential property industries, with Carrier also serving customers in the commercial and transport refrigeration industries. The aerospace businesses serve commercial and government aerospace customers in both the original equipment and aftermarket parts and services markets. Our consolidated net sales were derived from the commercial and aerospace businesses as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Commercial and industrial
|
41
|
%
|
|
47
|
%
|
|
50
|
%
|
|
Military aerospace and space
|
17
|
%
|
|
14
|
%
|
|
13
|
%
|
|
Commercial aerospace
|
42
|
%
|
|
39
|
%
|
|
37
|
%
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Our consolidated net sales were derived from original equipment manufacturing (OEM) and aftermarket parts and services as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
OEM
|
54
|
%
|
|
54
|
%
|
|
53
|
%
|
|
Aftermarket parts and services
|
46
|
%
|
|
46
|
%
|
|
47
|
%
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. Our operations include original equipment manufacturing and extensive related aftermarket parts and services in both our
commercial and aerospace businesses. Our business mix also reflects the combination of shorter cycles at Carrier and in our commercial aerospace spares businesses, and longer cycles at Otis and in our aerospace OEM and aftermarket maintenance businesses. Our customers are in both the public and private sectors, and our businesses reflect an extensive geographic diversification that has evolved with continued globalization. Refer to Note 20 of the Consolidated Financial Statements for additional discussion of sales attributed to geographic regions.
As part of our growth strategy, we invest in businesses in certain countries that carry high levels of currency, political and/or economic risk, such as Argentina, Brazil, China, India, Indonesia, Mexico, Poland, Russia, South Africa, Turkey, Ukraine and countries in the Middle East and Central Asia. As of December 31, 2019, the net assets in any one of these countries did not exceed 5% of consolidated shareowners' equity.
In a referendum on June 23, 2016, voters in the United Kingdom (the U.K.) voted in favor of the U.K.'s exiting the European Union (the EU). The manner in which the U.K. decides to exit the EU could have negative macroeconomic consequences. Our 2019 full year sales in and from the U.K. were approximately $4 billion and represented less than 5% of our overall sales, and we do not believe the U.K.'s withdrawal from the EU will significantly impact our businesses in the near term.
Organic sales growth was 5% in 2019, reflecting growth across all segments driven by:
•Higher sales across all channels at Pratt & Whitney;
•Higher commercial aftermarket and military sales, partially offset by lower commercial aerospace OEM sales at Collins Aerospace Systems;
•Higher service sales across all regions and higher new equipment sales driven by growth in Asia at Otis;
•Higher commercial and residential HVAC sales at Carrier.
We continue to invest in new platforms and new markets to position the Company for long-term growth, while remaining focused on innovation, structural cost reduction, disciplined capital allocation and execution to meet or exceed customer and shareowner commitments.
As discussed below in "Results of Operations," operating profit in both 2019 and 2018 includes the impact from activities that are not expected to recur often or that are not otherwise reflective of the underlying operations, such as the beneficial impact of net gains from sales of investments, the unfavorable impact of contract matters with customers, transaction, acquisition and integration costs, costs associated with the Company's intention to separate its commercial businesses, and other significant non-recurring and non-operational items. Our earnings growth strategy contemplates earnings from organic sales growth, including growth from new product development and product improvements, structural cost reductions, operational improvements, and incremental earnings from our investments in acquisitions.
In total, our investments in businesses in 2019 and 2018 totaled $56 million and $31,142 million, (including debt assumed of $7,784 million and stock issued of $7,960 million) respectively. Our investments in businesses in 2019 included a number of small acquisitions primarily at Otis. In addition to Rockwell Collins, acquisitions completed in 2018 primarily include an acquisition at Carrier and at Pratt & Whitney.
Both acquisition and restructuring costs associated with business combinations are expensed as incurred. Depending on the nature and level of acquisition activity, earnings could be adversely impacted due to acquisition and restructuring actions initiated in connection with the integration of businesses acquired. For additional discussion of acquisitions and restructuring, see "Liquidity and Financial Condition," "Restructuring Costs" and Notes 2 and 13 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Net sales
|
$
|
77,046
|
|
|
$
|
66,501
|
|
|
$
|
59,837
|
|
|
Percentage change year-over-year
|
16
|
%
|
|
11
|
%
|
|
5
|
%
|
The factors contributing to the total percentage change year-over-year in total net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Organic volume
|
5
|
%
|
|
8
|
%
|
|
Foreign currency translation
|
(1)
|
%
|
|
1
|
%
|
|
Acquisitions and divestitures, net
|
12
|
%
|
|
1
|
%
|
|
Other
|
—
|
%
|
|
1
|
%
|
|
Total % Change
|
16
|
%
|
|
11
|
%
|
All four segments experienced organic sales growth during 2019. Pratt & Whitney sales grew 8% organically, reflecting higher military, commercial OEM, and commercial aftermarket sales. Collins Aerospace Systems grew 6% organically, driven by higher commercial aftermarket and military sales, partially offset by lower commercial aerospace OEM sales. Organic sales growth of 5% at Otis reflects higher service sales, driven by broad-based growth across all regions, and higher new equipment sales driven by growth in Asia. Carrier sales grew 1% organically, driven by higher commercial and residential HVAC sales. The 12% increase in Acquisitions and divestitures, net primarily reflects the increase in sales attributed to the Rockwell Acquisition.
All four segments experienced organic sales growth during 2018. Pratt & Whitney sales grew 14% organically, reflecting higher commercial aftermarket, commercial OEM, and military sales. Collins Aerospace Systems grew 8% organically, driven by higher commercial aftermarket and military sales, and higher commercial OEM sales. Organic sales growth of 6% at Carrier was driven by growth in North America residential HVAC, global commercial HVAC, and transport refrigeration sales. Otis sales grew 3% organically, reflecting higher service sales in North America and Asia, and higher new equipment sales in Europe, Asia excluding China, and North America, partially offset by a decline in China.
Cost of Products and Services Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of products and services sold
|
$
|
57,065
|
|
|
$
|
49,985
|
|
|
$
|
44,201
|
|
|
Percentage change year-over-year
|
14
|
%
|
|
13
|
%
|
|
7
|
%
|
The factors contributing to the total percentage change year-over-year in total cost of products and services sold are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Organic volume
|
5
|
%
|
|
9
|
%
|
|
Foreign currency translation
|
(1)
|
%
|
|
1
|
%
|
|
Acquisitions and divestitures, net
|
11
|
%
|
|
1
|
%
|
|
|
|
|
|
|
Other
|
(1)
|
%
|
|
2
|
%
|
|
Total % Change
|
14
|
%
|
|
13
|
%
|
The organic increase in total cost of products and services sold in 2019 was primarily driven by the organic sales increases noted above. The 11% increase in Acquisitions and divestitures, net primarily reflects the increase in cost of products and services sold attributed to the Rockwell Acquisition. The 1% decline in Other primarily reflects the absence of a prior year customer contract settlement at Pratt & Whitney (1%).
The organic increase in total cost of products and services sold in 2018 was primarily driven by the organic sales increases noted above. The 2% increase in Other primarily reflects the impact of the adoption of the New Revenue Standard (1%) and a customer contract settlement at Pratt & Whitney (1%), partially offset by the absence of a prior year customer contract matter at Pratt & Whitney.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Gross margin
|
$
|
19,981
|
|
|
$
|
16,516
|
|
|
$
|
15,636
|
|
|
Percentage of net sales
|
25.9
|
%
|
|
24.8
|
%
|
|
26.1
|
%
|
The 110 basis point increase in gross margin as a percentage of sales in 2019, includes a 230 basis point increase at Collins Aerospace Systems driven by higher commercial aftermarket volumes and cost reduction, partially offset by adverse commercial OEM mix. Pratt & Whitney's gross margin increased 120 basis points primarily reflecting continued year-over-year cost reduction and favorable mix on large commercial engine shipments. Gross margin at Otis increased 30 basis points largely driven by favorable service contribution. These increases were partially offset by a 30 basis point decline in Carrier's gross margin primarily driven by unfavorable mix, the absence of a favorable prior year contract adjustment related to a large commercial project at Carrier, and the unfavorable year-over-year impact resulting from the revaluation of certain long-term liabilities.
The 130 basis point decrease in gross margin as a percentage of sales in 2018, includes a 300 basis point decline in Pratt & Whitney's gross margin driven by the unfavorable year-over-year impact of customer contract matters and higher negative engine margin from higher engine deliveries. Collins Aerospace Systems' gross margin declined 40 basis points as the benefits of higher commercial aftermarket volumes and cost reduction were more than offset by adverse commercial OEM and military OEM mix, and higher warranty expense. Gross margin at Otis declined 140 basis points largely driven by unfavorable price and mix, primarily in China. These declines were partially offset by a 40 basis point increase in Carrier's gross margin as favorable pricing and the favorable year-over-year impact of contract adjustments related to a large commercial project and a prior year product recall program were partially offset by increased commodities and logistics costs.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Company-funded
|
$
|
3,015
|
|
|
$
|
2,462
|
|
|
$
|
2,427
|
|
|
Percentage of net sales
|
3.9
|
%
|
|
3.7
|
%
|
|
4.1
|
%
|
|
Customer-funded
|
$
|
2,283
|
|
|
$
|
1,517
|
|
|
$
|
1,514
|
|
|
Percentage of net sales
|
3.0
|
%
|
|
2.3
|
%
|
|
2.5
|
%
|
Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year variations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses and relates largely to the next generation engine product family at Pratt & Whitney and systems being developed to support new aircraft and other program introductions at Collins Aerospace Systems. In 2019, company-funded research and development increased 22% over the prior year. This increase was primarily driven by the impact of the Rockwell Acquisition (18%). Excluding this impact, an increase in company-funded research and development at Collins Aerospace Systems (3%) was driven by higher spend across various commercial programs. Company-funded research and development expense at Pratt & Whitney also increased (2%) driven by higher spend across various commercial programs partially offset by a decline in military program spend.
Customer-funded research and development increased 50% over the prior year, primarily reflecting the impact of the Rockwell Acquisition (53%). Excluding this impact, customer-funded research and development declined year-over-year as a decrease at Pratt & Whitney (4%), primarily driven by lower research and development expenses on military development programs, was partially offset by an increase at Collins Aerospace Systems (2%), primarily driven by higher expenses on various military development programs.
In 2018, company-funded research and development increased 1% over the prior year. This increase was primarily driven by Collins Aerospace Systems (1%) as higher spend across various commercial programs was largely offset by the deferral of certain development costs as contract fulfillment costs in accordance with the New Revenue Standard. Company-funded research and development expense at Pratt & Whitney was consistent with the prior year.
Customer-funded research and development in 2018 was consistent with 2017, as a decrease at Collins Aerospace Systems, primarily driven by the deferral of certain development costs as contract fulfillment costs in accordance with the New Revenue Standard, was offset by an increase at Pratt & Whitney, primarily driven by higher research and development expenses on military development programs.
Selling, General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Selling, general and administrative
|
$
|
8,521
|
|
|
$
|
7,066
|
|
|
$
|
6,429
|
|
|
Percentage of net sales
|
11.1
|
%
|
|
10.6
|
%
|
|
10.7
|
%
|
Selling, general and administrative expenses increased 21% in 2019. This increase primarily reflects the impact of incremental selling, general and administrative expenses resulting from the Rockwell Acquisition (9%), costs associated with the Company's intention to separate its commercial businesses (8%), and costs associated with the Raytheon merger (1%). In addition, 2019 reflects higher expenses at Pratt & Whitney (1%) driven by increased headcount and employee compensation related expenses and costs to support higher volumes as well as higher restructuring costs; higher expenses at Collins Aerospace Systems (1%) primarily driven by increased headcount and employee compensation related expenses partially offset by synergy capture related to the Rockwell Acquisition; higher expenses at Otis (1%) resulting from higher labor and information technology cost; and an increase at Carrier (1%) primarily driven by higher costs related to productivity initiatives and higher employee compensation related expenses.
Selling, general and administrative expenses increased 10% in 2018, but decreased 10 basis points as a percentage of net sales. The increase reflects the impact of incremental selling, general and administrative expenses resulting from the acquisition of Rockwell Collins (1%). In addition, 2018 reflects higher expenses at Collins Aerospace Systems (3%) primarily driven by increased headcount and employee compensation related expenses; an increase at Carrier (2%) primarily driven by employee compensation related expenses; higher expenses at Pratt & Whitney (1%) driven by increased headcount and employee compensation related expenses and costs to support higher volumes; and higher expenses at Otis (1%) resulting from higher labor and information technology costs. The remaining increase includes transaction costs related to the acquisition of Rockwell Collins and the proposed separation of our commercial businesses into independent entities.
We are continuously evaluating our cost structure and have implemented restructuring actions as a method of keeping our cost structure competitive. As appropriate, the amounts reflected above include the beneficial impact of restructuring actions on Selling, general and administrative expenses. See Note 13 "Restructuring Costs" and the "Restructuring Costs" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion.
Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Other income, net
|
$
|
521
|
|
|
$
|
1,565
|
|
|
$
|
1,358
|
|
Other income, net includes the operational impact of equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses as well as other ongoing and infrequently occurring items. In 2019, the year-over-year decrease in Other income, net (67%) primarily reflects the absence of the prior year gain on the sale of Taylor Company (51%), the impairment of an investment at Carrier (7%) and the net unfavorable year-over-year impact of foreign exchange gains and losses (5%).
In 2018, the year-over-year increase in Other income, net (15%) is primarily driven by the gain on the sale of Taylor Company (59%), partially offset by the absence of a prior year gain from the sale of Carrier's investments in Watsco, Inc. (28%), lower year-over-year gains on the sale of securities (11%), an impairment of assets related to a previously acquired Collins Aerospace Systems business (4%) and the absence of a prior year gain on the sale of a Carrier business (2%).
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Interest expense
|
$
|
1,773
|
|
|
$
|
1,225
|
|
|
$
|
1,017
|
|
|
Interest income
|
(162)
|
|
|
(187)
|
|
|
(108)
|
|
|
Interest expense, net
|
$
|
1,611
|
|
|
$
|
1,038
|
|
|
$
|
909
|
|
|
Average interest expense rate - average outstanding borrowings during the year:
|
|
|
|
|
|
|
Short-term borrowings
|
1.9
|
%
|
|
1.5
|
%
|
|
1.1
|
%
|
|
Total debt
|
3.7
|
%
|
|
3.5
|
%
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
Average interest expense rate - outstanding borrowings as of December 31:
|
|
|
|
|
|
|
Short-term borrowings
|
3.1
|
%
|
|
1.2
|
%
|
|
2.3
|
%
|
|
Total debt
|
3.7
|
%
|
|
3.5
|
%
|
|
3.5
|
%
|
Interest expense, net increased 55% in 2019 as compared with 2018. The increase in interest expense primarily reflects interest on debt acquired from the Rockwell Collins acquisition and the impact of the August 16, 2018 issuance of notes representing $11 billion in aggregate principal. The average maturity of our long-term debt at December 31, 2019 is approximately 10 years. The decrease in interest income in 2019 as compared to 2018 primarily reflects the absence of interest earned on higher cash balances held in the prior year in advance of funding the Rockwell Acquisition.
Interest expense, net increased 14% in 2018 as compared with 2017. The increase in interest expense reflects the impact of the August 16, 2018 issuance of notes representing $11 billion in aggregate principal; the May 4, 2017 issuance of notes representing $4 billion in aggregate principal; and the May 18, 2018 issuance of Euro-denominated notes representing €2 billion in aggregate principal. These increases were partially offset by the favorable impact of the repayment at maturity of the following: 1.800% notes in June 2017 representing $1.5 billion in aggregate principal; the 6.8% notes in February 2018 representing $99 million of aggregate principal; the Euro-denominated floating rate notes in February 2018 representing €750 million in aggregate principal; and the 1.778% notes in May 2018 representing $1.1 billion of aggregate principal. The average maturity of our long-term debt at December 31, 2018 is approximately 11 years.
The $11 billion in aggregate principal amount of notes issued on August 16, 2018 was primarily used to fund the cash consideration in the acquisition of Rockwell Collins and related fees, expenses and other amounts. The increase in interest income in 2018 as compared with 2017 primarily reflects interest earned on higher cash balances, including interest earned on cash from the $11 billion of notes issued and held prior to funding the Rockwell Acquisition.
The year-over-year increase in the average interest expense rate for short-term borrowings was primarily driven by increased borrowings under our term credit agreement. In 2018, the year-over-year increase in the average interest expense rate for short-term borrowings was primarily driven by increases in LIBOR rates.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Effective income tax rate
|
27.8
|
%
|
|
31.7
|
%
|
|
36.6
|
%
|
The 2019 effective tax rate includes $729 million of income tax charges associated with the Company’s portfolio separation transactions, offset in part by amounts associated with the conclusion of the audit by the Examination Division of the Internal Revenue Service for the UTC 2014, 2015 and 2016 tax years, the filing by a subsidiary of the Company to participate in an amnesty program offered by the Italian Tax Authority.
On December 22, 2017 Public Law 115-97 “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” was enacted. This law is commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA).
The 2018 effective tax rate reflects a net charge of $744 million of TCJA related adjustments. The amount primarily relates to accounting completed under SAB 118 for non-U.S. taxes that will become due when previously reinvested earnings of certain international subsidiaries are remitted.
The 2017 effective tax rate reflects a tax charge of $690 million attributable to the passage of the TCJA. This amount relates to U.S. income tax attributable to previously undistributed earnings of UTC's international subsidiaries and equity investments, net of foreign tax credits, and the revaluation of U.S. deferred income taxes.
The effective income tax rate for 2017 also includes tax benefits associated with lower tax rates on international earnings and the expiration of statutes of limitations during 2017 resulted in a favorable adjustment of $55 million largely offset by the unfavorable impact related to a retroactive Quebec tax law change.
For additional discussion of income taxes and the effective income tax rate, see "Critical Accounting Estimates—Income Taxes" and Note 11 to the Consolidated Financial Statements.
Net Income Attributable to Common Shareowners from Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
2019
|
|
2018
|
|
2017
|
|
Net income from continuing operations attributable to common shareowners
|
$
|
5,537
|
|
|
$
|
5,269
|
|
|
$
|
4,552
|
|
|
Diluted earnings per share from continuing operations
|
$
|
6.41
|
|
|
$
|
6.50
|
|
|
$
|
5.70
|
|
To help mitigate the volatility of foreign currency exchange rates on our operating results, we maintain foreign currency hedging programs, the majority of which are entered into by Pratt & Whitney Canada (P&WC). In 2019, foreign currency, including hedging at P&WC, had a favorable impact on our consolidated operational results of $0.06 per diluted share. In 2018, foreign currency, including hedging at P&WC, had a favorable impact on our consolidated operational results of $0.02 per diluted share. In 2017, foreign currency, including hedging at P&WC, had a favorable impact on our consolidated operational
results of $0.13 per diluted share. For additional discussion of foreign currency exposure, see "Market Risk and Risk Management—Foreign Currency Exposures."
Net income from continuing operations attributable to common shareowners for the year ended December 31, 2019 includes restructuring charges, net of tax benefit, of $317 million ($425 million pre-tax) as well as a net charge for significant non-operational and/or nonrecurring items, including the impact of taxes, of $1,282 million. Non-operational and/or nonrecurring items primarily include costs associated with the Company's intention to separate its commercial businesses, amortization of an inventory fair value adjustment associated with the Rockwell Acquisition, an impairment of an investment, transaction expenses associated with the Raytheon Merger, pension curtailment costs, and transaction and integration costs related to the Rockwell Acquisition. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the year ended December 31, 2019 was a charge of $1.85 per share.
Net income from continuing operations attributable to common shareowners for the year ended December 31, 2018 includes restructuring charges, net of tax benefit, of $228 million ($307 million pre-tax) as well as a net charge for significant non-operational and/or nonrecurring items, including the impact of taxes, of $668 million. Non-operational and/or nonrecurring items include a tax charge in connection with the passage of the TCJA as described in Note 11 and the unfavorable impact of a customer contract matter at Pratt & Whitney, partially offset by a gain on Carrier's sale of Taylor Company. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the year ended December 31, 2018 was a charge of $1.11 per share.
Net income from continuing operations attributable to common shareowners for the year ended December 31, 2017 includes restructuring charges, net of tax benefit, of $176 million ($253 million pre-tax) as well as the net unfavorable impact of significant non-operational and/or nonrecurring items, net of tax, of $587 million. Non-operational and/or nonrecurring items include a tax charge in connection with the passage of the TCJA as described in Note 11, the unfavorable impact of customer contract matters at Pratt & Whitney, and the unfavorable impact of a product recall program at Carrier, partially offset by gains resulting from Carrier's sale of its investments in Watsco, Inc. The effect of restructuring charges and nonrecurring items on diluted earnings per share for 2017 was a charge of $0.95 per share.
RESTRUCTURING COSTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
$
|
425
|
|
|
$
|
307
|
|
|
$
|
253
|
|
Restructuring actions are an essential component of our operating margin improvement efforts and relate to existing and recently acquired operations. Charges generally arise from severance related to workforce reductions, facility exit and lease termination costs associated with the consolidation of field and manufacturing operations and costs to exit legacy programs. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.
2019 Actions. During 2019, we recorded net pre-tax restructuring charges of $321 million relating to ongoing cost reduction actions initiated in 2019. We are targeting to complete in 2020 and 2021 the majority of the remaining workforce and facility related cost reduction actions initiated in 2019. Approximately 90% of the total pre-tax charge will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During 2019, we had cash outflows of approximately $199 million related to the 2019 actions. We expect to incur additional restructuring and other charges of $123 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $389 million annually, of which, approximately $125 million was realized in 2019.
2018 Actions. During 2019 and 2018, we recorded net pre-tax restructuring charges of $46 million and $207 million, respectively, for actions initiated in 2018. We are targeting to complete in 2020 the majority of the remaining workforce and all facility related cost reduction actions initiated in 2018. Approximately 96% of the total pre-tax charge will require cash payments, which we have and expect to continue to fund with cash generated from operations. During 2019, we had cash outflows of approximately $143 million related to the 2018 actions. We expect to incur additional restructuring charges of $5 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $260 million annually.
In addition, during 2019, we recorded net pre-tax restructuring costs totaling $58 million for restructuring actions initiated in 2017 and prior. For additional discussion of restructuring, see Note 13 to the Consolidated Financial Statements.
SEGMENT REVIEW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Operating Profits
|
|
|
|
|
|
Operating Profit Margin
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
Otis
|
$
|
13,113
|
|
|
$
|
12,904
|
|
|
$
|
12,341
|
|
|
$
|
1,948
|
|
|
$
|
1,915
|
|
|
$
|
2,002
|
|
|
14.9
|
%
|
|
14.8
|
%
|
|
16.2
|
%
|
|
Carrier
|
18,608
|
|
|
18,922
|
|
|
17,812
|
|
|
2,697
|
|
|
3,777
|
|
|
3,165
|
|
|
14.5
|
%
|
|
20.0
|
%
|
|
17.8
|
%
|
|
Pratt & Whitney
|
20,892
|
|
|
19,397
|
|
|
16,160
|
|
|
1,668
|
|
|
1,269
|
|
|
1,300
|
|
|
8.0
|
%
|
|
6.5
|
%
|
|
8.0
|
%
|
|
Collins Aerospace Systems
|
26,028
|
|
|
16,634
|
|
|
14,691
|
|
|
4,100
|
|
|
2,303
|
|
|
2,191
|
|
|
15.8
|
%
|
|
13.8
|
%
|
|
14.9
|
%
|
|
Total segment
|
78,641
|
|
|
67,857
|
|
|
61,004
|
|
|
10,413
|
|
|
9,264
|
|
|
8,658
|
|
|
13.2
|
%
|
|
13.7
|
%
|
|
14.2
|
%
|
|
Eliminations and other
|
(1,595)
|
|
|
(1,356)
|
|
|
(1,167)
|
|
|
(932)
|
|
|
(236)
|
|
|
(81)
|
|
|
|
|
|
|
|
|
General corporate expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(515)
|
|
|
(475)
|
|
|
(439)
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
77,046
|
|
|
$
|
66,501
|
|
|
$
|
59,837
|
|
|
$
|
8,966
|
|
|
$
|
8,553
|
|
|
$
|
8,138
|
|
|
11.6
|
%
|
|
12.9
|
%
|
|
13.6
|
%
|
Commercial Businesses
The financial performance of our commercial businesses can be influenced by a number of external factors including fluctuations in residential and commercial construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, credit markets and other global and political factors. Carrier's financial performance can also be influenced by production and utilization of transport equipment, and weather conditions for its residential business. Geographic and industry diversity across the commercial businesses help to balance the impact of such factors on our consolidated operating results, particularly in the face of uneven economic growth. At constant currency, Otis new equipment orders were consistent with the prior year as order growth in Asia (3%) and Europe (2%) was offset by declines in North America (3%) and the Middle East (20%). At constant currency and excluding the effect of acquisitions and divestitures, Carrier equipment orders for 2019 decreased 8% in comparison to 2018 driven by a decline in global refrigeration (32%). Global HVAC and fire & security products equipment orders for 2019 were consistent with the prior year.
Total commercial business sales generated outside the U.S., including U.S. export sales, were 61% and 62% in 2019 and 2018, respectively. The following table shows sales generated outside the U.S., including U.S. export sales, for each of the commercial business segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Otis
|
73
|
%
|
|
73
|
%
|
|
Carrier
|
52
|
%
|
|
54
|
%
|
Otis is the world’s largest elevator and escalator manufacturing, installation and service company. Otis designs, manufactures, sells and installs a wide range of passenger and freight elevators as well as escalators and moving walkways. In addition to new equipment, Otis provides modernization products to upgrade elevators and escalators as well as maintenance and repair services for both its products and those of other manufacturers. Otis serves customers in the commercial, residential and infrastructure property sectors around the world. Otis sells direct and through sales representatives and distributors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) Year-Over-Year for:
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
2019 Compared with 2018
|
|
|
|
2018 Compared with 2017
|
|
|
|
Net Sales
|
$
|
13,113
|
|
|
$
|
12,904
|
|
|
$
|
12,341
|
|
|
$
|
209
|
|
|
2
|
%
|
|
$
|
563
|
|
|
5
|
%
|
|
Cost of Sales
|
9,291
|
|
|
9,192
|
|
|
8,612
|
|
|
99
|
|
|
1
|
%
|
|
580
|
|
|
7
|
%
|
|
|
3,822
|
|
|
3,712
|
|
|
3,729
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses and Other
|
1,874
|
|
|
1,797
|
|
|
1,727
|
|
|
|
|
|
|
|
|
|
|
Operating Profits
|
$
|
1,948
|
|
|
$
|
1,915
|
|
|
$
|
2,002
|
|
|
$
|
33
|
|
|
2
|
%
|
|
$
|
(87)
|
|
|
(4)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
Net Sales
|
|
Cost of Sales
|
|
Operating Profits
|
|
Net Sales
|
|
Cost of Sales
|
|
Operating Profits
|
|
Organic / Operational
|
5
|
%
|
|
5
|
%
|
|
4
|
%
|
|
3
|
%
|
|
5
|
%
|
|
(4)
|
%
|
|
Foreign currency translation
|
(3)
|
%
|
|
(4)
|
%
|
|
(4)
|
%
|
|
1
|
%
|
|
1
|
%
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
—
|
|
|
—
|
|
|
1
|
%
|
|
—
|
|
|
—
|
|
|
(1)
|
%
|
|
Other
|
—
|
|
|
—
|
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
(1)
|
%
|
|
Total % change
|
2
|
%
|
|
1
|
%
|
|
2
|
%
|
|
5
|
%
|
|
7
|
%
|
|
(4)
|
%
|
2019 Compared with 2018
The organic sales increase of 5% primarily reflects higher service sales (3%), driven by broad-based growth across all regions, and higher new equipment sales (2%) driven by growth in Asia.
The operational profit increase of 4% was driven by:
•margin contribution from the higher sales volumes noted above (6%)
•favorable price and mix (2%)
•favorable productivity (1%)
These increases were partially offset by:
•higher selling, general and administrative expenses (4%)
•unfavorable transactional foreign exchange gains and losses from mark-to-market adjustments and embedded foreign currency derivatives within certain new equipment contracts (1%)
2018 Compared with 2017
The organic sales increase of 3% primarily reflects higher service sales (2%), driven by growth in North America and Asia, and higher new equipment sales (1%) driven by growth in Europe, Asia excluding China, and North America (combined, 2%), partially offset by a decline in China (1%).
The operational profit decrease of 4% was driven by:
•unfavorable price and mix (8%), primarily in China
•higher selling, general and administrative expenses and research and development costs (3%)
•unfavorable commodity costs (2%)
•unfavorable transactional foreign exchange from mark-to-market adjustments (1%)
These decreases were partially offset by:
•profit contribution from the higher sales volumes noted above (8%)
•favorable productivity (2%)
Carrier is a leading provider of heating, ventilating, air conditioning (HVAC), refrigeration, fire, security, and building automation products, solutions, and services for commercial, government, infrastructure, and residential property applications and refrigeration and transportation applications. Carrier provides a wide range of building systems, including cooling, heating, ventilation, refrigeration, fire, flame, gas, and smoke detection, portable fire extinguishers, fire suppression, intruder alarms, access control systems, video surveillance, and building control systems. Carrier also provides a broad array of related building services, including audit, design, installation, system integration, repair, maintenance, and monitoring services. Carrier also provides refrigeration and monitoring products and solutions to the transport industry.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) Year-Over-Year for:
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
2019 Compared with 2018
|
|
|
|
2018 Compared with 2017
|
|
|
|
Net Sales
|
$
|
18,608
|
|
|
$
|
18,922
|
|
|
$
|
17,812
|
|
|
$
|
(314)
|
|
|
(2)
|
%
|
|
$
|
1,110
|
|
|
6
|
%
|
|
Cost of Sales
|
13,180
|
|
|
13,337
|
|
|
12,630
|
|
|
(157)
|
|
|
(1)
|
%
|
|
707
|
|
|
6
|
%
|
|
|
5,428
|
|
|
5,585
|
|
|
5,182
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses and Other
|
2,731
|
|
|
1,808
|
|
|
2,017
|
|
|
|
|
|
|
|
|
|
|
Operating Profits
|
$
|
2,697
|
|
|
$
|
3,777
|
|
|
$
|
3,165
|
|
|
$
|
(1,080)
|
|
|
(29)
|
%
|
|
$
|
612
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
Net Sales
|
|
Cost of Sales
|
|
Operating
Profits
|
|
Net Sales
|
|
Cost of Sales
|
|
Operating
Profits
|
|
Organic / Operational
|
1
|
%
|
|
2
|
%
|
|
(2)
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
Foreign currency translation
|
(2)
|
%
|
|
(2)
|
%
|
|
(1)
|
%
|
|
1
|
%
|
|
1
|
%
|
|
—
|
|
|
Acquisitions and divestitures, net
|
(1)
|
%
|
|
(1)
|
%
|
|
(1)
|
%
|
|
(1)
|
%
|
|
(1)
|
%
|
|
(1)
|
%
|
|
Restructuring costs
|
—
|
|
|
—
|
|
|
(1)
|
%
|
|
—
|
|
|
—
|
|
|
1
|
%
|
|
Other
|
—
|
|
|
—
|
|
|
(24)
|
%
|
|
—
|
|
|
—
|
|
|
13
|
%
|
|
Total % change
|
(2)
|
%
|
|
(1)
|
%
|
|
(29)
|
%
|
|
6
|
%
|
|
6
|
%
|
|
19
|
%
|
2019 Compared with 2018
The organic sales increase of 1% was primarily driven by growth in commercial and residential HVAC (1%, combined). Sales in global fire & security and global refrigeration were consistent with the prior year.
Operational profit decreased 2% in comparison to the prior year as the favorable impact of pricing and productivity net of unfavorable commodities and tariffs (4%, combined) were more than offset by lower volume and unfavorable mix (3%), the absence of a favorable prior year contract adjustment related to a large commercial project (1%), and the unfavorable year-over-year impact resulting from the revaluation of certain long-term liabilities (1%).
The 24% decrease in Other primarily reflects the absence of the prior year gain on the sale of Taylor Company (21%) and a current-year impairment of an investment (3%).
2018 Compared with 2017
The organic sales increase of 6% was driven primarily by growth in North America residential HVAC (2%), global commercial HVAC (2%), and global refrigeration (2%).
The operational profit increase of 6% was driven by:
•profit contribution from the higher sales volumes noted above, net of mix (6%)
•the year-over-year impact of contract adjustments related to a large commercial project (3%)
•favorable pricing, net of commodities (2%)
These increases were partially offset by:
•higher logistics costs (3%)
•higher research and development costs (1%)
The 13% increase in Other primarily reflects the year-over-year impact of gains on sale of businesses and investments (11%), primarily driven by the sale of Taylor Company in 2018 (25%), partially offset by the absence of the prior year sale of investments in Watsco, Inc. (12%). The remaining increase in Other is largely driven by the year-over-year impact of a prior year product recall program (2%).
Aerospace Businesses
The financial performance of Pratt & Whitney and Collins Aerospace Systems is directly tied to the economic conditions of the commercial aerospace and defense aerospace industries. In particular, Pratt & Whitney experiences intense competition for new commercial airframe/engine combinations. Engine suppliers may offer substantial discounts and other financial incentives, performance and operating cost guarantees, and participate in financing arrangements in an effort to compete for the aftermarket associated with these engine sales. These OEM engine sales may result in losses on the engine sales, which economically are recovered through the sales and profits generated over the engine's maintenance cycle. At times, the aerospace businesses also enter into development programs and firm fixed-price development contracts, which may require the company to bear cost overruns related to unforeseen technical and design challenges that arise during the development stage of the program. Customer selections of engines and components can also have a significant impact on later sales of parts and service. Predicted traffic levels, load factors, worldwide airline profits, general economic activity and global defense spending have been reliable indicators for new aircraft and aftermarket orders within the aerospace industry. Spare part sales and aftermarket service trends are affected by many factors, including usage, technological improvements, pricing, regulatory changes and the retirement of older aircraft. Our commercial aftermarket businesses continue to evolve as an increasing proportion of our aerospace businesses' customers are covered under long-term aftermarket service agreements. These agreements are comprehensive long-term spare part and service agreements with our customers. We expect a continued shift to long-term aftermarket service agreements in lieu of transactional spare part sales as new aerospace products enter our customers' fleets under long-term aftermarket service agreements and legacy fleets are retired. In 2019, as compared with 2018, total commercial aerospace aftermarket sales increased 2% at Pratt & Whitney and 63% at Collins Aerospace Systems, or 14% excluding the impact of the Rockwell Acquisition.
Our long-term aerospace contracts are subject to strict safety and performance regulations which can affect our ability to estimate costs precisely. Contract cost estimation for the development of complex projects, in particular, requires management to make significant judgments and assumptions regarding the complexity of the work to be performed, availability of materials, the performance by subcontractors, the timing of funding from customers and the length of time to complete the contract. As a result, we review and update our cost estimates on significant contracts on a quarterly basis, and no less frequently than annually for all others, and when circumstances change and warrant a modification to a previous estimate. Changes in estimates relate to the current period impact of revisions to total estimated contract sales and costs at completion. We record changes in contract estimates primarily using the cumulative catch-up method. Operating profits included net unfavorable changes in aerospace contract estimates of approximately $69 million, $50 million and $110 million in 2019, 2018 and 2017, respectively, primarily the result of unexpected increases in estimated costs related to Pratt & Whitney long-term aftermarket agreements. In accordance with our revenue recognition policy, losses, if any, on long-term contracts are provided for when anticipated. There were no material loss provisions recorded in continuing operations in 2019 or 2018.
Performance in the general aviation sector is closely tied to the overall health of the economy. We continue to see growth in a strong commercial airline industry. Airline traffic, as measured by revenue passenger miles (RPMs), grew approximately 4% in the first eleven months of 2019.
Our military sales are affected by U.S. Department of Defense spending levels. Total sales to the U.S. Government were $10.6 billion in 2019, $7.4 billion in 2018, and $5.8 billion in 2017, and were 14% of total UTC sales in 2019, and 11% in 2018 and 10% in 2017. The defense portion of our aerospace business is also affected by changes in market demand and the global political environment. Our participation in long-term production and development programs for the U.S. Government has contributed positively to our results in 2019 and is expected to continue to benefit results in 2020.
Collins Aerospace Systems provides standard and selectable content to Boeing for its 737 MAX aircraft including standard avionics, cockpit flight displays, and cabin interior products. In March 2019, aviation authorities suspended worldwide operations of the Boeing 737 MAX fleet. In January 2020, Boeing announced that it expects the fleet to remain grounded until mid-2020. In addition, Boeing announced the temporary suspension of 737 MAX production. The Company has made various investments in support of content for the 737 MAX which we currently expect to recover despite these delays in the production and operation of the fleet.
Pratt & Whitney is among the world’s leading suppliers of aircraft engines for the commercial, military, business jet and general aviation markets. Pratt & Whitney provides fleet management services and aftermarket maintenance, repair and overhaul services. Pratt & Whitney produces and develops families of large engines for wide- and narrow-body and large regional aircraft in the commercial market and for fighter, bomber, tanker and transport aircraft in the military market. P&WC is among the world's leading suppliers of engines powering general and business aviation, as well as regional airline, utility and military airplanes, and helicopters. Pratt & Whitney and P&WC also produce, sell and service auxiliary power units for commercial and military aircraft. Pratt & Whitney’s products are sold principally to aircraft manufacturers, airlines and other aircraft operators, aircraft leasing companies and the U.S. and foreign governments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) Year-Over-Year for:
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
2019 Compared with 2018
|
|
|
|
2018 Compared with 2017
|
|
|
|
Net Sales
|
$
|
20,892
|
|
|
$
|
19,397
|
|
|
$
|
16,160
|
|
|
$
|
1,495
|
|
|
8
|
%
|
|
$
|
3,237
|
|
|
20
|
%
|
|
Cost of Sales
|
17,291
|
|
|
16,301
|
|
|
13,093
|
|
|
990
|
|
|
6
|
%
|
|
3,208
|
|
|
25
|
%
|
|
|
3,601
|
|
|
3,096
|
|
|
3,067
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses and Other
|
1,933
|
|
|
1,827
|
|
|
1,767
|
|
|
|
|
|
|
|
|
|
|
Operating Profits
|
$
|
1,668
|
|
|
$
|
1,269
|
|
|
$
|
1,300
|
|
|
$
|
399
|
|
|
31
|
%
|
|
$
|
(31)
|
|
|
(2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
Net Sales
|
|
Cost of Sales
|
|
Operating
Profits
|
|
Net Sales
|
|
Cost of Sales
|
|
Operating
Profits
|
|
Organic* / Operational*
|
8
|
%
|
|
8
|
%
|
|
18
|
%
|
|
14
|
%
|
|
17
|
%
|
|
(8)
|
%
|
|
Foreign currency (including P&WC net hedging)*
|
—
|
|
|
—
|
|
|
(1)
|
%
|
|
—
|
|
|
1
|
%
|
|
—
|
|
|
Acquisitions and divestitures, net
|
—
|
|
|
—
|
|
|
(1)
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Restructuring costs
|
—
|
|
|
—
|
|
|
(11)
|
%
|
|
—
|
|
|
—
|
|
|
1
|
%
|
|
Other
|
—
|
|
|
(2)
|
%
|
|
26
|
%
|
|
6
|
%
|
|
7
|
%
|
|
5
|
%
|
|
Total % change
|
8
|
%
|
|
6
|
%
|
|
31
|
%
|
|
20
|
%
|
|
25
|
%
|
|
(2)
|
%
|
* As discussed further in the "Business Overview" and "Results of Operations" sections, for Pratt & Whitney only, the transactional impact of foreign exchange hedging at P&WC has been netted against the translational foreign exchange impact for presentation purposes in the above table. For all other segments, these foreign exchange transactional impacts are included within the organic sales/operational operating profit caption in their respective tables. Due to its significance to Pratt & Whitney's overall operating results, we believe it is useful to segregate the foreign exchange transactional impact in order to clearly identify the underlying financial performance.
2019 Compared with 2018
The organic sales growth of 8% primarily reflects higher military sales (4%), higher commercial OEM sales (3%), and higher commercial aftermarket sales (1%).
The operational profit increase of 18% was primarily driven by:
•higher military margin contribution (13%), driven by the sales increase noted above
•higher OEM margin contribution (11%) primarily driven by continued year-over-year cost reduction and favorable mix on large commercial engine shipments
These increases were partially offset by:
•higher research and development costs (4%)
•higher selling, general and administrative expenses (3%)
The 26% increase in "Other" primarily reflects the absence of a prior year customer contract settlement.
2018 Compared with 2017
The organic sales increase of 14% primarily reflects higher commercial aftermarket sales (6%), higher commercial OEM sales (5%) and increased military sales (3%). The 6% increase in Other primarily reflects the impact of the adoption of the New Revenue Standard (4%) and the absence of a prior year customer contract matter (2%).
The operational profit decrease of 8% was primarily driven by:
•lower commercial OEM profit contribution (27%) primarily driven by higher negative engine margin on higher deliveries
•higher selling, general and administrative expenses (5%)
•the absence of the favorable impact from a prior year license agreement (4%)
•higher research and development costs (2%)
These decreases were partially offset by:
•higher commercial aftermarket profit contribution (23%), driven by the sales increase noted above
•higher military profit contribution (5%), driven by the sales increase noted above
The 5% increase in Other primarily reflects the favorable impact resulting from the adoption of the New Revenue Standard (13%) partially offset by the unfavorable year-over-year impact of contract settlements (8%).
Collins Aerospace Systems is a leading global provider of technologically advanced aerospace products and aftermarket service solutions for aircraft manufacturers, airlines, regional, business and general aviation markets, military and space operations. Collins Aerospace Systems’ product portfolio includes electric power generation, power management and distribution systems, air data and aircraft sensing systems, engine control systems, intelligence, surveillance and reconnaissance systems, engine components, environmental control systems, fire and ice detection and protection systems, propeller systems, engine nacelle systems, including thrust reversers and mounting pylons, interior and exterior aircraft lighting, aircraft seating and cargo systems, actuation systems, landing systems, including landing gear and wheels and brakes, space products and subsystems, integrated avionics systems, precision targeting, electronic warfare and range and training systems, flight controls, communications systems, navigation systems, oxygen systems, simulation and training systems, food and beverage preparation, storage and galley systems, lavatory and wastewater management systems. Collins Aerospace Systems also designs, produces and supports cabin interior, communications and aviation systems and products and provides information management services through voice and data communication networks and solutions worldwide. Aftermarket services include spare parts, overhaul and repair, engineering and technical support, training and fleet management solutions, and information management services. Collins Aerospace Systems sells aerospace products and services to aircraft manufacturers, airlines and other aircraft operators, the U.S. and foreign governments, maintenance, repair and overhaul providers, and independent distributors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) Year-Over-Year for:
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
2019 Compared with 2018
|
|
|
|
2018 Compared with 2017
|
|
|
|
Net Sales
|
$
|
26,028
|
|
|
$
|
16,634
|
|
|
$
|
14,691
|
|
|
$
|
9,394
|
|
|
56
|
%
|
|
$
|
1,943
|
|
|
13
|
%
|
|
Cost of Sales
|
18,702
|
|
|
12,336
|
|
|
10,838
|
|
|
6,366
|
|
|
52
|
%
|
|
1,498
|
|
|
14
|
%
|
|
|
7,326
|
|
|
4,298
|
|
|
3,853
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses and Other
|
3,226
|
|
|
1,995
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
Operating Profits
|
$
|
4,100
|
|
|
$
|
2,303
|
|
|
$
|
2,191
|
|
|
$
|
1,797
|
|
|
78
|
%
|
|
$
|
112
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
Net Sales
|
|
Cost of Sales
|
|
Operating
Profits
|
|
Net Sales
|
|
Cost of Sales
|
|
Operating
Profits
|
|
Organic / Operational
|
6
|
%
|
|
6
|
%
|
|
7
|
%
|
|
8
|
%
|
|
7
|
%
|
|
10
|
%
|
|
Foreign currency translation
|
—
|
|
|
(1)
|
%
|
|
1
|
%
|
|
—
|
|
|
1
|
%
|
|
(1)
|
%
|
|
Acquisitions and divestitures, net
|
50
|
%
|
|
46
|
%
|
|
68
|
%
|
|
5
|
%
|
|
6
|
%
|
|
1
|
%
|
|
Restructuring costs
|
—
|
|
|
—
|
|
|
3
|
%
|
|
—
|
|
|
—
|
|
|
(4)
|
%
|
|
Other
|
—
|
|
|
1
|
%
|
|
(1)
|
%
|
|
—
|
|
|
—
|
|
|
(1)
|
%
|
|
Total % change
|
56
|
%
|
|
52
|
%
|
|
78
|
%
|
|
13
|
%
|
|
14
|
%
|
|
5
|
%
|
2019 Compared with 2018
The organic sales increase of 6% primarily reflects higher commercial aerospace aftermarket sales (5%) and higher military sales (2%), partially offset by lower commercial aerospace OEM sales (1%).
The operational profit increase of 7% primarily reflects:
•higher commercial aerospace margin contribution (10%) driven by the commercial aftermarket sales growth noted above, partially offset by lower commercial aerospace OEM margin contribution
•higher military margin contribution (4%) driven by the sales growth noted above
This increase was partially offset by:
•higher selling, general and administrative expenses (4%)
•higher research and development costs (3%)
2018 Compared with 2017
The organic sales growth of 8% primarily reflects higher commercial aftermarket and military sales (combined, 6%) and higher commercial aerospace OEM sales (2%).
The increase in operational profit of 10% primarily reflects:
•higher commercial aftermarket and military profit contribution (combined, 18%) primarily driven by the commercial aftermarket sales growth noted above
•higher commercial aerospace OEM profit contribution (3%)
These increases were partially offset by:
•higher selling, general, and administrative expenses (7%)
•higher warranty costs (4%)
Eliminations and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Operating Profits
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
Eliminations and other
|
$
|
(1,595)
|
|
|
$
|
(1,356)
|
|
|
$
|
(1,167)
|
|
|
$
|
(932)
|
|
|
$
|
(236)
|
|
|
$
|
(81)
|
|
|
General corporate expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(515)
|
|
|
(475)
|
|
|
(439)
|
|
Eliminations and other reflects the elimination of sales, other income and operating profit transacted between segments, as well as the operating results of certain smaller businesses. The year-over-year increase in sales eliminations in 2019 as compared with 2018 reflects an increase in the amount of inter-segment eliminations, principally between our aerospace businesses. The year-over-year decrease in operating profit for 2019 as compared with 2018, is primarily driven by costs associated with the Company's intention to separate its commercial businesses, costs associated with the Raytheon merger, and the absence of the favorable impact of prior year insurance settlements, partially offset by lower year-over-year costs related to the Rockwell Acquisition.
LIQUIDITY AND FINANCIAL CONDITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Cash and cash equivalents
|
$
|
7,378
|
|
|
$
|
6,152
|
|
|
Total debt
|
43,648
|
|
|
45,537
|
|
|
Net debt (total debt less cash and cash equivalents)
|
36,270
|
|
|
39,385
|
|
|
Total equity
|
44,231
|
|
|
40,610
|
|
|
Total capitalization (total debt plus total equity)
|
87,879
|
|
|
86,147
|
|
|
Net capitalization (total debt plus total equity less cash and cash equivalents)
|
80,501
|
|
|
79,995
|
|
|
Total debt to total capitalization
|
50
|
%
|
|
53
|
%
|
|
Net debt to net capitalization
|
45
|
%
|
|
49
|
%
|
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows from operations. For 2019 our cash flows from operations, net of capital expenditures was $6.6 billion. The 2019 cash flows from operations reflect cash payments associated with the Company's portfolio separation costs of approximately $400 million. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, customer financing requirements, investments in businesses, dividends, common stock repurchases, pension funding, access to the commercial paper markets, adequacy of available bank lines of credit, redemptions of debt and the ability to attract long-term capital at satisfactory terms.
At December 31, 2019, we had cash and cash equivalents of $7.4 billion, of which approximately 56% was held by UTC's foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The Company no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. As such, in 2018 it recorded the international taxes associated with the future remittance of these earnings. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, UTC will continue to
permanently reinvest these earnings. We repatriated $1.6 billion and $6.2 billion of overseas cash for the year ended December 31, 2019 and 2018, respectively.
On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions or divestitures or other legal obligations. As of December 31, 2019, 2018 and 2017, the amount of such restricted cash was approximately $42 million, $60 million and $33 million, respectively.
On November 26, 2018, we completed the acquisition of Rockwell Collins. The total aggregate consideration payable in the Merger was $15.5 billion in cash ($14.9 billion net of cash acquired) and 62.2 million shares of Company common stock. In addition, $7.8 billion of Rockwell Collins debt was outstanding as of the acquisition date. Refer to Note 2 of the Consolidated Financial Statements for additional discussion on the Rockwell Acquisition.
Our domestic pension funds experienced a positive return on assets of 19.8% during 2019 and a negative return on assets of 5.1% during 2018. Approximately 90% of these domestic pension plans' funds are invested in readily-liquid investments, including equity, fixed income, asset-backed receivables and structured products. The balance of these domestic pension plans' funds (10%) is invested in less-liquid but market-valued investments, including real estate and private equity. As part of the Rockwell Collins acquisition on November 26, 2018, we assumed approximately $3.7 billion of projected pension benefit obligations and $3.4 billion of plan assets. As part of our long-term strategy to de-risk our defined benefit pension plans, we made discretionary contributions of approximately $1.9 billion to our domestic defined benefit pension plans in 2017.
The funded status of our defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and actuarial mortality assumptions. We can contribute cash or UTC shares to our plans at our discretion, subject to applicable regulations. As of December 31, 2019, the total investment by the global defined benefit pension plans in the Company's securities was less than 1% of total plan assets. Our qualified domestic defined benefit pension plans are approximately 99% funded on a projected benefit obligation basis as of December 31, 2019, and we are not required to make additional contributions through the end of 2025. We expect to make total contributions of approximately $125 million to our global defined benefit pension plans in 2020. Contributions to our global defined benefit pension plans in 2020 are expected to meet or exceed the current funding requirements.
Historically, our strong debt ratings and financial position have enabled us to issue long-term debt at favorable market rates. Our ability to obtain debt financing or additional credit facilities at comparable risk-based interest rates is partly a function of our existing debt-to-total-capitalization level as well as our credit standing. Our debt-to-total-capitalization decreased 300 basis points from 53% at December 31, 2018 to 50% at December 31, 2019. The average maturity of our long-term debt at December 31, 2019 is approximately 10 years.
At December 31, 2019, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $10.35 billion pursuant to a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement, both of which expire in August 2021; and a $2.0 billion revolving credit agreement and a $4.0 billion term credit agreement, both of which we entered into on March 15, 2019 and which will expire on March 15, 2021 or, if earlier, the date that is 180 days after the date on which each of the separations of Otis and Carrier have been consummated. As of December 31, 2019, we drew down $2.1 billion on the term credit agreement to pay current debt maturities. There were no borrowings on any of the other agreements. The undrawn portions of the revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper.
As of December 31, 2019, our maximum commercial paper borrowing limit was $6.35 billion. We had no commercial paper borrowings outstanding at December 31, 2019. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, pension contributions, debt refinancing, dividend payments and repurchases of our common stock. The need for commercial paper borrowings arises when the use of domestic cash for general corporate purposes exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.
We have an existing universal shelf registration statement filed with the SEC for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of debt to be issued under this shelf registration statement.
We had no debt issuances in 2019 and the following issuances of debt in 2018 and 2017:
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
Description of Notes
|
Aggregate Principal Balance
|
|
August 16, 2018:
|
3.350% notes due 20211
|
$
|
1,000
|
|
|
|
3.650% notes due 20231
|
2,250
|
|
|
|
3.950% notes due 20251
|
1,500
|
|
|
|
4.125% notes due 20281
|
3,000
|
|
|
|
4.450% notes due 20381
|
750
|
|
|
|
4.625% notes due 20482
|
1,750
|
|
|
|
LIBOR plus 0.65% floating rate notes due 20211
|
750
|
|
|
|
|
|
|
May 18, 2018:
|
1.150% notes due 20243
|
€
|
750
|
|
|
|
2.150% notes due 20303
|
500
|
|
|
|
EURIBOR plus 0.20% floating rate notes due 20203
|
750
|
|
|
|
|
|
|
November 13, 2017:
|
EURIBOR plus 0.15% floating rate notes due 20192
|
€
|
750
|
|
|
|
|
|
|
May 4, 2017:
|
1.900% notes due 20204
|
$
|
1,000
|
|
|
|
2.300% notes due 20224
|
500
|
|
|
|
2.800% notes due 20244
|
800
|
|
|
|
3.125% notes due 20274
|
1,100
|
|
|
|
4.050% notes due 20474
|
600
|
|
1 The net proceeds received from these debt issuances were used to partially finance the cash consideration portion of the purchase price for Rockwell Collins and fees, expenses and other amounts related to the acquisition of Rockwell Collins.
2 The net proceeds from these debt issuances were used to fund the repayment of commercial paper and for other general corporate purposes.
3 The net proceeds received from these debt issuances were used for general corporate purposes.
4 The net proceeds received from these debt issuances were used to fund the repayment at maturity of our 1.800% notes due 2017, representing $1.5 billion in aggregate principal and other general corporate purposes.
We made the following repayments of debt in 2019, 2018 and 2017:
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Repayment Date
|
Description of Notes
|
Aggregate Principal Balance
|
|
November 15, 2019
|
8.875% notes
|
$
|
271
|
|
|
|
|
|
|
November 13, 2019
|
EURIBOR plus 0.15% floating rate notes
|
€
|
750
|
|
|
|
|
|
|
November 1, 2019:
|
LIBOR plus 0.350% floating rate notes
|
$
|
350
|
|
|
|
1.500% notes
|
$
|
650
|
|
|
|
|
|
|
July 15, 2019:
|
1.950% notes1
|
$
|
300
|
|
|
|
5.250% notes1
|
$
|
300
|
|
|
|
|
|
|
December 14, 2018
|
Variable-rate term loan due 2020 (1 month LIBOR plus 1.25%)1
|
$
|
482
|
|
|
|
|
|
|
May 4, 2018
|
1.778% junior subordinated notes
|
$
|
1,100
|
|
|
|
|
|
February 22, 2018
|
EURIBOR plus 0.80% floating rate notes
|
€
|
750
|
|
|
|
|
|
|
February 1, 2018
|
6.80% notes
|
$
|
99
|
|
|
|
|
|
|
June 1, 2017
|
1.800% notes
|
$
|
1,500
|
|
1 These notes and term loan were assumed in connection with the Rockwell Collins acquisition and subsequently repaid.
We believe our future operating cash flows will be sufficient to meet our future operating cash needs. Further, we continue to have access to the commercial paper markets and our existing credit facilities, and our ability to obtain debt or equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate.
Cash Flow—Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Net cash flows provided by operating activities
|
$
|
8,883
|
|
|
$
|
6,322
|
|
|
$
|
5,631
|
|
2019 Compared with 2018
Cash generated from operating activities in 2019 was approximately $2.6 billion higher than 2018. This increase is largely driven by an increase in Net income after adjustments for depreciation and amortization, deferred income tax provision, stock compensation costs, net periodic pension and other postretirement benefit, portfolio separation costs, and the gain on the sale of Taylor Company of $2.4 billion and working capital improvements of $0.9 billion, partially offset by outflows with other long term assets and liabilities of $0.9 billion. Reduced factoring activity resulted in a decrease of approximately $1.6 billion in cash flows from operating activities during the year ended December 31, 2019, as compared to the prior year. This decrease in factoring activity was primarily driven from an increase in funded factoring levels at Pratt & Whitney partially offset by increased factoring at Collins Aerospace Systems. Factoring activity does not reflect the factoring of certain receivables performed at customer request for which we are compensated by the customer for the extended collection cycle.
The 2019 cash flows provided by working capital were $175 million. Accounts receivable decreased $419 million primarily driven by a decrease in V2500 sales and lower collaborator receivables at Pratt & Whitney and an increase in factoring activity at Collins Aerospace. Accounts payable and accrued liabilities increased $1.2 billion. The Accounts payable increase is primarily driven by Pratt & Whitney due to an increase in collaborator payables. The increase in Accrued liabilities was driven by an increase in accrued costs for the Company's portfolio separation and various accruals at Collins Aerospace Systems and Pratt & Whitney. Contract liabilities, current increased $359 million driven by Collins Aerospace due to higher advanced billings. These inflows were partially offset by increases in Contract assets, current, Inventory and Other current assets. Contract assets, current increased $307 million due to work performed in excess of billings at Pratt & Whitney and Collins Aerospace. Inventory increased $1.2 billion to support higher sales volume at Collins Aerospace Systems and Pratt & Whitney. Other current assets increased $309 million due to increases in prepaid expenses at Pratt & Whitney.
Total cash contributions to our global defined benefit pension plans were $118 million, $147 million and $2,112 million during 2019, 2018 and 2017, respectively.
2018 Compared with 2017
Cash generated from operating activities in 2018 was approximately $691 million higher than 2017. Cash outflows for working capital increased $703 million over the prior period to support higher top line organic growth. Factoring activity resulted in a decrease of approximately $148 million in cash generated from operating activities during the year ended, December 31, 2018, as compared to the prior year. This decrease was primarily driven from lower factoring levels at Pratt & Whitney and Carrier. Factoring activity does not reflect the factoring of certain aerospace receivables performed at customer request for which we are compensated by the customer for the extended collection cycle.
The 2018 cash outflows from working capital were $755 million. Accounts receivable increased approximately $2.4 billion due to an increase in sales volume. Contract assets, current increased $604 million due to costs in excess of billings primarily at Pratt & Whitney driven by military engines, at Otis due to progression on major projects, and at Collins Aerospace Systems. Inventory increased $537 million primarily driven by an increase in production for the Geared Turbofan at Pratt & Whitney, increases at Carrier to support higher sales volume and increases at Collins Aerospace Systems. This was partially offset by decreases in Other assets of $161 million primarily due to tax refunds received, an increase in Accounts payable and accrued liabilities of approximately $2.4 billion, driven by higher inventory purchasing activity at Pratt & Whitney and higher direct material purchases at Collins Aerospace Systems, as well as an increase in Contract liabilities, current of $205 million driven by progress payments on major contracts and seasonal advanced billings at Otis.
Cash Flow—Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Net cash flows used in investing activities
|
$
|
(3,092)
|
|
|
$
|
(16,973)
|
|
|
$
|
(3,019)
|
|
2019 Compared with 2018
Cash flows used in investing activities for 2019 and 2018 primarily reflect capital expenditures, cash investments in customer financing assets, investments/dispositions of businesses, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms, and settlements of derivative contracts. The $13.9 billion decrease in cash flows used in investing activities in 2019 the compared to 2018 primarily relates to the absence of cash paid to acquire Rockwell Collins of $14.9 billion in November 2018 and the absence of $1 billion in proceeds from the sale of Taylor Company in June 2018 by Carrier.
Capital expenditures in 2019 ($2.3 billion) primarily relate to several projects at Collins Aerospace Systems and investments in production and aftermarket capacity at Pratt & Whitney.
Cash investments in businesses in 2019 ($56 million) primarily consisted of several acquisitions at Otis. Dispositions of businesses in 2019 ($138 million) primarily consisted of the businesses sold in connection with the Rockwell Collins acquisition.
Customer financing assets is primarily driven by additional Geared Turbofan engines to support customer fleets and was a use of cash of $787 million and $988 million in 2019 and 2018, respectively. The decrease in the source of cash related to customer financing assets of $129 million in 2019 compared to $606 million in 2018 is driven by lower repayments on customer financing. At December 31, 2019, we had commercial aerospace financing and other contractual commitments of approximately $15.0 billion related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which as much as $1.6 billion may be required to be disbursed during 2020. As discussed in Note 1 to the Consolidated Financial Statements, we have entered into certain collaboration arrangements, which may include participation by our collaborators in these commitments. At December 31, 2019, our collaborators' share of these commitments was approximately $5.3 billion of which as much as $508 million may be required to be disbursed to us during 2020. Refer to Note 4 to the Consolidated Financial Statements for additional discussion of our commercial aerospace industry assets and commitments.
In 2019, we increased our collaboration intangible assets by approximately $351 million, which primarily relates to payments made under our 2012 agreement to acquire Rolls-Royce's collaboration interests in IAE.
As discussed in Note 14 to the Consolidated Financial Statements, 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. During the years ended December 31, 2019 and 2018, we had net cash receipts of approximately $336 million and $143 million, respectively, from the settlement of these derivative instruments.
2018 Compared with 2017
Cash flows used in investing activities for 2018 and 2017 primarily reflect capital investments/dispositions of businesses, expenditures, cash investments in customer financing assets, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms and settlements of derivative contracts. The $14 billion increase in cash flows used in investing activities from the prior year primarily relates to the $14.9 billion of cash paid for the acquisition of Rockwell Collins (net of cash acquired) and the absence of $596 million in net proceeds received from Carrier's sale of investments in Watsco, Inc. in 2017, partially offset by proceeds from the sale of Taylor Company in June 2018 by Carrier of $1.0 billion, a decrease in customer financing assets of $593 million and $143 million in receipts from settlements of derivative contracts compared to payments of $317 million in 2017.
Capital expenditures in 2018 ($1,902 million) primarily relate to investments in production capacity at Pratt & Whitney, investments in production capacity and several small projects at Collins Aerospace Systems, and new facilities and investments in products and information technology at Carrier, and investments in digital and information technology at Otis.
Cash investments in businesses (net of cash acquired) in 2018 ($15.4 billion) primarily relate to the acquisition of Rockwell Collins in November 2018. Dispositions of businesses in 2018 of $1.1 billion primarily relate to the sale of Taylor Company.
Customer financing activities, primarily driven by additional Geared Turbofan engines to support customer fleets, were a net use of cash of $382 million and $975 million in 2018 and 2017, respectively. At December 31, 2018, we had commercial aerospace financing and other contractual commitments of approximately $15.5 billion related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which as much as $1.7 billion have been be required to be disbursed during 2019. At December 31, 2018, our collaborators' share of these commitments was approximately $5.3 billion of which as much as $468 million may have been required to be dispersed to us during 2019.
In 2018, we increased our collaboration intangible assets by approximately $400 million, which primarily relates to payments made under our 2012 agreement to acquire Rolls-Royce's collaboration interests in IAE.
Cash Flow—Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Net cash flows (used in) provided by financing activities
|
$
|
(4,564)
|
|
|
$
|
7,965
|
|
|
$
|
(993)
|
|
2019 Compared with 2018
Our financing activities primarily include the issuance and repayment of short-term and long-term debt, payment of dividends and stock repurchases. Financing activities was a cash outflow of $4.6 billion in 2019 compared to a cash inflow of $8.0 billion in 2018. This change is driven by the absence of $13.5 billion of long-term debt issuances in the prior year which was primarily utilized to fund the Rockwell Acquisition, an increase in debt repayments of $0.3 billion, an increase in dividends paid on common stock of $0.3 billion, partially offset by an increase in short term borrowings of $1.3 billion and a reduction in common stock repurchases of $0.2 billion.
Commercial paper borrowings and revolving credit facilities provide short-term liquidity to supplement operating cash flows and are used for general corporate purposes, including the funding of potential acquisitions and repurchases of our stock. We had no outstanding commercial paper at December 31, 2019.
At December 31, 2019, management had remaining authority to repurchase approximately $1.8 billion of our common stock under the October 14, 2015 share repurchase program. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase programs, and under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended. We may also reacquire shares outside of the program from time to time in connection with the surrender of shares to cover taxes on vesting of restricted stock and as required under our employee savings plan. Our ability to repurchase shares is subject to applicable law, including restrictions arising from the pending merger transaction with Raytheon. We made cash payments of approximately $151 million to repurchase approximately 1.1 million shares of our common stock during the year ended December 31, 2019.
We paid aggregate dividends on common stock of approximately $2.4 billion and $2.2 billion in 2019 and 2018, respectively. On February 3, 2020, the Board of Directors declared a dividend of $0.735 per share payable March 10, 2020 to shareowners of record at the close of business on February 14, 2020.
2018 Compared with 2017
Net cash provided by financing activities increased $8,958 million in 2018 compared to the prior year due to an increase in long-term debt issuances of $8.5 billion, including the $11 billion issued in 2018 for the financing of the Rockwell Collins acquisition, and a decrease in repurchases of common stock of $1.1 billion, partially offset by an increase in repayments of long-term debt of $0.9 billion.
We had approximately $1.3 billion of outstanding commercial paper at December 31, 2018.
We made cash payments of approximately $325 million to repurchase approximately 2.7 million shares of our common stock during the year ended December 31, 2018.
We paid aggregate dividends on common stock of approximately $2.2 billion and $2.1 billion in 2018 and 2017, respectively.
CRITICAL ACCOUNTING ESTIMATES
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Consolidated Financial Statements describes the significant accounting policies used in preparation of the Consolidated Financial Statements. Management believes the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The most significant areas involving management judgments and estimates are described below. Actual results in these areas could differ from management's estimates.
Long-Term Contract Accounting. As described in Note 1, several of our businesses use an over-time revenue recognition model. Revenue is recognized on an over-time basis using an input method for repair contracts within Otis and Carrier; certain U.S. Government and commercial aerospace equipment contracts; and aerospace aftermarket service work. We measure progress toward completion for these contracts using costs incurred to date relative to total estimated costs at completion. This over-time basis using an input method requires estimates of future revenues and costs over the full term of product and/or service delivery. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management's judgment.
The long-term nature of these contracts, the complexity of the products, and the strict safety and performance standards under which they are regulated can affect our ability to estimate costs precisely. As a result, we review our cost estimates on significant contracts on a quarterly basis and for others, at least annually or when circumstances change and warrant a modification to a previous estimate. We record changes in contract estimates using the cumulative catch-up method.
Costs incurred for engineering and development of aerospace products under contracts with customers are capitalized as contract fulfillment costs, to the extent recoverable from the associated contract margin, and subsequently amortized as the OEM products are delivered to the customer. The estimation of contract margin requires management's judgment.
Income Taxes. The future tax benefit arising from deductible temporary differences and tax carryforwards was $5.2 billion at December 31, 2019 and $4.7 billion at December 31, 2018. Management believes that our earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits, which may be realized over an extended period of time. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided.
In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through an increase to tax expense in the period in which that determination is made or when tax law changes are enacted. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease to tax expense in the period in which that determination is made.
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. In addition, we have entered into certain internal legal entity restructuring transactions necessary to effectuate the separation transactions. We have accrued tax on these transactions based on our interpretation of the applicable tax laws and our determination of appropriate entity valuations. See Notes 1 and 11 to the Consolidated Financial Statements for further discussion. Also see Note 18 for discussion of UTC administrative review proceedings with the German Tax Office.
See Note 11 to the Consolidated Financial Statements for additional tax provision items.
Goodwill and Intangible Assets. Our investments in businesses net of cash acquired in 2019 totaled $56 million. The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the dates of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets consist of service portfolios, patents, trademarks/tradenames, customer relationships and other intangible assets including a collaboration asset established in connection with our 2012 agreement to acquire Rolls-Royce's ownership and collaboration interests in IAE AG, as discussed in Note 2 to the Consolidated Financial Statements. The fair value for acquired customer relationship intangibles is determined as of the acquisition date based on estimates and judgments regarding expectations for the future after-tax cash flows arising from the follow-on revenue from customer relationships that existed on the acquisition date over their estimated lives, including the probability of expected future contract renewals and revenue, less a contributory assets charge, all of which is discounted to present value. The fair value of the tradename intangible assets were determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the tradename and discounted to present value using an appropriate discount rate. See Note 2 to the Consolidated Financial Statements for further details.
Also included within other intangible assets are payments made to secure certain contractual rights to provide products on new commercial aerospace platforms. Such payments are capitalized when there are distinct rights obtained and there are sufficient incremental cash flows to support the recoverability of the assets established. Otherwise, the applicable portion of the payments are expensed. Capitalized payments made on these contractual commitments are amortized as a reduction of sales. We amortize these intangible assets based on the pattern of economic benefit, which typically results in an amortization method other than straight-line. In the aerospace industry, amortization based on the pattern of economic benefit generally results in lower amortization expense during the development period with increasing amortization expense as programs enter full production and aftermarket cycles. If a pattern of economic benefit cannot be reliably determined, a straight-line amortization method is used. The gross value of these contractual commitments at December 31, 2019 was approximately $12.3 billion, of
which approximately $3.2 billion has been paid to date. We record these payments as intangible assets when such payments are no longer conditional. The recoverability of these intangibles is dependent upon the future success and profitability of the underlying aircraft platforms including the associated aftermarket revenue streams.
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual, or more frequent if necessary, impairment testing using the guidance and criteria described in the Intangibles—Goodwill and Other Topic of the FASB ASC. A goodwill impairment loss is measured at the amount by which a reporting unit's carrying value exceeds its fair value, without exceeding the recorded amount of goodwill. In developing our estimates for the fair value of our reporting units, significant judgment is required in the determination of the appropriateness of using a qualitative assessment or quantitative assessment. For these quantitative assessments that are performed, fair value is primarily based on income approaches using discounted cash flow models and relief from royalty models, respectively, which have significant assumptions including revenue growth rates, projected operating income, terminal growth rates, discount rates and royalty rates. Such assumptions are subject to variability from year to year and are directly impacted by global market conditions. We completed our annual impairment testing as of July 1, 2019 and determined that no significant adjustments to the carrying value of goodwill or indefinite lived intangible assets were necessary. Although these assets are not currently impaired, there can be no assurance that future impairments will not occur. See Note 2 to the Consolidated Financial Statements for further discussion.
Contingent Liabilities. Our operating units include businesses which sell products and services and conduct operations throughout the world. As described in Note 18 to the Consolidated Financial Statements, contractual, regulatory and other matters, including asbestos claims, in the normal course of business may arise that subject us to claims or litigation. Of note, the design, development, production and support of new aerospace technologies is inherently complex and subject to risk. Since the PW1000G Geared Turbofan engine entered into service in 2016, technical issues have been identified and experienced with the engine, which is typical for new engines and new aerospace technologies. Pratt & Whitney has addressed these issues through various improvements and modifications. These issues have resulted in financial impacts, including increased warranty provisions, customer contract settlements, and reductions in contract performance estimates. Additional technical issues may also arise in the normal course, which may result in financial impacts that could be material to the Company’s financial position, results of operations and cash flows.
Additionally, we have significant contracts with the U.S. Government, subject to government oversight and audit, which may require significant adjustment of contract prices. We accrue for liabilities associated with these matters 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 then currently available facts with respect to each matter. When no amount within a range of estimates is more likely, the minimum is accrued. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.
Employee Benefit Plans. We sponsor domestic and foreign defined benefit pension and other postretirement plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on plan assets, rate of increase in employee compensation levels, mortality rates, and health care cost increase projections. Assumptions are determined based on company data and appropriate market indicators, and are evaluated each year at December 31. A change in any of these assumptions would have an effect on net periodic pension and postretirement benefit costs reported in the Consolidated Financial Statements.
In the following table, we show the sensitivity of our pension and other postretirement benefit plan liabilities and net periodic cost to a 25 basis point change in the discount rates for benefit obligations, interest cost and service cost as of December 31, 2019:
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|
|
|
|
(dollars in millions)
|
|
Increase in
Discount Rate
of 25 bps
|
|
Decrease in
Discount Rate
of 25 bps
|
|
Pension plans
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
(1,141)
|
|
|
$
|
1,198
|
|
|
Net periodic pension (benefit) cost
|
|
(5)
|
|
|
7
|
|
|
Other postretirement benefit plans1
|
|
|
|
|
|
Accumulated postretirement benefit obligation
|
|
(11)
|
|
|
12
|
|
|
|
|
|
|
|
1 The impact on net periodic postretirement (benefit) cost is less than $1M.
These estimates assume no change in the shape or steepness of the company-specific yield curve used to plot the individual spot rates that will be applied to the future cash outflows for future benefit payments in order to calculate interest and service cost. A flattening of the yield curve, from a narrowing of the spread between interest and obligation discount rates,
would increase our net periodic pension cost. Conversely, a steepening of the yield curve, from an increase in the spread between interest and obligation discount rates, would decrease our net periodic pension cost.
Pension expense is also sensitive to changes in the expected long-term rate of asset return. An increase or decrease of 25 basis points in the expected long-term rate of asset return would have decreased or increased 2019 pension expense by approximately $89 million.
The weighted-average discount rates used to measure pension liabilities and costs are set by reference to UTC-specific analyses using each plan's specific cash flows and are then compared to high-quality bond indices for reasonableness. For our significant plans, we utilize a full yield curve approach in the estimation of the service cost and interest cost components by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant projected cash flows. Global market interest rates have decreased in 2019 as compared with 2018 and, as a result, the weighted-average discount rate used to measure pension liabilities decreased from 4.0% in 2018 to 3.0% in 2019. The weighted-average discount rates used to measure service cost and interest cost was 3.6% in 2019. Across our global pension plans, the amendment to our domestic pension plans to cease accrual of additional benefits and domestic pension plan merger, partially offset by reduction in expected return on assets for 2020, will result in a net periodic pension benefit in 2020 consistent with 2019 amounts.
See Note 12 to the Consolidated Financial Statements for further discussion.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We extend a variety of financial guarantees to third parties in support of unconsolidated affiliates and for potential financing requirements of commercial aerospace customers. We also have obligations arising from sales of certain businesses and assets, including indemnities for representations and warranties and environmental, health and safety, tax and employment matters. Circumstances that could cause the contingent obligations and liabilities arising from these arrangements to come to fruition include changes in an underlying transaction (e.g., hazardous waste discoveries, etc.), nonperformance under a contract, customer requests for financing, or deterioration in the financial condition of the guaranteed party.
A summary of our consolidated contractual obligations and commitments as of December 31, 2019 is as follows:
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|
|
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|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Total
|
|
2020
|
|
2021-2022
|
|
2023-2024
|
|
Thereafter
|
|
Long-term debt—principal
|
|
$
|
41,599
|
|
|
$
|
3,496
|
|
|
$
|
8,061
|
|
|
$
|
6,093
|
|
|
$
|
23,949
|
|
|
Long-term debt—future interest
|
|
16,865
|
|
|
1,400
|
|
|
2,535
|
|
|
2,136
|
|
|
10,794
|
|
|
Operating leases
|
|
3,147
|
|
|
641
|
|
|
952
|
|
|
540
|
|
|
1,014
|
|
|
Purchase obligations
|
|
15,334
|
|
|
10,845
|
|
|
4,050
|
|
|
374
|
|
|
65
|
|
|
Other long-term liabilities
|
|
3,750
|
|
|
1,020
|
|
|
1,215
|
|
|
491
|
|
|
1,024
|
|
|
Total contractual obligations
|
|
$
|
80,695
|
|
|
$
|
17,402
|
|
|
$
|
16,813
|
|
|
$
|
9,634
|
|
|
$
|
36,846
|
|
Purchase obligations include amounts committed for the purchase of goods and services under legally enforceable contracts or purchase orders. Where it is not practically feasible to determine the legally enforceable portion of our obligation under certain of our long-term purchase agreements, we include additional expected purchase obligations beyond what is legally enforceable. Approximately 19% of the purchase obligations disclosed above represent purchase orders for products to be delivered under firm contracts with the U.S. Government for which we have full recourse under customary contract termination clauses.
Other long-term liabilities primarily include those amounts on our December 31, 2019 balance sheet representing obligations under product service and warranty policies, performance and operating cost guarantees, estimated environmental remediation costs and expected contributions under employee benefit programs. The timing of expected cash flows associated with these obligations is based upon management's estimates over the terms of these agreements and is largely based upon historical experience.
In connection with the acquisitions of Rockwell Collins in 2018 and Goodrich in 2012, we recorded assumed liabilities of approximately $1.03 billion and $2.2 billion, respectively related to customer contractual obligations on certain programs with terms less favorable than could be realized in market transactions as of the acquisition date. These liabilities are being liquidated in accordance with the underlying pattern of obligations, as reflected by the net cash outflows incurred on the contracts. Total consumption of the contractual obligations for the year ended December 31, 2019 was approximately $345 million. Total future consumption of the contractual obligations is expected to be as follows: $263 million in 2020, $189 million in 2021, $148 million in 2022, $118 million in 2023, $127 million in 2024 and $563 million thereafter. These amounts are not included in the table above.
The above table also does not reflect unrecognized tax benefits of $1,347 million, the timing of which is uncertain, except for approximately $24 million that may become payable during 2020. Refer to Note 11 to the Consolidated Financial Statements for additional discussion on unrecognized tax benefits.
COMMERCIAL COMMITMENTS
The following table summarizes our commercial commitments outstanding as of December 31, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration per Period
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Committed
|
|
2020
|
|
2021-2022
|
|
2023-2024
|
|
Thereafter
|
|
Commercial aerospace financing commitments
|
|
$
|
3,937
|
|
|
$
|
911
|
|
|
$
|
2,093
|
|
|
$
|
863
|
|
|
$
|
70
|
|
|
Other commercial aerospace commitments
|
|
11,055
|
|
|
702
|
|
|
1,453
|
|
|
1,295
|
|
|
7,605
|
|
|
Commercial aerospace financing arrangements
|
|
333
|
|
|
11
|
|
|
10
|
|
|
—
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance guarantees
|
|
48
|
|
|
4
|
|
|
—
|
|
|
39
|
|
|
5
|
|
|
Total commercial commitments
|
|
$
|
15,373
|
|
|
$
|
1,628
|
|
|
$
|
3,556
|
|
|
$
|
2,197
|
|
|
$
|
7,992
|
|
In connection with our 2012 agreement to acquire Rolls-Royce's ownership and collaboration interests in IAE AG, additional payments are due to Rolls-Royce contingent upon each hour flown through June 2027 by the V2500-powered aircraft in service as of the acquisition date. These flight hour payments, included in "Other commercial aerospace commitments" in the table above, are being capitalized as collaboration intangible assets. The collaboration intangible assets are amortized based upon the pattern of economic benefit as represented by the underlying cash flows.
We also have other contractual commitments, including commitments to secure certain contractual rights to provide product on new aircraft platforms, which are included in "Other commercial aerospace commitments" in the table above. Such payments are capitalized when distinct rights are obtained and there are sufficient incremental cash flows to support the recoverability of the assets established. Otherwise, the applicable portion of the payments are expensed. Capitalized payments made on these contractual commitments are included in intangible assets and are amortized over the term of underlying economic benefit.
Refer to Notes 1, 4 and 17 to the Consolidated Financial Statements for additional discussion on contractual and commercial commitments.
MARKET RISK AND RISK MANAGEMENT
We are exposed to fluctuations in foreign currency exchange rates, interest rates and commodity prices. To manage certain of those exposures, we use derivative instruments, including swaps, forward contracts and options. Derivative instruments utilized by us in our hedging activities are viewed as risk management tools, involve relatively little complexity and are not used for trading or speculative purposes. We diversify the counterparties used and monitor the concentration of risk to limit our counterparty exposure.
We have evaluated our exposure to changes in foreign currency exchange rates, interest rates and commodity prices in our market risk sensitive instruments, which are primarily cash, debt, and derivative instruments, using a value at risk analysis. Based on a 95% confidence level and a one-day holding period, at December 31, 2019, the potential loss in fair value on our market risk sensitive instruments was not material in relation to our financial position, results of operations or cash flows. Our calculated value at risk exposure represents an estimate of reasonably possible net losses based on volatilities and correlations and is not necessarily indicative of actual results. Refer to Notes 1, 9 and 14 to the Consolidated Financial Statements for additional discussion of foreign currency exchange, interest rates and financial instruments.
Foreign Currency Exposures. We have a large volume of foreign currency exposures that result from our international sales, purchases, investments, borrowings and other international transactions. International segment sales, excluding U.S. export sales, averaged approximately $27 billion over the last three years. We actively manage foreign currency exposures that are associated with committed foreign currency purchases and sales, and other assets and liabilities created in the normal course of business at the operating unit level. More than insignificant exposures that cannot be naturally offset within an operating unit are hedged with foreign currency derivatives. We also have a significant amount of foreign currency net asset exposures. As discussed in Note 9 to the Consolidated Financial Statements, at December 31, 2019 we have approximately €4.20 billion of euro-denominated long-term debt, which qualifies as a net investment hedge against our investments in European businesses. As of December 31, 2019, the net investment hedge is deemed to be effective. Currently, we do not hold any derivative contracts that hedge our foreign currency net asset exposures but may consider such strategies in the future.
Within aerospace, our sales are typically denominated in U.S. Dollars under accepted industry convention. However, for our non-U.S. based entities, such as P&WC, a substantial portion of their costs are incurred in local currencies. Consequently,
there is a foreign currency exchange impact and risk to operational results as U.S. Dollars must be converted to local currencies such as the Canadian Dollar in order to meet local currency cost obligations. Additionally, we transact business in various foreign currencies which exposes our cash flows and earnings to changes in foreign currency exchange rates. In order to minimize the exposure that exists from changes in the exchange rate of the U.S. Dollar against these other currencies, we hedge a certain portion of sales to secure the rates at which U.S. Dollars will be converted. The majority of this hedging activity occurs at P&WC and Collins Aerospace Systems, and hedging activity also occurs to a lesser extent at the remainder of Pratt & Whitney. At P&WC and Collins Aerospace Systems, firm and forecasted sales for both original equipment and spare parts are hedged at varying amounts for up to 49 months on the U.S. Dollar sales exposure as represented by the excess of U.S. Dollar sales over U.S. Dollar denominated purchases. Hedging gains and losses resulting from movements in foreign currency exchange rates are partially offset by the foreign currency translation impacts that are generated on the translation of local currency operating results into U.S. Dollars for reporting purposes. While the objective of the hedging program is to minimize the foreign currency exchange impact on operating results, there are typically variances between the hedging gains or losses and the translational impact due to the length of hedging contracts, changes in the sales profile, volatility in the exchange rates and other such operational considerations.
Interest Rate Exposures. Our long-term debt portfolio consists mostly of fixed-rate instruments. From time to time, we may hedge to floating rates using interest rate swaps. The hedges are designated as fair value hedges and the gains and losses on the swaps are reported in interest expense, reflecting that portion of interest expense at a variable rate. We issue commercial paper, which exposes us to changes in interest rates. Currently, we do not hold any derivative contracts that hedge our interest exposures, but may consider such strategies in the future.
Commodity Price Exposures. We are exposed to volatility in the prices of raw materials used in some of our products and from time to time we may use forward contracts in limited circumstances to manage some of those exposures. In the future, if hedges are used, gains and losses may affect earnings. There were no significant outstanding commodity hedges as of December 31, 2019.
ENVIRONMENTAL MATTERS
Our operations are subject to environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over our foreign operations. As a result, we have established, and continually update, policies relating to environmental standards of performance for our operations worldwide. We believe that expenditures necessary to comply with the present regulations governing environmental protection will not have a material effect upon our competitive position, results of operations, cash flows or financial condition.
We have identified 773 locations, mostly in the United States, at which we may have some liability for remediating contamination. We have resolved our liability at 363 of these locations. We do not believe that any individual location's exposure will have a material effect on our results of operations. Sites in the investigation, remediation or operation and maintenance stage represent approximately 91% of our accrued environmental remediation reserve.
We have been identified as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA or Superfund) at 129 sites. The number of Superfund sites, in and of itself, does not represent a relevant measure of liability because the nature and extent of environmental concerns vary from site to site and our share of responsibility varies from sole responsibility to very little responsibility. In estimating our liability for remediation, we consider our likely proportionate share of the anticipated remediation expense and the ability of other potentially responsible parties to fulfill their obligations.
At December 31, 2019 and 2018, we had $896 million and $830 million reserved for environmental remediation, respectively. Cash outflows for environmental remediation were $52 million in 2019, $48 million in 2018 and $42 million in 2017. We estimate that ongoing environmental remediation expenditures in each of the next two years will not exceed approximately $100 million.
ASBESTOS MATTERS
The estimated range of total liabilities to resolve all pending and unasserted potential future asbestos claims through 2059 is approximately $330 million to $400 million. Where no amount within a range of estimates is more likely, the minimum is accrued. We have recorded the minimum amount of $330 million, which is principally recorded in Other long-term liabilities on our Consolidated Balance Sheet as of December 31, 2019. This amount is on a pre-tax basis, not discounted, and excludes the Company’s legal fees to defend the asbestos claims (which will continue to be expensed by the Company as they are incurred). In addition, the Company has an insurance recovery receivable for probable asbestos related recoveries of approximately $140 million, which is included primarily in Other assets on our Consolidated Balance Sheet as of December 31, 2019. See Note 18 "Contingent Liabilities" of our Consolidated Financial Statements for further discussion of this matter.
GOVERNMENT MATTERS
As described in "Critical Accounting Estimates—Contingent Liabilities," our contracts with the U.S. Government are subject to audits. Such audits may recommend that certain contract prices should be reduced to comply with various government regulations, or that certain payments be delayed or withheld. We are also the subject of one or more investigations and legal proceedings initiated by the U.S. Government with respect to government contract matters. See "Legal Proceedings" in Item 1 to this Form 10-K, and Note 11 "Income Taxes" and Note 18 "Contingent Liabilities" of our Consolidated Financial Statements for further discussion of these and other government matters.
Cautionary Note Concerning Factors That May Affect Future Results
This 2019 Annual Report to Shareowners (2019 Annual Report) contains statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements” under the securities laws. From time to time, oral or written forward-looking statements may also be included in other information released to the public. These forward-looking statements are intended to provide management’s current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “expectations,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “will,” “should,” “see,” “guidance,” “outlook,” “confident,” “on track” and other words of similar meaning. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash, share repurchases, tax rates, R&D spend, other measures of financial performance, potential future plans, strategies or transactions, credit ratings and net indebtedness, other anticipated benefits of the Rockwell Acquisition, the proposed merger with Raytheon or the spin-offs by UTC of Otis and Carrier into separate independent companies (the “separation transactions”), including estimated synergies and customer cost savings resulting from the proposed merger, the expected timing of completion of the proposed merger and the separation transactions, estimated costs associated with such transactions and other statements that are not historical facts. All forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Such risks, uncertainties and other factors include, without limitation:
•the effect of economic conditions in the industries and markets in which we and Raytheon operate in the U.S. and globally and any changes therein, including financial market conditions, fluctuations in commodity prices, interest rates and foreign currency exchange rates, levels of end market demand in construction and in both the commercial and defense segments of the aerospace industry, levels of air travel, financial condition of commercial airlines, the impact of pandemic health issues, aviation safety concerns, weather conditions and natural disasters, the financial condition of our customers and suppliers, and the risks associated with U.S. government sales (including changes or shifts in defense spending due to budgetary constraints, spending cuts resulting from sequestration, a government shutdown, or otherwise, and uncertain funding of programs);
•challenges in the development, production, delivery, support, performance and realization of the anticipated benefits (including our expected returns under customer contracts) of advanced technologies and new products and services;
•the scope, nature, impact or timing of the proposed merger with Raytheon and the separation transactions and other merger, acquisition and divestiture activity, including among other things the integration of or with other businesses and realization of synergies and opportunities for growth and innovation and incurrence of related costs and expenses;
•future levels of indebtedness, including indebtedness that may be incurred in connection with the proposed merger with Raytheon and the separation transactions, and capital spending and research and development spending;
•future availability of credit and factors that may affect such availability, including credit market conditions and our capital structure;
•the timing and scope of future repurchases of our common stock, which may be suspended at any time due to various factors, including market conditions and the level of other investing activities and uses of cash, including in connection with the proposed merger with Raytheon;
•delays and disruption in delivery of materials and services from suppliers;
•company and customer-directed cost reduction efforts and restructuring costs and savings and other consequences thereof (including the potential termination of U.S. government contracts and performance under undefinitized contract awards and the potential inability to recover termination costs);
•new business and investment opportunities;
•the ability to realize the intended benefits of organizational changes;
•the anticipated benefits of diversification and balance of operations across product lines, regions and industries;
•the outcome of legal proceedings, investigations and other contingencies;
•pension plan assumptions and future contributions;
•the impact of the negotiation of collective bargaining agreements and labor disputes;
•the effect of changes in political conditions in the U.S. and other countries in which we and Raytheon and our businesses each operate, including the effect of changes in U.S. trade policies or the U.K.’s pending withdrawal from the European Union, on general market conditions, global trade policies and currency exchange rates in the near term and beyond;
•the effect of changes in tax (including U.S. tax reform enacted on December 22, 2017, which is commonly referred to as the Tax Cuts and Jobs Act of 2017), environmental, regulatory and other laws and regulations (including, among other things, export and import requirements such as the International Traffic in Arms Regulations and the Export Administration Regulations, anti-bribery and anti-corruption requirements, including the Foreign Corrupt Practices
Act, industrial cooperation agreement obligations, and procurement and other regulations) in the U.S. and other countries in which we, Raytheon and our businesses each operate;
•negative effects of the announcement or pendency of the proposed merger with Raytheon or the separation transactions on the market price of our and/or Raytheon’s respective common stock and/or on our respective financial performance;
•the ability of UTC and Raytheon to receive the required regulatory approvals for the proposed merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction) and to satisfy the other conditions to the closing of the merger on a timely basis or at all;
•the occurrence of events that may give rise to a right of one or both of UTC or Raytheon to terminate the merger agreement;
•risks relating to the value of our shares to be issued in the proposed merger with Raytheon, significant transaction costs and/or unknown liabilities;
•the possibility that the anticipated benefits from the proposed merger with Raytheon cannot be realized in full or at all or may take longer to realize than expected, including risks associated with third party contracts containing consent and/or other provisions that may be triggered by the proposed transaction;
•risks associated with merger-related litigation;
•the possibility that costs or difficulties related to the integration of UTC’s and Raytheon’s operations will be greater than expected;
•risks relating to completed merger, acquisition and divestiture activity, including UTC’s integration of Rockwell Collins, including the risk that the integration may be more difficult, time-consuming or costly than expected or may not result in the achievement of estimated synergies within the contemplated time frame or at all;
•the ability of each of UTC, Raytheon, the companies resulting from the separation transactions and the combined company to retain and hire key personnel;
•the expected benefits and timing of the separation transactions, and the risk that conditions to the separation transactions will not be satisfied and/or that the separation transactions will not be completed within the expected time frame, on the expected terms or at all;
•the intended qualification of (i) the merger as a tax-free reorganization and (ii) the separation transactions as tax-free to UTC and UTC’s shareowners, in each case, for U.S. federal income tax purposes;
•the possibility that any opinions, consents, approvals or rulings required in connection with the separation transactions will not be received or obtained within the expected time frame, on the expected terms or at all;
•expected financing transactions undertaken in connection with the proposed merger with Raytheon and the separation transactions and risks associated with additional indebtedness;
•the risk that dissynergy costs, costs of restructuring transactions and other costs incurred in connection with the separation transactions will exceed our estimates; and
•the impact of the proposed merger and the separation transactions on the respective businesses of UTC and Raytheon and the risk that the separation transactions may be more difficult, time-consuming or costly than expected, including the impact on UTC’s resources, systems, procedures and controls and the impact on relationships with customers, suppliers, employees and other business counterparties.
In addition, our Annual Report on Form 10-K for 2019 includes important information as to risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. See the "Notes to Consolidated Financial Statements" under the heading "Note 18: Contingent Liabilities," the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Business Overview," "Results of Operations," "Liquidity and Financial Condition," and "Critical Accounting Estimates," and the section titled "Risk Factors." Our Annual Report on Form 10-K for 2019 also includes important information as to these factors in the "Business" section under the headings "General," "Description of Business by Segment" and "Other Matters Relating to Our Business as a Whole," and in the "Legal Proceedings" section. Additional important information as to these factors is included in this 2019 Annual Report in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Restructuring Costs," "Environmental Matters" and "Governmental Matters" and in our Form S-4 Registration Statements (Registration No. 333-220883) and (Registration No. 333-232696) under the heading "Risk Factors." The forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Additional information as to factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements is disclosed from time to time in our other filings with the SEC.
Management's Report on Internal Control over Financial Reporting
The management of UTC is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management has assessed the effectiveness of UTC's internal control over financial reporting as of December 31, 2019. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control—Integrated Framework, released in 2013. Management concluded that based on its assessment, UTC's internal control over financial reporting was effective as of December 31, 2019. The effectiveness of UTC's internal control over financial reporting, as of December 31, 2019, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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/s/ Gregory J. Hayes
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Gregory J. Hayes
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Chairman, President and Chief Executive Officer
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/s/ Neil G. Mitchill, Jr.
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Neil G. Mitchill, Jr.
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Acting Senior Vice President & Chief Financial Officer
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/s/ Robert J. Bailey
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Robert J. Bailey
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Corporate Vice President, Controller
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Report of Independent Registered Public Accounting Firm
To the Shareowners and Board of Directors of United Technologies Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of United Technologies Corporation and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 19 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and, as discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition - Estimated Costs at Completion for Certain Long-Term Aerospace Aftermarket Service Contracts
As described in Notes 1 and 20 to the consolidated financial statements, the Company recognizes revenue on an over-time basis on certain long-term aerospace aftermarket service contracts. A substantial portion of the Company’s $8.0 billion Pratt & Whitney segment service sales is derived from long-term contracts providing fleet management services and aftermarket maintenance, repair and overhaul services. As disclosed by management, the Company generally measures progress toward completion for these contracts using costs incurred to date relative to total estimated costs at completion because management believes that measure best depicts the transfer of control to the customer, which occurs as the Company incurs costs on the contracts. Due to the long-term duration of these contracts and technical complexity of the engines on which the work is required to be performed for many of the performance obligations, management’s estimation of costs at completion is complex and requires significant judgment. Periodically during the year, or as needed when circumstances change and warrant a modification to a previous estimate, cost estimates requiring management judgment are updated to measure the revenue to recognize in line with progress made on contracts.
The principal considerations for our determination that performing procedures relating to revenue recognition - estimated costs at completion for certain long-term aerospace aftermarket service contracts is a critical audit matter are there was significant judgment by management to determine the estimated costs at completion. This in turn led to significant auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the estimates of the costs to complete.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, specifically as it relates to controls over significant assumptions used in the development of estimated costs at contract completion. These procedures also included, among others, evaluating and testing management’s process for developing estimated costs at contract completion, which included evaluating on a test basis the reasonableness of assumptions considered by management specific to each contract. Evaluating the assumptions related to the estimated costs at completion involved evaluating whether the assumptions used were reasonable considering (i) management’s historical forecasting accuracy, (ii) current and past service cost and frequency experience, (iii) the consistent application of accounting policies, and (iv) the timely identification of circumstances which may warrant a modification to a previous estimate.
Goodwill and Intangible Assets Quantitative Impairment Assessments
As described in Notes 1 and 2 to the consolidated financial statements, the Company’s consolidated goodwill and intangible asset balances were $48.1 billion and $26.0 billion, respectively as of December 31, 2019. Intangible assets included unamortized intangible assets of $3.9 billion as of December 31, 2019. Goodwill and unamortized intangible assets are subject to annual impairment testing, or more frequent if a triggering event occurs. In developing the estimates for the fair value of reporting units and unamortized intangible assets, significant judgment is required by management in the determination of the appropriateness of using a qualitative assessment or quantitative assessment. The quantitative impairment testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value. For these quantitative assessments that are performed for goodwill and unamortized intangible assets, fair value is primarily based on income approaches using discounted cash flow and relief from royalty models, respectively, which have significant
assumptions, including revenue growth rates, projected operating income, terminal growth rates, discount rates and royalty rates.
The principal considerations for our determination that performing procedures relating to the goodwill and unamortized intangible assets quantitative impairment assessments is a critical audit matter as there was significant judgment by management when developing the fair value measurements of these assets. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s fair value measurements and significant assumptions for both goodwill and unamortized intangible assets, including revenue growth rates, projected operating income, terminal growth rates, and discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill and unamortized intangible assets quantitative impairment assessments, including controls over the valuation of the Company’s reporting units and unamortized intangible assets. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the discounted cash flow and relief from royalty models; testing the completeness, accuracy, and relevance of underlying data in the models; and evaluating the significant assumptions used by management, including revenue growth rates, projected operating income, terminal value growth rates and discount rates. Evaluating management’s assumptions related to revenue growth rates, projected operating income, and terminal growth rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting units and unamortized intangible assets, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow models and certain significant assumptions, including discount rates.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 6, 2020
We have served as the Company’s auditor since 1947.
Consolidated Statement of Operations
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(dollars in millions, except per share amounts; shares in millions)
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2019
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2018
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2017
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Net Sales:
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Product sales
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$
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54,004
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$
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45,434
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$
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41,361
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Service sales
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23,042
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21,067
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18,476
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77,046
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66,501
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59,837
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Costs and Expenses:
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Cost of products sold
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42,444
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36,754
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31,224
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Cost of services sold
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14,621
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13,231
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12,977
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Research and development
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3,015
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2,462
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2,427
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Selling, general and administrative
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8,521
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7,066
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6,429
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68,601
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59,513
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53,057
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Other income, net
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521
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1,565
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1,358
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Operating profit
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8,966
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8,553
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8,138
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Non-service pension (benefit)
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(888)
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(765)
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(534)
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Interest expense, net
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1,611
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1,038
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909
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Income from operations before income taxes
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8,243
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8,280
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7,763
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Income tax expense
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2,295
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2,626
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2,843
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Net income from operations
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5,948
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5,654
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4,920
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Less: Noncontrolling interest in subsidiaries' earnings from operations
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411
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385
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368
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Net income attributable to common shareowners
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$
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5,537
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$
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5,269
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$
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4,552
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Earnings Per Share of Common Stock—Basic:
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Net income attributable to common shareowners
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$
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6.48
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|
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$
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6.58
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$
|
5.76
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Earnings Per Share of Common Stock—Diluted:
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Net income attributable to common shareowners
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$
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6.41
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|
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$
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6.50
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$
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5.70
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Weighted average number of shares outstanding:
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Basic shares
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854.8
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800.4
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790.0
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Diluted shares
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863.9
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810.1
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799.1
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See accompanying Notes to Consolidated Financial Statements
Consolidated Statement of Comprehensive Income
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(dollars in millions)
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2019
|
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2018
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2017
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|
|
|
|
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Net income from operations
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$
|
5,948
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|
|
$
|
5,654
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|
|
$
|
4,920
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|
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Other comprehensive (loss) income, net of tax
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|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
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Foreign currency translation adjustments arising during period
|
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266
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(516)
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|
620
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Less: Reclassification adjustments for gain on sale of an investment in a
foreign entity recognized in Other income, net
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2
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(2)
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|
|
(10)
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|
|
|
|
268
|
|
|
(518)
|
|
|
610
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|
|
Tax expense
|
|
(43)
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|
|
(4)
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|
—
|
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|
|
|
225
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|
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(522)
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|
|
610
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|
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Pension and postretirement benefit plans
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|
|
|
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Net actuarial (loss) gain arising during period
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(543)
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|
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(1,819)
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|
|
241
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|
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Prior service (cost) credit arising during period
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|
(6)
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|
|
(22)
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|
|
2
|
|
Amortization of actuarial loss and prior service cost
|
|
228
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|
|
344
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|
|
529
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|
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Other
|
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(93)
|
|
|
105
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|
|
(116)
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|
|
|
|
(414)
|
|
|
(1,392)
|
|
|
656
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|
|
Tax benefit (expense)
|
|
97
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|
|
326
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|
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(263)
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|
|
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(317)
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(1,066)
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|
393
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|
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Unrealized (loss) gain on available-for-sale securities
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|
|
|
|
|
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Unrealized holding gain arising during period
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—
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|
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—
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5
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|
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Reclassification adjustments for gain included in Other income, net
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—
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|
|
—
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(566)
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ASU 2016-01 adoption impact (Note 10)
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—
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(5)
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|
—
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|
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|
|
—
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(5)
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|
|
(561)
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|
|
Tax benefit
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—
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|
|
—
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|
213
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|
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|
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—
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(5)
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(348)
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|
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Change in unrealized cash flow hedging
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Unrealized cash flow hedging (loss) gain arising during period
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(33)
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|
|
(307)
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|
|
347
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|
|
Loss (gain) reclassified into Product sales
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|
51
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|
|
(16)
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|
|
(39)
|
|
|
|
|
|
|
|
|
|
|
|
|
18
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|
|
(323)
|
|
|
308
|
|
|
Tax (expense) benefit
|
|
(11)
|
|
|
78
|
|
|
(74)
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|
|
|
|
7
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|
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(245)
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|
|
234
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|
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Other comprehensive (loss) income, net of tax
|
|
(85)
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|
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(1,838)
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|
|
889
|
|
|
Comprehensive income
|
|
5,863
|
|
|
3,816
|
|
|
5,809
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|
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Less: comprehensive income attributable to noncontrolling interest
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|
(399)
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|
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(355)
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|
|
(448)
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|
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Comprehensive income attributable to common shareowners
|
|
$
|
5,464
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|
|
$
|
3,461
|
|
|
$
|
5,361
|
|
See accompanying Notes to Consolidated Financial Statements
Consolidated Balance Sheet
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(dollars in millions, except per share amounts; shares in thousands)
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2019
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2018
|
|
Assets
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
7,378
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|
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$
|
6,152
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|
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Accounts receivable (net of allowance for doubtful accounts of $389 and $488)
|
|
13,524
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|
|
14,271
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|
|
Contract assets, current
|
|
4,184
|
|
|
3,486
|
|
|
Inventory, net
|
|
10,950
|
|
|
10,083
|
|
|
|
|
|
|
|
|
Other assets, current
|
|
1,461
|
|
|
1,511
|
|
|
Total Current Assets
|
|
37,497
|
|
|
35,503
|
|
|
Customer financing assets
|
|
3,477
|
|
|
3,023
|
|
|
Future income tax benefits
|
|
1,611
|
|
|
1,646
|
|
|
Fixed assets, net
|
|
12,755
|
|
|
12,297
|
|
|
Operating lease right-of-use assets
|
|
|
2,599
|
|
|
—
|
|
|
Goodwill
|
|
48,063
|
|
|
48,112
|
|
|
Intangible assets, net
|
|
26,046
|
|
|
26,424
|
|
|
Other assets
|
|
7,668
|
|
|
7,206
|
|
|
Total Assets
|
|
$
|
139,716
|
|
|
$
|
134,211
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
2,364
|
|
|
$
|
1,469
|
|
|
Accounts payable
|
|
10,809
|
|
|
11,080
|
|
|
Accrued liabilities
|
|
11,737
|
|
|
10,223
|
|
|
Contract liabilities, current
|
|
6,180
|
|
|
5,720
|
|
|
Long-term debt currently due
|
|
3,496
|
|
|
2,876
|
|
|
Total Current Liabilities
|
|
34,586
|
|
|
31,368
|
|
|
Long-term debt
|
|
37,788
|
|
|
41,192
|
|
|
Future pension and postretirement benefit obligations
|
|
3,502
|
|
|
4,018
|
|
|
Operating lease liabilities
|
|
2,144
|
|
|
—
|
|
|
Contract liabilities, long-term
|
|
5,732
|
|
|
5,069
|
|
|
Other long-term liabilities
|
|
11,638
|
|
|
11,845
|
|
|
Total Liabilities
|
|
95,390
|
|
|
93,492
|
|
|
Commitments and contingent liabilities (Notes 4 and 18)
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
|
95
|
|
|
109
|
|
|
Shareowners’ Equity:
|
|
|
|
|
|
Capital Stock:
|
|
|
|
|
|
Preferred Stock, $1 par value; 250,000 shares authorized; None issued or outstanding
|
|
—
|
|
|
—
|
|
|
Common Stock, $1 par value; 4,000,000 shares authorized; 1,450,845 and 1,446,961 shares issued
|
|
23,019
|
|
|
22,514
|
|
|
Treasury Stock— 586,479 and 585,479 common shares at average cost
|
|
(32,626)
|
|
|
(32,482)
|
|
|
Retained earnings
|
|
61,594
|
|
|
57,823
|
|
|
Unearned ESOP shares
|
|
(64)
|
|
|
(76)
|
|
|
Total Accumulated other comprehensive loss
|
|
(10,149)
|
|
|
(9,333)
|
|
|
Total Shareowners’ Equity
|
|
41,774
|
|
|
38,446
|
|
|
Noncontrolling interest
|
|
2,457
|
|
|
2,164
|
|
|
Total Equity
|
|
44,231
|
|
|
40,610
|
|
|
Total Liabilities and Equity
|
|
$
|
139,716
|
|
|
$
|
134,211
|
|
See accompanying Notes to Consolidated Financial Statements
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
2017
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from operations
|
|
$
|
5,948
|
|
|
$
|
5,654
|
|
|
$
|
4,920
|
|
|
Adjustments to reconcile income from operations to net cash flows provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
3,783
|
|
|
2,433
|
|
|
2,140
|
|
|
Deferred income tax provision
|
|
35
|
|
|
735
|
|
|
62
|
|
|
Stock compensation cost
|
|
356
|
|
|
251
|
|
|
192
|
|
|
Net periodic pension and other postretirement benefit
|
|
(525)
|
|
|
(393)
|
|
|
(158)
|
|
|
Portfolio separation tax cost
|
|
634
|
|
|
—
|
|
|
—
|
|
|
Gain on sale of Taylor Company
|
|
—
|
|
|
(799)
|
|
|
—
|
|
|
Change in:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
419
|
|
|
(2,426)
|
|
|
(448)
|
|
|
Contract assets, current
|
|
(307)
|
|
|
(604)
|
|
|
—
|
|
|
Inventory
|
|
(1,216)
|
|
|
(537)
|
|
|
(1,074)
|
|
|
Other current assets
|
|
(309)
|
|
|
161
|
|
|
(101)
|
|
|
Accounts payable and accrued liabilities
|
|
1,229
|
|
|
2,446
|
|
|
1,571
|
|
|
Contract liabilities, current
|
|
359
|
|
|
205
|
|
|
—
|
|
|
Income taxes
|
|
(406)
|
|
|
(195)
|
|
|
1,579
|
|
|
Global pension contributions
|
|
(118)
|
|
|
(147)
|
|
|
(2,112)
|
|
|
Canadian government settlement
|
|
(38)
|
|
|
(429)
|
|
|
(285)
|
|
|
Other operating activities, net
|
|
(961)
|
|
|
(33)
|
|
|
(655)
|
|
|
Net cash flows provided by operating activities
|
|
8,883
|
|
|
6,322
|
|
|
5,631
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(2,256)
|
|
|
(1,902)
|
|
|
(2,014)
|
|
|
Increase in customer financing assets
|
|
(787)
|
|
|
(988)
|
|
|
(1,197)
|
|
|
Decrease in customer financing assets
|
|
129
|
|
|
606
|
|
|
222
|
|
|
Investments in businesses (Note 2)
|
|
(56)
|
|
|
(15,398)
|
|
|
(231)
|
|
|
Dispositions of businesses (Note 2)
|
|
138
|
|
|
1,105
|
|
|
70
|
|
|
Proceeds from sale of investments in Watsco, Inc.
|
|
—
|
|
|
—
|
|
|
596
|
|
|
Increase in collaboration intangible assets
|
|
(351)
|
|
|
(400)
|
|
|
(380)
|
|
|
Receipts (payments) from settlements of derivative contracts
|
|
336
|
|
|
143
|
|
|
(317)
|
|
|
Other investing activities, net
|
|
(245)
|
|
|
(139)
|
|
|
232
|
|
|
Net cash flows used in investing activities
|
|
(3,092)
|
|
|
(16,973)
|
|
|
(3,019)
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
88
|
|
|
13,455
|
|
|
4,954
|
|
|
Repayment of long-term debt
|
|
(2,830)
|
|
|
(2,520)
|
|
|
(1,604)
|
|
|
Increase (decrease) in short-term borrowings, net
|
|
927
|
|
|
(356)
|
|
|
(271)
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Common Stock issued under employee stock plans
|
|
27
|
|
|
36
|
|
|
31
|
|
|
Dividends paid on Common Stock
|
|
(2,442)
|
|
|
(2,170)
|
|
|
(2,074)
|
|
|
Repurchase of Common Stock
|
|
(151)
|
|
|
(325)
|
|
|
(1,453)
|
|
|
Other financing activities, net
|
|
(183)
|
|
|
(155)
|
|
|
(576)
|
|
|
Net cash flows (used in) provided by financing activities
|
|
(4,564)
|
|
|
7,965
|
|
|
(993)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
(19)
|
|
|
(120)
|
|
|
210
|
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
1,208
|
|
|
(2,806)
|
|
|
1,829
|
|
|
Cash, cash equivalents and restricted cash, beginning of year
|
|
6,212
|
|
|
9,018
|
|
|
7,189
|
|
|
Cash, cash equivalents and restricted cash, end of year
|
|
7,420
|
|
|
6,212
|
|
|
9,018
|
|
|
Less: Restricted cash, included in Other assets
|
|
42
|
|
|
60
|
|
|
33
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
7,378
|
|
|
$
|
6,152
|
|
|
$
|
8,985
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized
|
|
$
|
1,801
|
|
|
$
|
1,027
|
|
|
$
|
974
|
|
|
Income taxes paid, net of refunds
|
|
$
|
1,768
|
|
|
$
|
1,714
|
|
|
$
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
Consolidated Statement of Changes in Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts; shares in thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
Equity at January 1
|
|
$
|
40,610
|
|
|
$
|
31,421
|
|
|
$
|
29,169
|
|
|
Common Stock
|
|
|
|
|
|
|
|
Balance at January 1
|
|
22,514
|
|
|
17,574
|
|
|
17,285
|
|
|
Common Stock issued under employee plans
|
|
525
|
|
|
423
|
|
|
331
|
|
|
Common Stock repurchased
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Common Stock issued for Rockwell Collins outstanding common stock & equity awards
|
|
—
|
|
|
4,523
|
|
|
—
|
|
|
(Purchase) sale of subsidiary shares from noncontrolling interest, net
|
|
(20)
|
|
|
(6)
|
|
|
4
|
|
|
Redeemable noncontrolling interest fair value adjustment
|
|
—
|
|
|
—
|
|
|
(47)
|
|
|
Balance at December 31
|
|
23,019
|
|
|
22,514
|
|
|
17,574
|
|
|
Treasury Stock
|
|
|
|
|
|
|
|
Balance at January 1
|
|
(32,482)
|
|
|
(35,596)
|
|
|
(34,150)
|
|
|
Common Stock issued under employee plans
|
|
7
|
|
|
6
|
|
|
7
|
|
|
Common Stock repurchased
|
|
(151)
|
|
|
(329)
|
|
|
(1,453)
|
|
|
Common Stock issued for Rockwell Collins outstanding common stock & equity awards
|
|
—
|
|
|
3,437
|
|
|
—
|
|
|
Balance at December 31
|
|
(32,626)
|
|
|
(32,482)
|
|
|
(35,596)
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
Balance at January 1
|
|
57,823
|
|
|
55,242
|
|
|
52,873
|
|
|
Net Income
|
|
5,537
|
|
|
5,269
|
|
|
4,552
|
|
|
Dividends on Common Stock
|
|
(2,442)
|
|
|
(2,170)
|
|
|
(2,074)
|
|
|
Dividends on ESOP Common Stock
|
|
(70)
|
|
|
(71)
|
|
|
(72)
|
|
|
Redeemable noncontrolling interest fair value adjustment
|
|
4
|
|
|
7
|
|
|
(42)
|
|
|
ASU 2018-02 adoption impact (Note 10)
|
|
745
|
|
|
—
|
|
|
—
|
|
|
New Revenue Standard adoption impact
|
|
—
|
|
|
(480)
|
|
|
—
|
|
|
Other
|
|
(3)
|
|
|
26
|
|
|
5
|
|
|
Balance at December 31
|
|
61,594
|
|
|
57,823
|
|
|
55,242
|
|
|
Unearned ESOP Shares
|
|
|
|
|
|
|
|
Balance at January 1
|
|
(76)
|
|
|
(85)
|
|
|
(95)
|
|
|
Common Stock issued under employee plans
|
|
12
|
|
|
9
|
|
|
10
|
|
|
Balance at December 31
|
|
(64)
|
|
|
(76)
|
|
|
(85)
|
|
|
Accumulated Other Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
Balance at January 1
|
|
(9,333)
|
|
|
(7,525)
|
|
|
(8,334)
|
|
|
Other comprehensive (loss) income, net of tax
|
|
(816)
|
|
|
(1,808)
|
|
|
809
|
|
|
Balance at December 31
|
|
(10,149)
|
|
|
(9,333)
|
|
|
(7,525)
|
|
|
Noncontrolling Interest
|
|
|
|
|
|
|
|
Balance at January 1
|
|
2,164
|
|
|
1,811
|
|
|
1,590
|
|
|
Net Income
|
|
411
|
|
|
385
|
|
|
368
|
|
|
Redeemable noncontrolling interest in subsidiaries' earnings
|
|
7
|
|
|
(4)
|
|
|
(17)
|
|
|
Other comprehensive (loss) income, net of tax
|
|
(12)
|
|
|
(30)
|
|
|
56
|
|
|
Dividends attributable to noncontrolling interest
|
|
(268)
|
|
|
(315)
|
|
|
(336)
|
|
|
Sale (purchase) of subsidiary shares from noncontrolling interest, net
|
|
70
|
|
|
(23)
|
|
|
—
|
|
|
(Disposition) acquisition of noncontrolling interest, net
|
|
(23)
|
|
|
(8)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Capital contributions
|
|
108
|
|
|
342
|
|
|
135
|
|
|
Other
|
|
—
|
|
|
6
|
|
|
1
|
|
|
Balance at December 31
|
|
2,457
|
|
|
2,164
|
|
|
1,811
|
|
|
Equity at December 31
|
|
$
|
44,231
|
|
|
$
|
40,610
|
|
|
$
|
31,421
|
|
|
|
|
|
|
|
|
|
|
Supplemental share information
|
|
|
|
|
|
|
|
Shares of Common Stock issued under employee plans
|
|
3,883
|
|
|
2,775
|
|
|
3,205
|
|
|
Shares of Common Stock repurchased
|
|
1,133
|
|
|
2,727
|
|
|
12,900
|
|
|
Dividends per share of Common Stock
|
|
$
|
2.94
|
|
|
$
|
2.84
|
|
|
$
|
2.72
|
|
See accompanying Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
NOTE 1: SUMMARY OF ACCOUNTING PRINCIPLES
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation.
Consolidation. The Consolidated Financial Statements include the accounts of United Technologies Corporation (UTC) and its controlled subsidiaries. Intercompany transactions have been eliminated.
Cash and Cash Equivalents. Cash and cash equivalents includes cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities of three months or less.
On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions or divestitures or other legal obligations. As of December 31, 2019 and 2018, the amount of such restricted cash was approximately $42 million and $60 million, respectively.
Accounts Receivable. Accounts receivable are stated at their net estimated realized value. The allowance for doubtful accounts is based upon an assessment of customer creditworthiness, historical payment experience, and the age and status of outstanding receivables. Current and long-term accounts receivable as of December 31, 2019 includes retainage of $111 million and unbilled receivables of $522 million, which primarily includes unbilled receivables with commercial aerospace customers. Current and long-term accounts receivable as of December 31, 2018 include retainage of $116 million and unbilled receivables of $678 million, which primarily includes unbilled receivables with commercial aerospace customers. See Note 4 for discussion of commercial aerospace industry assets and commitments.
Retainage represents amounts that, pursuant to the applicable contract, are not due until project completion and acceptance by the customer. Unbilled receivables represent revenues that are not currently billable to the customer under the terms of the contract. These items are expected to be billed and collected in the normal course of business. Unbilled receivables where we have an unconditional right to payment are included in Accounts receivable.
Contract Assets and Liabilities. Contract assets and liabilities represent the difference in the timing of revenue recognition from receipt of cash from our customers. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Performance obligations partially satisfied in advance of customer billings are included in contract assets.
Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. See Note 6 for further discussion of contract assets and liabilities.
Inventory. Inventory is stated at the lower of cost or estimated realizable value and are primarily based on first-in, first-out (FIFO) or average cost methods; however, certain Collins Aerospace Systems and Carrier entities use the last-in, first-out (LIFO) method. If inventories that were valued using the LIFO method had been valued under the FIFO method, they would have been higher by $126 million and $119 million at December 31, 2019 and 2018, respectively.
Valuation reserves for excess, obsolete, and slow-moving inventory are estimated by comparing the inventory levels of individual parts to both future sales forecasts or production requirements and historical usage rates in order to identify inventory where the resale value or replacement value is less than inventoriable cost. Other factors that management considers in determining the adequacy of these reserves include whether individual inventory parts meet current specifications and cannot be substituted for a part currently being sold or used as a service part, overall market conditions, and other inventory management initiatives. Manufacturing costs are allocated to current production and firm contracts.
Equity Method Investments. Investments in which we have the ability to exercise significant influence, but do not control, are accounted for under the equity method of accounting and are included in Other assets on the Consolidated Balance Sheet. Under this method of accounting, our share of the net earnings or losses of the investee is included in Other income, net on the Consolidated Statement of Operations since the activities of the investee are closely aligned with the operations of the business segment holding the investment. We evaluate our equity method investments whenever events or changes in circumstance indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. UTC sells products to and purchases products from unconsolidated entities accounted for under the equity method, which are considered related parties. This activity is predominantly within our Carrier segment and is not considered material to the Consolidated Statement of Operations nor Consolidated Balance Sheet of UTC.
Customer Financing Assets. Customer Financing Assets (CFA) primarily relate to the aerospace business in which we provide financing to airline customers. The most common types of financing include products under lease, notes receivable, long-term accounts receivable and lease receivable. We record revenue from lease assets by applying Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842, Leases, and from interest on the notes, accounts and lease receivables. Interest from notes and financing leases, rental income from operating lease assets and gains or losses on sales of operating lease assets is aggregated under the caption of “Other income, net” in the Consolidated Statement of Operations. The current portion of these financing arrangements are aggregated under the caption of “Other assets, current” and the non-current portions of these financing arrangements are aggregated under the caption of “Customer financing assets” in the Consolidated Balance Sheet. The increases and decreases in CFA from funding, receipts and certain other activity, are reflected as Investing Activities in the Consolidated Statement of Cash Flows. The product under lease assets are valued at cost and reviewed for impairment when circumstances indicate that the related carrying amounts may not be recoverable. Notes, accounts and lease receivable are valued at cost and reviewed for impairment when it is probable that we will be unable to collect amounts due. As of December 31, 2019 the reserves related to customer financing assets are not material.
Business Combinations. We account for transactions that are classified as business combinations in accordance with FASB ASC Topic 805, “Business Combinations.” Once a business is acquired, the fair value of the identifiable assets acquired and liabilities assumed is determined with the excess cost recorded to goodwill. As required, a preliminary fair value is determined once a business is acquired, with the final determination of the fair value being completed within the one year measurement period from the date of acquisition.
Goodwill and Intangible Assets. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized. Goodwill and indefinite-lived intangible assets are subject to annual impairment testing or when a triggering event occurs using the guidance and criteria described in the Intangibles - Goodwill and Other Topic of the FASB ASC. This testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value.
Intangible assets consist of service portfolios, patents, trademarks/tradenames, customer relationships and other intangible assets including collaboration assets, as discussed further in Note 2. Acquired intangible assets are recognized at fair value in purchase accounting and then amortized to cost of sales and selling, general & administrative expenses over the applicable useful lives. Also included within other intangible assets are commercial aerospace payments made to secure certain contractual rights to provide product on new aircraft platforms. We classify amortization of such payments as a reduction of sales. Such payments are capitalized when there are distinct rights obtained and there are sufficient incremental cash flows to support the recoverability of the assets established. Otherwise, the applicable portion of the payments are expensed. Consideration paid on these contractual commitments is capitalized when it is no longer conditional.
Useful lives of finite-lived intangible assets are estimated based upon the nature of the intangible asset and the industry in which the intangible asset is used. These intangible assets are amortized based on the pattern in which the economic benefits of the intangible assets are consumed. For both our commercial aerospace collaboration assets and exclusivity arrangements, the pattern of economic benefit generally results in lower amortization during the development period with increasing amortization as programs enter full rate production and aftermarket cycles. If a pattern of economic benefit cannot be reliably determined or if straight-line amortization approximates the pattern of economic benefit, a straight-line amortization method may be used. The range of estimated useful lives is as follows:
|
|
|
|
|
|
|
|
Collaboration assets
|
30 years
|
|
Customer relationships and related programs
|
1 to 32 years
|
|
Purchased service contracts
|
5 to 25 years
|
|
Patents & trademarks
|
4 to 40 years
|
|
Exclusivity assets
|
5 to 25 years
|
Leases. We account for leases in accordance with ASC Topic 842: Leases. Under Topic 842, the right-of-use model requires a lessee to record a right-of-use asset and a lease liability on the Consolidated Balance Sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statement of Operations. In addition, Topic 842 requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor doesn’t convey risks and rewards or control, the lease is treated as operating.
We enter into lease agreements for the use of real estate space, vehicles, information technology equipment, and certain other equipment under operating and finance leases. We determine if an arrangement contains a lease at inception. Operating leases are included in Operating lease right-of-use assets, Accrued liabilities, and Operating lease liabilities in our
Consolidated Balance Sheet. Finance leases are not considered significant to our Consolidated Balance Sheet or Consolidated Statement of Operations. Finance lease right-of-use assets at December 31, 2019 of $55 million are included in Other assets in our Consolidated Balance Sheet. Finance lease liabilities at December 31, 2019 of $84 million are included in Long-term debt currently due, and Long-term debt in our Consolidated Balance Sheet.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments, and use the implicit rate when readily determinable. We determine our incremental borrowing rate through market sources including relevant industry rates. Our lease right-of-use assets also include any lease pre-payments and exclude lease incentives. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. We exclude variable payments from lease right-of-use assets and lease liabilities, to the extent not considered fixed, and instead, expense variable payments as incurred. Variable lease expense and lease expense for short duration contracts is not a material component of lease expense. Our leases generally have remaining lease terms of 1 to 20 years, some of which include options to extend leases. For the majority of our leases with options to extend, those options are up to 5 years with the ability to terminate the lease within 1 year. The exercise of lease renewal options is at our sole discretion and our lease right-of-use assets and liabilities reflect only the options we are reasonably certain that we will exercise. Lease expense is recognized on a straight-line basis over the lease term.
In limited instances we act as a lessor, primarily for commercial aerospace engines and certain heating, ventilation and air conditioning (HVAC) systems and commercial equipment, all of which are classified as operating leases. These leases are not significant to our Consolidated Balance Sheet or Consolidated Statement of Operations.
Other Long-Lived Assets. We evaluate the potential impairment of other long-lived assets whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. If the carrying value of other long-lived assets held and used exceeds the sum of the undiscounted expected future cash flows, the carrying value is written down to fair value.
Long-Term Financing Receivables. Our long-term 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 of those other receivables are not significant.
Long-term trade accounts receivable are principally amounts arising from the sale of goods and services with a contractual maturity date or realization period of greater than one year and are recognized as "Other assets" in our Consolidated Balance Sheet. Notes and leases receivable are recognized as "Customer financing assets" in our Consolidated Balance Sheet. These exclude receivables related to operating leases. The following table summarizes the balance by class of aerospace business-related long-term receivables as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
Long-term trade accounts receivable
|
|
$
|
251
|
|
|
$
|
269
|
|
|
Notes and leases receivable
|
|
265
|
|
|
258
|
|
|
Total long-term receivables
|
|
$
|
516
|
|
|
$
|
527
|
|
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.
We determine credit ratings for each customer in our 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. Customer credit ratings range from customers with an extremely strong capacity to meet financial obligations, to customers whose uncollateralized receivable is in default. 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. Based upon the customer credit ratings, approximately $150 million of our long-term receivables were considered to bear high credit risk as of December 31, 2019 and 2018. See Note 4 for further discussion of commercial aerospace industry assets and commitments.
Reserves for credit losses on receivables relate 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. Our long-term receivables reflected in the table above, which include reserves of $17 million and $16 million as of December 31, 2019 and 2018, respectively, are individually evaluated for impairment. At both December 31, 2019 and 2018, 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.
Income Taxes. 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 expense has also been recognized. We recognize accrued interest related to unrecognized tax benefits in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense.
On December 22, 2017 the TCJA was enacted. The TCJA contains a new law that subjects the Company to a tax on Global Intangible Low-Taxed Income (GILTI), beginning in 2018. GILTI is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The FASB has provided that companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for temporary differences, including outside basis differences, expected to reverse as GILTI. We have elected to account for GILTI as a period cost, as incurred.
Revenue Recognition. We account for revenue in accordance with ASC Topic 606: Revenue from Contracts with Customers. We adopted ASC 606 effective January 1, 2018 and elected the modified retrospective approach. The results for periods before 2018 were not adjusted for the new standard and the cumulative effect of the change in accounting was recognized through retained earnings at the date of adoption. Under Topic 606, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Some of our contracts with customers contain a single performance obligation, while others contain multiple performance obligations most commonly when a contract spans multiple phases of the product life-cycle such as development, production, maintenance and support. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on its standalone selling price.
We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price, including contractual discounts, contract incentive payments, estimates of award fees, unfunded contract value under U.S. Government contracts, and other sources of variable consideration, when determining the transaction price of each contract. We include variable consideration in the estimated transaction price when there is a basis to reasonably estimate the amount. These estimates are based on historical experience, anticipated performance and our best judgment at the time. We also consider whether our contracts provide customers with significant financing. Generally, our contracts do not contain significant financing.
Timing of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms.
Point in time revenue recognition. Performance obligations are satisfied as of a point in time for heating, ventilating, air-conditioning and refrigeration systems, certain alarm and fire detection and suppression systems, and certain aerospace components, engines, and spare parts. Revenue is recognized when control of the product transfers to the customer, generally upon product shipment.
Over-time revenue recognition. Performance obligations are satisfied over-time if the customer receives the benefits as we perform work, if the customer controls the asset as it is being produced, or if the product being produced for the customer has no alternative use and we have a contractual right to payment. Revenue is recognized for our construction-type and certain production-type contracts on an over-time basis. We recognize revenue on an over-time basis on certain long-term aerospace aftermarket contracts and aftermarket service work; development, fixed price, and other cost reimbursement contracts in our aerospace businesses; and elevator and escalator sales, installation, service, modernization and other construction contracts in our commercial businesses. For construction and installation contracts within our commercial businesses and aerospace performance obligations satisfied over time, revenue is recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with and best depict transfer of
control to the customer. Contract costs include labor, materials, and subcontractors' costs, or other direct costs, and where applicable on government and commercial contracts, indirect costs.
For certain of our long-term aftermarket contracts, revenue is recognized over the contract period. In the commercial businesses, revenue is primarily recognized on a straight-line basis over the contract period. In the aerospace businesses, we generally account for such contracts as a series of daily obligations to stand ready to provide spare parts and product maintenance and aftermarket services. These arrangements include the sale of spare parts with integral services to our customers, and are generally classified as Service sales, with the corresponding costs classified in Cost of services sold, within the Consolidated Statement of Operations. Revenue is primarily recognized in proportion to cost as sufficient historical evidence indicates that the cost of performing services under the contract is incurred on an other than straight-line basis. Aerospace contract modifications are routine and contracts are often modified to account for changes in contract specifications or requirements. Contract modifications that are for goods or services that are not distinct are accounted for as part of the existing contract.
We incur costs for engineering and development of aerospace products directly related to existing or anticipated contracts with customers. Such costs generate or enhance our ability to satisfy our performance obligations under these contracts. We capitalize these costs as contract fulfillment costs to the extent the costs are recoverable from the associated contract margin and subsequently amortize the costs as the original equipment (OEM) products performance obligations are satisfied. In instances where intellectual property does not transfer to the customer, we defer the customer funding of OEM product engineering and development and recognize revenue when the OEM products performance obligations are satisfied. Capitalized contract fulfillment costs were $1,519 million and $914 million as of December 31, 2019 and 2018, respectively and are recognized in "Other assets" in our Consolidated Balance Sheet and are included in Other operating activities, net in our Consolidated Statement of Cash Flows. The increase in capitalized net contract fulfillment costs is driven by current year activity at Collins Aerospace Systems. Costs to obtain contracts are not material.
Loss provisions on OEM contracts are recognized to the extent that estimated contract costs exceed the estimated consideration from the products contemplated under the contractual arrangement. For new commitments, we generally record loss provisions at the earlier of contract announcement or contract signing except for certain contracts under which losses are recorded upon receipt of the purchase order that obligates us to perform. For existing commitments, anticipated losses on contractual arrangements are recognized in the period in which losses become evident. Products contemplated under contractual arrangements include firm quantities of product sold under contract and, in the commercial engine and wheels and brakes businesses, future highly probable sales of replacement parts required by regulation that are expected to be sold subsequently for incorporation into the original equipment. In the commercial engine and wheels and brakes businesses, when the combined original equipment and aftermarket arrangement for each individual sales campaign are profitable, we record original equipment product losses, as applicable, at the time of delivery.
We review our cost estimates on significant contracts on a quarterly basis and for others, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. We record changes in contract estimates using the cumulative catch-up method. Operating profits included net unfavorable changes in aerospace contract estimates of approximately $69 million, $50 million, and $110 million in 2019, 2018 and 2017, respectively, primarily the result of unexpected increases in estimated costs related to Pratt & Whitney long-term aftermarket contracts.
Collaborations: Sales generated from engine programs, spare parts sales, and aftermarket business under collaboration arrangements are recorded consistent with our revenue recognition policies in our Consolidated Financial Statements. Amounts attributable to our collaborators for their share of sales are recorded as cost of sales in our Consolidated Financial Statements based upon the terms and nature of the arrangement. Costs associated with engine programs under collaborative arrangements are expensed as incurred. Under these arrangements, collaborators contribute their program share of engine parts, incur their own production costs and make certain payments to Pratt & Whitney for shared or joint program costs. The reimbursement from collaborators of their share of program costs is recorded as a reduction of the related expense item at that time.
Cash Payments to Customers: Carrier customarily offers its customers incentives to purchase products to ensure an adequate supply of its products in the distribution channels. The principal incentive program provides reimbursements to distributors for offering promotional pricing for our products. We account for incentive payments made as a reduction in sales. In our aerospace businesses, we offer customers certain incentives to purchase our products. These incentives may result in payments made to customers. In addition, we may make participation payments to certain aerospace customers to secure certain contractual rights. To the extent these rights are incremental and are supported by the incremental cash flows obtained, they are capitalized as intangible assets. Otherwise, such payments are recorded as a reduction in sales. We classify the subsequent amortization of the capitalized acquired intangible assets from our customers as a reduction in sales. Contractually stated prices in arrangements with our customers that include the acquisition of intangible rights within the scope of the Intangibles - Goodwill and Other Topic of the FASB ASC and deliverables within the scope of the Revenue Recognition Topic
of the FASB ASC are not presumed to be representative of fair value for determining the amounts to allocate to each element of an arrangement.
Remaining Performance Obligations (RPO). RPO represents the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of December 31, 2019 our total RPO was approximately $132.7 billion compared to $115.5 billion as of December 31, 2018. Of the total RPO as of December 31, 2019, we expect approximately 45% will be recognized as sales over the following 24 months.
Research and Development. Research and development costs not specifically covered by contracts and those related to the company sponsored share of research and development activity in connection with cost-sharing arrangements are charged to expense as incurred. Government research and development support, not associated with specific contracts, is recorded as a reduction to research and development expense in the period earned.
Research and development costs incurred under contracts with customers are included as a contract cost and reported as a component of cost of products sold when revenue from such contracts is recognized. Research and development costs in excess of contractual consideration are expensed as incurred.
Foreign Exchange. We conduct business in many different currencies and, accordingly, are subject to the inherent risks associated with foreign exchange rate movements. The financial position and results of operations of substantially all of our foreign subsidiaries are measured using the local currency as the functional currency. Foreign currency denominated assets and liabilities are translated into U.S. Dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods. The aggregate effects of translating the balance sheets of these subsidiaries are deferred as a separate component of shareowners' equity.
Derivatives and Hedging Activity. We have used derivative instruments, including swaps, forward contracts and options, to help manage certain foreign currency, interest rate and commodity price exposures. Derivative instruments are viewed as risk management tools by us and are not used for trading or speculative purposes. 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. We enter into transactions that are subject to enforceable master netting arrangements or similar agreements with various counterparties. 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.
Derivatives used for hedging purposes may be designated and effective as a hedge of the identified risk exposure at the inception of the contract. All derivative instruments are recorded on the balance sheet at fair value. Derivatives used to hedge foreign currency denominated balance sheet items are reported directly in earnings along with offsetting transaction gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases may be accounted for as cash flow hedges, as deemed appropriate. Gains and losses on derivatives designated as cash flow hedges are recorded in other comprehensive income and reclassified to earnings as a component of product sales or expenses, as applicable, when the hedged transaction occurs. Gains and losses on derivatives designated as cash flow hedges are recorded in Other operating activities, net within the Consolidated Statement of Cash Flows. 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 it occurs. As discussed in Note 14, at December 31, 2019 we have approximately €4.20 billion of euro-denominated long-term debt, which qualifies as a net investment hedge against our investments in European businesses.
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. Additional information pertaining to foreign currency forward contracts and net investment hedging is included in Note 14.
Environmental. Environmental investigatory, remediation, operating and maintenance costs are accrued 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, the minimum is accrued. 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. Liabilities with fixed or reliably determinable future cash payments are discounted. Accrued environmental liabilities are not reduced by potential insurance reimbursements. See Note 18 for additional details on the environmental remediation activities.
Pension and Postretirement Obligations. Guidance under the Compensation - Retirement Benefits Topic of the FASB ASC requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under this guidance, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit cost.
Product Performance Obligations. We extend performance and operating cost guarantees beyond our normal service and warranty policies for extended periods on some of our products, particularly commercial aircraft engines. Liability under such guarantees is based upon future product performance and durability. We accrue for such costs that are probable and can be reasonably estimated. In addition, we incur discretionary costs to service our products in connection with product performance issues. The costs associated with these product performance and operating cost guarantees require estimates over the full terms of the agreements, and require management to consider factors such as the extent of future maintenance requirements and the future cost of material and labor to perform the services. These cost estimates are largely based upon historical experience. See Note 17 for further discussion.
Collaborative Arrangements. In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into certain collaboration arrangements in which sales, costs and risks are shared. Sales generated from engine programs, spare parts, and aftermarket business under collaboration arrangements are recognized in our financial statements when earned. Amounts attributable to our collaborators for their share of sales are recorded as an expense in our financial statements based upon the terms and nature of the arrangement. Costs associated with engine programs under collaborative arrangements are expensed as incurred. Under these arrangements, collaborators contribute their program share of engine parts, incur their own production costs and make certain payments to Pratt & Whitney for shared or joint program costs. The reimbursement from the collaborators of their share of program costs is recorded as a reduction of the related expense item at that time. As of December 31, 2019, the collaborators' interests in all commercial engine programs ranged from 13% to 49%, inclusive of a portion of Pratt & Whitney's interests held by other participants. Pratt & Whitney is the principal participant in all existing collaborative arrangements, with the exception of the Engine Alliance (EA), a joint venture with GE Aviation, which markets and manufactures the GP7000 engine for the Airbus A380 aircraft. There are no individually significant collaborative arrangements and none of the collaborators individually exceed a 31% share in an individual program. The following table illustrates the Consolidated Statement of Operations classification and amounts attributable to transactions arising from the collaborative arrangements between participants for each period presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Collaborator share of sales:
|
|
|
|
|
|
|
Cost of products sold
|
$
|
2,097
|
|
|
$
|
1,688
|
|
|
$
|
1,789
|
|
|
Cost of services sold
|
1,674
|
|
|
1,765
|
|
|
929
|
|
|
Collaborator share of program costs (reimbursement of expenses incurred):
|
|
|
|
|
|
|
Cost of products sold
|
(190)
|
|
|
(209)
|
|
|
(143)
|
|
|
Research and development
|
(219)
|
|
|
(225)
|
|
|
(190)
|
|
|
Selling, general and administrative
|
(101)
|
|
|
(87)
|
|
|
(74)
|
|
Accounting Pronouncements.
In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU and its related amendments modifies the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables, contract assets, long-term receivables and off-balance sheet credit exposures. The amendment requires entities to consider a broader range of information to estimate expected credit losses, including historical information, current conditions and a reasonable forecast period, which may result in earlier recognition of certain losses. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. A modified retrospective approach is required with a cumulative-effect adjustment to retained earnings as of January 1, 2020. We are still quantifying the impact of this ASU and its related amendments on our Consolidated Financial Statements which is not expected to be material.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new standard removes the disclosure requirements for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. This standard did not have a material impact on our financial statement disclosures. We early adopted this standard effective January 1, 2019.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The new standard includes updates to the disclosure requirements for defined benefit plans including several additions, deletions and modifications to the disclosure requirements. The provisions of this ASU are effective for fiscal years ending after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this ASU.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard provides updated guidance surrounding implementation costs associated with cloud computing arrangements that are service contracts. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. We adopted the new standard prospectively effective January 1, 2020. We do not expect this ASU to have a material impact on the Consolidated Financial Statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The amendments in this update for determining whether a decision-making fee is a variable interest require reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in generally accepted accounting principles (GAAP)). These amendments also will create alignment between determining whether a decision making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a VIE. This will significantly reduce the risk that decision makers with insignificant direct and indirect interests could be deemed the primary beneficiary of a VIE. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. We adopted the new standard effective January 1, 2020. This ASU did not have an impact on the Consolidated Financial Statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. The amendments in this update make targeted improvements to GAAP for collaborative arrangements as follows: clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements; add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606; and require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. We adopted the new standard effective January 1, 2020. This ASU did not have an impact on the Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to: franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
NOTE 2: BUSINESS ACQUISITIONS, DISPOSITIONS, GOODWILL AND INTANGIBLE ASSETS
Business Acquisitions. Our investments in businesses net of cash acquired in 2019, 2018 and 2017 totaled $56 million, $31,142 million (including debt assumed of $7,784 million and stock issued of $7,960 million), and $231 million respectively. Our investments in businesses in 2019 primarily consisted of several acquisitions at Otis. Our investments in businesses in 2018 primarily consisted of the acquisition of Rockwell Collins, Inc. (Rockwell Collins). Our investments in businesses in 2017 consisted of a number of small acquisitions, primarily in our commercial businesses.
On June 9, 2019, UTC entered into a merger agreement with Raytheon Company (Raytheon) providing for an all-stock merger of equals transaction. The Raytheon merger agreement provides, among other things, that each share of Raytheon common stock issued and outstanding immediately prior to the closing of the Raytheon merger (except for shares held by Raytheon as treasury stock) will be converted into the right to receive 2.3348 shares of UTC common stock. Upon the closing
of the Raytheon merger, Raytheon will become a wholly-owned subsidiary of UTC, and UTC will change its name to Raytheon Technologies Corporation. On October 11, 2019, the shareowners of each of UTC and Raytheon approved the proposals necessary to complete the Raytheon merger. The Raytheon merger is expected to close early in the second quarter 2020 and is subject to customary closing conditions, including receipt of required regulatory approvals, as well as the completion of UTC's previously announced separation of its Otis and Carrier businesses.
On November 26, 2018, we completed the acquisition of Rockwell Collins (the "Rockwell Acquisition"), a leader in aviation and high-integrity solutions for commercial and military customers as well as leading-edge avionics, flight controls, aircraft interior and data connectivity solutions. Under the terms of the Rockwell acquisition agreement, each share of common stock, par value $0.01 per share, of Rockwell Collins issued and outstanding immediately prior to the effective time of the Rockwell Acquisition (other than shares held by Rockwell Collins, the Company, Riveter Merger Sub Corp or any of their respective wholly owned subsidiaries) was converted into the right to receive (1) $93.33 in cash, without interest, and (2) 0.37525 shares of Company common stock (together, the “Acquisition Consideration”), less any applicable withholding taxes, with cash paid in lieu of fractional shares. The total aggregate consideration payable in the Rockwell Acquisition was $15.5 billion in cash ($14.9 billion net of cash acquired) and 62.2 million shares of Company common stock. In addition, $7.8 billion of Rockwell Collins debt was outstanding at the time of the Rockwell Acquisition. This equated to a total enterprise value of $30.6 billion, including the $7.8 billion of Rockwell Collins' outstanding debt.
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Amount
|
|
Cash consideration paid for Rockwell Collins outstanding common stock & equity awards
|
|
$
|
15,533
|
|
|
Fair value of UTC common stock issued for Rockwell Collins outstanding common stock & equity awards
|
|
7,960
|
|
|
Total consideration transferred
|
|
$
|
23,493
|
|
The cash consideration utilized for the Rockwell Acquisition was partially financed through the previously disclosed issuance of $11.0 billion aggregate principal notes on August 16, 2018 for net proceeds of $10.9 billion. For the remainder of the cash consideration, we utilized repatriated cash and cash equivalents and cash flow generated from operating activities.
Final Allocation of Consideration Transferred to Net Assets Acquired:
The table below represents the final determination of the fair value of identifiable assets acquired and liabilities assumed from the Rockwell Collins acquisition after utilizing the one year measurement period allowed by the FASB ASC Topic 805, “Business Combinations.”
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Cash and cash equivalents
|
$
|
640
|
|
|
Accounts receivable
|
1,659
|
|
|
Inventory
|
|
1,487
|
|
|
Contract assets, current
|
|
320
|
|
|
Other assets, current
|
|
251
|
|
|
Future income tax benefits
|
|
38
|
|
|
Fixed assets
|
|
1,542
|
|
|
Intangible assets:
|
|
|
|
Customer relationships
|
|
8,720
|
|
|
Tradenames/trademarks
|
|
1,870
|
|
|
Developed technology
|
600
|
|
|
Other assets
|
217
|
|
|
Total identifiable assets acquired
|
|
17,344
|
|
|
|
|
|
Short-term borrowings
|
|
2,254
|
|
|
Accounts payable
|
|
520
|
|
|
Accrued liabilities
|
|
1,663
|
|
|
Contract liabilities, current
|
|
299
|
|
|
Long-term debt
|
|
5,530
|
|
|
Future pension and postretirement benefit obligation
|
|
502
|
|
|
Other long-term liabilities
|
|
3,614
|
|
|
Noncontrolling interest
|
|
6
|
|
|
Total liabilities acquired
|
|
14,388
|
|
|
Total identifiable net assets
|
|
2,956
|
|
|
Goodwill
|
|
20,537
|
|
|
Total consideration transferred
|
$
|
23,493
|
|
In order to allocate the consideration transferred for Rockwell Collins, the fair values of all identifiable assets and liabilities were established. For accounting and financial reporting purposes, fair value is defined under FASB ASC Topic 820, “Fair Value Measurements and Disclosures” 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. Fair value adjustments to Rockwell Collins' identified assets and liabilities resulted in an increase in inventory and fixed assets of $282 million and $244 million, respectively. 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. This assessment did not note any significant contingencies related to existing legal or government action.
The fair values of the customer relationship and related program intangible assets, which include the related aerospace program original equipment (OEM) and aftermarket cash flows, were determined by using an “income approach." 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 23 years. The developed technology intangible asset is being amortized over the economic pattern of benefit. The fair value of the tradename intangible assets were determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the valuation of the tradename and discounted to present value using an appropriate discount rate. The tradename intangible assets have been determined to have an indefinite life. The intangible assets included above consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Fair Value
|
|
Estimated
Life
|
|
Acquired customer relationships
|
$
|
8,720
|
|
|
10-23 years
|
|
Acquired tradenames/trademarks
|
1,870
|
|
|
indefinite
|
|
Acquired developed technology
|
600
|
|
|
15 years
|
|
|
$
|
11,190
|
|
|
|
We also identified customer contractual obligations on certain contracts with economic returns that are lower than could be realized in market transactions as of the acquisition date. We measured these liabilities under the measurement provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” 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 programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, we recorded assumed liabilities of approximately $1.02 billion in connection with the Rockwell Acquisition. These liabilities will be liquidated in accordance with the underlying pattern of obligations, as reflected by the expenses incurred on the contracts. Total consumption of the contractual obligation in 2019 was $129 million. Total consumption of the contractual obligation for the next five years is expected to be as follows: $104 million in 2020, $104 million in 2021, $112 million in 2022, $96 million in 2023, and $101 million in 2024.
Acquisition-Related Costs:
Acquisition-related costs have been expensed as incurred. In 2019, 2018, and 2017 approximately $40 million, $112 million, and $39 million respectively, of transaction and integration costs have been incurred. These costs were recorded in Selling, general and administrative expenses within the Consolidated Statement of Operations.
Supplemental Pro-Forma Data:
Rockwell Collins' results of operations have been included in UTC’s financial statements for the period subsequent to the completion of the acquisition on November 26, 2018. Rockwell Collins contributed sales of approximately$778 million and operating profit of approximately $11 million for the year ended December 31, 2018. The following unaudited supplemental pro-forma data presents consolidated information as if the acquisition had been completed on January 1, 2017. The pro-forma results were calculated by combining the results of UTC with the stand-alone results of Rockwell Collins for the pre-acquisition periods, which were adjusted to account for certain costs that would have been incurred during this pre-acquisition period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
(dollars in millions, except per share amounts; shares in millions)
|
2018
|
|
2017
|
|
Net sales
|
$
|
74,136
|
|
|
$
|
68,033
|
|
|
Net income attributable to common shareowners from continuing operations
|
$
|
6,064
|
|
|
$
|
4,662
|
|
|
Basic earnings per share of common stock from continuing operations
|
$
|
6.82
|
|
|
$
|
5.45
|
|
|
Diluted earnings per share of common stock from continuing operations
|
$
|
6.76
|
|
|
$
|
5.39
|
|
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, 2017, as adjusted for the applicable tax impact. As our acquisition of Rockwell Collins was completed on November 26, 2018, the pro-forma adjustments in the table below only include the required adjustments through November 26, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
(dollars in millions)
|
2018
|
|
2017
|
|
Amortization of inventory and fixed asset fair value adjustment 1
|
58
|
|
|
$
|
(192)
|
|
|
Amortization of acquired Rockwell Collins intangible assets, net 2
|
(193)
|
|
|
(202)
|
|
|
Utilization of contractual customer obligation 3
|
16
|
|
|
116
|
|
|
UTC/Rockwell fees for advisory, legal, accounting services 4
|
212
|
|
|
(212)
|
|
|
Interest expense incurred on acquisition financing, net 5
|
(199)
|
|
|
(234)
|
|
|
Elimination of capitalized pre-production engineering amortization 6
|
63
|
|
|
42
|
|
|
Adjustment to net periodic pension cost 7
|
42
|
|
|
34
|
|
|
Adjustment to reflect the adoption of ASC 606 8
|
106
|
|
|
—
|
|
|
Elimination of entities held for sale 9
|
(47)
|
|
|
(35)
|
|
|
Inclusion of B/E Aerospace 10
|
—
|
|
|
(51)
|
|
|
|
$
|
58
|
|
|
$
|
(734)
|
|
1 2018 reflects the elimination of the inventory step-up amortization recorded by UTC in 2018 as this would have been completed within the first two quarters of 2017. Additionally, this adjustment reflects the amortization of the fixed asset fair value adjustment as of the acquisition date.
2 Reflects the additional amortization of the acquired Rockwell Collins' intangible assets recognized at fair value in purchase accounting and eliminates the historical Rockwell Collins intangible asset amortization expense.
3 Reflects the additional amortization of liabilities recognized for acquired contracts with terms less favorable than could be realized in market transactions as of the acquisition date and eliminates Rockwell Collins historical amortization of these liabilities.
4 2018 reflects the elimination of transaction-related fees incurred by UTC and Rockwell Collins in connection with the acquisition and assumes all of the fees were incurred during the first quarter of 2017.
5 Reflects the additional interest expense incurred on debt to finance our acquisition of Rockwell Collins and reduces interest expense for the debt fair value adjustment which would have been amortized.
6 Reflects the elimination of Rockwell Collins capitalized pre-production engineering amortization to conform to UTC policy.
7 Reflects adjustments for the elimination of amortization of prior service cost and actuarial loss amortization, which was recorded by Rockwell Collins, as a result of fair value purchase accounting, net of the impact of the revised pension and post-retirement benefit (expense) as determined under UTC’s plan assumptions.
8 Reflects adjustments to Rockwell Collins revenue recognition as if they adopted the New Revenue Standard as of January 1, 2018 and primarily relates to capitalization of contract costs and changes in timing of sales recognition for contracts requiring an over time method of revenue recognition, partially offset by deferral of revenue recognized on OEM product engineering and development.
9 Reflects the elimination of entities required to be sold for regulatory approvals.
10 Reflects adjustments to include the results and related adjustments for B/E Aerospace as if it had been acquired by Rockwell Collins on January 1, 2017.
The unaudited supplemental pro-forma financial information does not reflect the potential realization of cost savings related 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, 2017, nor are they indicative of future results.
Dispositions. Cash inflows related to dispositions during the 2019 were $138 million and primarily consisted of the dispositions of businesses held for sale associated with the Rockwell Collins acquisition. In accordance with conditions imposed for regulatory approval of the acquisition, Rockwell Collins was required to dispose of certain businesses. These businesses were held separate from UTC’s and Rockwell Collins' ongoing businesses pursuant to regulatory requirements. Definitive agreements to sell each of the businesses were entered into prior to the completion of UTC's acquisition of Rockwell Collins. The related assets and liabilities of these businesses had been accounted for as held for sale at fair value less cost to sell. As of December 31, 2018, assets held for sale of $175 million were included within Other assets, current and liabilities held for sale of $40 million were included within Accrued liabilities on the Consolidated Balance Sheet. The major classes of assets and liabilities primarily included net Inventory of $51 million and net Fixed assets of $37 million. In the first quarter of 2019, Rockwell Collins completed the sale of all businesses which were held for sale as of December 31, 2018.
On November 26, 2018, the Company announced its intention to separate into three independent companies. Following the separations, the Company will operate as an aerospace company comprised of Collins Aerospace Systems and the Pratt & Whitney businesses, and Otis and Carrier will become independent companies. The proposed separations are expected to be
effected through spin-offs of Otis and Carrier that are intended to be tax-free for the Company’s shareowners for U.S. federal income tax purposes, and are expected to be completed in the first half of 2020. Separation of Otis and Carrier from UTC via spin-off transactions will be subject to the satisfaction of customary conditions, including, among others, final approval by the Company’s Board of Directors, receipt of tax rulings and a tax opinion from external counsel, the filing with the Securities and Exchange Commission (SEC) and effectiveness of Form 10 registration statements, and satisfactory completion of financing (subject to UTC’s agreement to consummate the distributions pursuant to, and subject to the terms and conditions of, the Raytheon merger agreement). As of December 31, 2019, approximately $600 million of charges have been incurred related to the separation activities which are predominantly recorded in Selling, general and administrative costs and approximately $730 million of tax charges have been incurred.
On June 21, 2018, Carrier completed its sale of Taylor Company for proceeds of $1.0 billion resulting in a pre-tax gain of $799 million ($591 million after tax).
On January 20, 2020 the Company reached an agreement with BAE Systems, Inc. on a proposed sale of assets related to the Collins Aerospace Systems military global positioning system business for $1.93 billion. The proposed sale is required as a regulatory condition to the Raytheon merger, and is subject to the completion of the Raytheon merger, as well as the satisfaction of other customary closing conditions, including receipt of required regulatory approvals. Due to these closing conditions, the criteria for held for sale accounting treatment were not met as of December 31, 2019.
Goodwill. Changes in our goodwill balances for the year ended in 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Balance as of
January 1,
2019
|
|
Goodwill
resulting from
business
combinations
|
|
Foreign
currency
translation
and other
|
|
Balance as of
December 31,
2019
|
|
Otis
|
$
|
1,688
|
|
|
$
|
16
|
|
|
$
|
(57)
|
|
|
$
|
1,647
|
|
|
Carrier
|
9,835
|
|
|
1
|
|
|
(29)
|
|
|
9,807
|
|
|
Pratt & Whitney
|
1,567
|
|
|
—
|
|
|
(4)
|
|
|
1,563
|
|
|
Collins Aerospace Systems
|
35,001
|
|
|
75
|
|
|
(51)
|
|
|
35,025
|
|
|
Total Segments
|
48,091
|
|
|
92
|
|
|
(141)
|
|
|
48,042
|
|
|
Eliminations and other
|
21
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
Total
|
$
|
48,112
|
|
|
$
|
92
|
|
|
$
|
(141)
|
|
|
$
|
48,063
|
|
The $75 million increase in Goodwill at Collins Aerospace Systems reflects a $475 million net increase in Goodwill resulting from several individually insignificant purchase accounting adjustments related to the Rockwell Acquisition, partially offset by a $400 million decrease in Goodwill related to adjustments to the customer relationship intangible asset associated with the Rockwell Acquisition.
Intangible Assets. Identifiable intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
(dollars in millions)
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Amortized:
|
|
|
|
|
|
|
|
|
Service portfolios
|
$
|
2,105
|
|
|
$
|
(1,626)
|
|
|
$
|
2,164
|
|
|
$
|
(1,608)
|
|
|
Patents and trademarks
|
356
|
|
|
(250)
|
|
|
361
|
|
|
(236)
|
|
|
Collaboration intangible assets
|
4,862
|
|
|
(920)
|
|
|
4,509
|
|
|
(649)
|
|
|
Customer relationships and other
|
23,210
|
|
|
(5,607)
|
|
|
22,525
|
|
|
(4,560)
|
|
|
|
30,533
|
|
|
(8,403)
|
|
|
29,559
|
|
|
(7,053)
|
|
|
Unamortized:
|
|
|
|
|
|
|
|
|
Trademarks and other
|
3,916
|
|
|
—
|
|
|
3,918
|
|
|
—
|
|
|
Total
|
$
|
34,449
|
|
|
$
|
(8,403)
|
|
|
$
|
33,477
|
|
|
$
|
(7,053)
|
|
In addition to acquired customer relationship intangible assets, customer relationship intangible assets include payments made to our customers to secure certain contractual rights. Such payments are capitalized when distinct rights are obtained and sufficient incremental cash flows to support the recoverability of the assets have been established. Otherwise, the applicable portion of the payments is expensed. We amortize these intangible assets based on the underlying pattern of economic benefit, which may result in an amortization method other than straight-line. In the aerospace industry, amortization based on the pattern of economic benefit generally results in lower amortization expense during the development period with amortization
expense increasing as programs enter full production and aftermarket cycles. If a pattern of economic benefit cannot be reliably determined, a straight-line amortization method may be used. We classify amortization of such payments as a reduction of sales. Amortization of intangible assets was $1,452 million, $976 million and $834 million in 2019, 2018 and 2017, respectively. The collaboration intangible assets are amortized based upon the pattern of economic benefits as represented by the underlying cash flows. The following is the expected amortization of total intangible assets for 2020 through 2024, which reflects the pattern of expected economic benefit on certain aerospace intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Amortization expense
|
$1,438
|
|
$1,420
|
|
$1,420
|
|
$1,411
|
|
$1,381
|
Other Matters. In January 2020, Boeing announced that it expects the 737 Max fleet to remain grounded until mid-2020. In addition, Boeing has also announced the temporary suspension of its production of the 737 Max. The Company considered the potential impact of these developments on goodwill and intangible asset balances that could be impacted by this situation and concluded that the balances remain recoverable and no adjustment was required.
NOTE 3: EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts; shares in millions)
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareowners
|
$
|
5,537
|
|
|
$
|
5,269
|
|
|
$
|
4,552
|
|
|
Basic weighted average number of shares outstanding
|
854.8
|
|
|
800.4
|
|
|
790.0
|
|
|
Stock awards and equity units (share equivalent)
|
9.1
|
|
|
9.7
|
|
|
9.1
|
|
|
Diluted weighted average number of shares outstanding
|
863.9
|
|
|
810.1
|
|
|
799.1
|
|
|
Earnings Per Share of Common Stock:
|
|
|
|
|
|
|
Basic
|
$
|
6.48
|
|
|
$
|
6.58
|
|
|
$
|
5.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
$
|
6.41
|
|
|
$
|
6.50
|
|
|
$
|
5.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 because the effect would be anti-dilutive. In addition, the computation of diluted earnings per share excludes the effect of the potential exercise of stock awards when the awards' assumed proceeds exceed the average market price of the common shares during the period. For 2019, 2018 and 2017, there were 8.3 million, 5.1 million and 5.9 million anti-dilutive stock awards excluded from the computation, respectively.
NOTE 4: COMMERCIAL AEROSPACE INDUSTRY ASSETS AND COMMITMENTS
We have receivables and other financing assets with commercial aerospace industry customers totaling $11,394 million and $11,695 million at December 31, 2019 and 2018, respectively. These include customer financing assets related to commercial aerospace industry customers, consisting of products under lease of $3,185 million and $2,736 million, and notes and leases receivable of $308 million and $299 million, at December 31, 2019 and 2018, respectively.
Aircraft financing commitments, in the form of debt or lease financing, are provided to commercial aerospace customers. The extent to which the financing commitments will be utilized is not currently known, since customers may be able to obtain more favorable terms from other financing sources. We may also arrange for third-party investors to assume a portion of these commitments. If financing commitments are exercised, debt financing is generally secured by assets with fair market values equal to or exceeding the financed amounts consistent with market terms and conditions. We may also lease aircraft and subsequently sublease the aircraft to customers under long-term non-cancelable operating leases. Our financing commitments with customers are contingent upon maintenance of certain levels of financial condition by the customers.
We have also made residual value and other guarantees related to various commercial aerospace customer financing arrangements. The estimated fair market values of the guaranteed assets equal or exceed the value of the related guarantees, net of existing reserves. We have residual value and other guarantees of $333 million as of December 31, 2019. Partner share of these guarantees is $142 million. Refer to Note 17 to the Consolidated Financial Statements for additional discussion on guarantees.
We also have other contractual commitments, including commitments to secure certain contractual rights to provide product on new aircraft platforms, which are included in "Other commercial aerospace commitments" in the table below. Payments made on these contractual commitments are included within other intangible assets and are to be amortized over the term of underlying economic benefit. Our commercial aerospace financing and other contractual commitments as of December
31, 2019 were approximately $15.0 billion. We have entered into certain collaboration arrangements, which may include participation by our collaboration partners in these commitments.
The following is the expected maturity of commercial aerospace industry assets and commitments as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Committed
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Notes and leases receivable
|
$
|
308
|
|
|
$
|
30
|
|
|
$
|
23
|
|
|
$
|
14
|
|
|
$
|
22
|
|
|
$
|
38
|
|
|
$
|
181
|
|
|
Commercial aerospace financing commitments
|
$
|
3,937
|
|
|
$
|
911
|
|
|
$
|
1,119
|
|
|
$
|
974
|
|
|
$
|
819
|
|
|
$
|
44
|
|
|
$
|
70
|
|
|
Other commercial aerospace commitments
|
11,055
|
|
|
702
|
|
|
736
|
|
|
717
|
|
|
668
|
|
|
627
|
|
|
7,605
|
|
|
Collaboration partners' share
|
(5,284)
|
|
|
(508)
|
|
|
(623)
|
|
|
(571)
|
|
|
(538)
|
|
|
(193)
|
|
|
(2,851)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments
|
$
|
9,708
|
|
|
$
|
1,105
|
|
|
$
|
1,232
|
|
|
$
|
1,120
|
|
|
$
|
949
|
|
|
$
|
478
|
|
|
$
|
4,824
|
|
In connection with our 2012 agreement to acquire Rolls-Royce's ownership and collaboration interests in IAE AG, additional payments are due to Rolls-Royce contingent upon each hour flown through June 2027 by the V2500-powered aircraft in service as of the acquisition date. These flight hour payments, included in "Other commercial aerospace commitments" in the table above, are being capitalized as collaboration intangible assets.
We have long-term aftermarket maintenance contracts with commercial aerospace industry customers for which revenue is recognized over-time in proportion to actual costs incurred relative to total expected costs to be incurred over the respective contract periods. Billings, however, are typically based on factors such as aircraft or engine flight hours. The timing differences between the billings and the maintenance costs incurred generates both Contract assets and Contract liabilities. Additionally, we have other contracts with commercial aerospace industry customers which can result in the generation of Contract assets and Contract liabilities. Contract assets totaled $2,741 million and $2,247 million at December 31, 2019 and 2018, respectively, and are included in "Contract assets, current" and "Other assets" in the accompanying Consolidated Balance Sheet.
Allowance for doubtful accounts was $248 million and $245 million at December 31, 2019 and 2018, respectively. Reserves related to financing commitments and guarantees were $7 million and $15 million at December 31, 2019 and 2018, respectively.
In addition, in connection with the acquisition of Rockwell Collins in 2018 and Goodrich in 2012, we recorded assumed liabilities of approximately $1.02 billion and $2.2 billion, respectively related to customer contractual obligations on certain programs with terms less favorable than could be realized in market transactions as of the acquisition date. These liabilities are being liquidated in accordance with the underlying pattern of obligations, as reflected by the net cash outflows incurred on the contracts. Total consumption of the contractual obligations for the years ended December 31, 2019 and 2018 was approximately $345 million and $252 million, respectively. The balance of the contractual obligations at December 31, 2019 was $1,408 million, with future consumption expected to be as follows: $263 million in 2020, $189 million in 2021, $148 million in 2022, $118 million in 2023, $127 million in 2024 and $563 million thereafter.
We also have intangible assets associated with commercial aerospace. Refer to Note 2 for discussion of intangible assets. Refer to Note 1 for discussion of contract fulfillment costs. Refer to Note 19 for discussion of leases, including those that were disclosed as commitments prior to the adoption of ASC842.
NOTE 5: INVENTORY, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Raw materials
|
$
|
3,357
|
|
|
$
|
3,052
|
|
|
Work-in-process
|
2,726
|
|
|
2,673
|
|
|
Finished goods
|
4,867
|
|
|
4,358
|
|
|
|
$
|
10,950
|
|
|
$
|
10,083
|
|
Raw materials, work-in-process and finished goods are net of valuation reserves of $1,377 million and $1,270 million as of December 31, 2019 and 2018, respectively.
NOTE 6: CONTRACT ASSETS AND LIABILITIES
Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments
from customers based on the terms established in our contracts. Total contract assets and contract liabilities as of December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
December 31, 2019
|
|
December 31, 2018
|
|
Contract assets, current
|
$
|
4,184
|
|
|
$
|
3,486
|
|
|
Contract assets, noncurrent (included within Other assets)
|
1,338
|
|
|
1,142
|
|
|
Total contract assets
|
5,522
|
|
|
4,628
|
|
|
Contract liabilities, current
|
(6,180)
|
|
|
(5,720)
|
|
|
Contract liabilities, noncurrent
|
(5,732)
|
|
|
(5,069)
|
|
|
Total contract liabilities
|
(11,912)
|
|
|
(10,789)
|
|
|
Net contract liabilities
|
$
|
(6,390)
|
|
|
$
|
(6,161)
|
|
Contract assets increased $894 million during the year ended December 31, 2019 due to revenue recognition in excess of customer billings, primarily on Pratt & Whitney military and commercial aftermarket service agreements and various programs at Collins Aerospace Systems. Contract liabilities increased $1,123 million during the year ended December 31, 2019 primarily due to customer billings in excess of revenue recognized on Pratt & Whitney commercial aftermarket service agreements and various programs at Collins Aerospace Systems. We recognized revenue of $4.9 billion during the year ended December 31, 2019 related to contract liabilities as of December 31, 2018.
NOTE 7: FIXED ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Estimated
Useful Lives
|
|
2019
|
|
2018
|
|
Land
|
|
|
$
|
447
|
|
|
$
|
425
|
|
|
Buildings and improvements
|
12-40 years
|
|
6,673
|
|
|
6,486
|
|
|
Machinery, tools and equipment
|
3-20 years
|
|
16,353
|
|
|
15,119
|
|
|
Other, including assets under construction
|
|
|
2,213
|
|
|
2,054
|
|
|
|
|
|
25,686
|
|
|
24,084
|
|
|
Accumulated depreciation
|
|
|
(12,931)
|
|
|
(11,787)
|
|
|
|
|
|
$
|
12,755
|
|
|
$
|
12,297
|
|
Depreciation expense is recorded predominantly utilizing the straight-line method and was $1,506 million in 2019, $1,240 million in 2018 and $1,178 million in 2017.
NOTE 8: ACCRUED LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Accrued salaries, wages and employee benefits
|
$
|
2,407
|
|
|
$
|
2,074
|
|
|
Service and warranty accruals
|
734
|
|
|
754
|
|
|
Interest payable
|
608
|
|
|
637
|
|
|
Litigation and contract matters
|
502
|
|
|
461
|
|
|
Income taxes payable
|
928
|
|
|
460
|
|
|
Accrued property, sales and use taxes
|
320
|
|
|
277
|
|
|
Canadian government settlement - current portion
|
—
|
|
|
34
|
|
|
Accrued restructuring costs
|
208
|
|
|
249
|
|
|
Accrued workers compensation
|
157
|
|
|
142
|
|
|
Liabilities held for sale
|
—
|
|
|
40
|
|
|
Operating lease liabilities, current
|
544
|
|
|
—
|
|
|
Other
|
5,329
|
|
|
5,095
|
|
|
|
$
|
11,737
|
|
|
$
|
10,223
|
|
The increase in Income taxes payable is primarily related to income taxes associated with the Company’s portfolio separation transactions. Refer to Note 19 for discussion of leases.
NOTE 9: BORROWINGS AND LINES OF CREDIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Short-term borrowings:
|
|
|
|
|
Commercial paper
|
$
|
—
|
|
|
$
|
1,257
|
|
|
Other borrowings
|
2,364
|
|
|
212
|
|
|
Total short-term borrowings
|
$
|
2,364
|
|
|
$
|
1,469
|
|
At December 31, 2019, we had credit agreements with various banks permitting aggregate borrowings of up to $10.35 billion including a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement, both of which expire in August 2021; and a $2.0 billion revolving credit agreement and a $4.0 billion term credit agreement, both of which we entered into on March 15, 2019 and which will expire on March 15, 2021 or, if earlier, the date that is 180 days after the date on which each of the separations of Otis and Carrier have been consummated. As of December 31, 2019, there were borrowings of $2.10 billion under the $4.0 billion term credit agreement. The undrawn portions of the revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper.
As of December 31, 2019, our maximum commercial paper borrowing limit was $6.35 billion. We had no commercial paper borrowings as of December 31, 2019. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, pension contributions, debt refinancing, dividend payments and repurchases of our common stock. The need for commercial paper borrowings arises when the use of domestic cash for general corporate purposes exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.
At December 31, 2019, approximately $2.3 billion was available under short-term lines of credit with local banks at our various domestic and international subsidiaries. The weighted-average interest expense rates applicable to short-term borrowings and total debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Average interest expense rate - average outstanding borrowings during the year:
|
|
|
|
|
Short-term borrowings
|
1.9
|
%
|
|
1.5
|
%
|
|
Total debt
|
3.7
|
%
|
|
3.5
|
%
|
|
|
|
|
|
|
Average interest expense rate - outstanding borrowings as of December 31:
|
|
|
|
|
Short-term borrowings
|
3.1
|
%
|
|
1.2
|
%
|
|
Total debt
|
3.7
|
%
|
|
3.5
|
%
|
Long-term debt consisted of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Libor plus 0.350% floating rate notes due 2019 3
|
$
|
—
|
|
|
|
$
|
350
|
|
|
1.500% notes due 2019 1
|
—
|
|
|
650
|
|
|
1.950% notes due 2019 4
|
—
|
|
|
300
|
|
|
Euribor plus 0.15% floating rate notes due 2019 (€750 million principal value)2
|
—
|
|
|
858
|
|
|
5.250% notes due 2019 4
|
—
|
|
|
300
|
|
|
8.875% notes due 2019
|
—
|
|
|
271
|
|
|
4.875% notes due 2020 1
|
171
|
|
|
171
|
|
|
4.500% notes due 2020 1
|
1,250
|
|
|
1,250
|
|
|
1.900% notes due 2020 1
|
1,000
|
|
|
1,000
|
|
|
EURIBOR plus 0.20% floating rate notes due 2020 (€750 million principal value)2
|
831
|
|
|
858
|
|
|
8.750% notes due 2021
|
250
|
|
|
250
|
|
|
3.100% notes due 2021 4
|
250
|
|
|
250
|
|
|
3.350% notes due 2021 1
|
1,000
|
|
|
1,000
|
|
|
LIBOR plus 0.650% floating rate notes due 2021 1,3
|
750
|
|
|
750
|
|
|
1.950% notes due 2021 1
|
750
|
|
|
750
|
|
|
1.125% notes due 2021 (€950 million principal value)1
|
1,053
|
|
|
1,088
|
|
|
2.300% notes due 2022 1
|
500
|
|
|
500
|
|
|
2.800% notes due 2022 4
|
1,100
|
|
|
1,100
|
|
|
3.100% notes due 2022 1
|
2,300
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.250% notes due 2023 (€750 million principal value)1
|
831
|
|
|
858
|
|
|
3.650% notes due 2023 1
|
2,250
|
|
|
2,250
|
|
|
3.700% notes due 2023 4
|
400
|
|
|
400
|
|
|
2.800% notes due 2024 1
|
800
|
|
|
800
|
|
|
3.200% notes due 2024 4
|
950
|
|
|
950
|
|
|
1.150% notes due 2024 (€750 million principal value)1
|
831
|
|
|
858
|
|
|
3.950% notes due 2025 1
|
1,500
|
|
|
1,500
|
|
|
1.875% notes due 2026 (€500 million principal value)1
|
554
|
|
|
573
|
|
|
2.650% notes due 2026 1
|
1,150
|
|
|
1,150
|
|
|
3.125% notes due 2027 1
|
1,100
|
|
|
1,100
|
|
|
3.500% notes due 2027 4
|
1,300
|
|
|
1,300
|
|
|
7.100% notes due 2027
|
141
|
|
|
141
|
|
|
6.700% notes due 2028
|
400
|
|
|
400
|
|
|
4.125% notes due 2028 1
|
3,000
|
|
|
3,000
|
|
|
7.500% notes due 2029 1
|
550
|
|
|
550
|
|
|
2.150% notes due 2030 (€500 million principal value)1
|
554
|
|
|
573
|
|
|
5.400% notes due 2035 1
|
600
|
|
|
600
|
|
|
6.050% notes due 2036 1
|
600
|
|
|
600
|
|
|
6.800% notes due 2036 1
|
134
|
|
|
134
|
|
|
7.000% notes due 2038
|
159
|
|
|
159
|
|
|
6.125% notes due 2038 1
|
1,000
|
|
|
1,000
|
|
|
4.450% notes due 2038 1
|
750
|
|
|
750
|
|
|
5.700% notes due 2040 1
|
1,000
|
|
|
1,000
|
|
|
4.500% notes due 2042 1
|
3,500
|
|
|
3,500
|
|
|
4.800% notes due 2043 4
|
400
|
|
|
400
|
|
|
4.150% notes due 2045 1
|
850
|
|
|
850
|
|
|
3.750% notes due 2046 1
|
1,100
|
|
|
1,100
|
|
|
4.050% notes due 2047 1
|
600
|
|
|
600
|
|
|
4.350% notes due 2047 4
|
1,000
|
|
|
1,000
|
|
|
4.625% notes due 2048 1
|
1,750
|
|
|
1,750
|
|
|
Project financing obligations5
|
309
|
|
|
287
|
|
|
Other (including finance leases)
|
331
|
|
|
287
|
|
|
Total principal long-term debt
|
41,599
|
|
|
44,416
|
|
|
Other (fair market value adjustments, discounts and debt issuance costs)
|
(315)
|
|
|
(348)
|
|
|
Total long-term debt
|
41,284
|
|
|
44,068
|
|
|
Less: current portion
|
3,496
|
|
|
2,876
|
|
|
Long-term debt, net of current portion
|
$
|
37,788
|
|
|
$
|
41,192
|
|
1 We may redeem these notes at our option pursuant to their terms.
2 The three-month EURIBOR rate as of December 31, 2019 was approximately (0.383)%. The notes may be redeemed at our option in whole, but not in part, at any time in the event of certain developments affecting U.S. taxation.
3 The three-month LIBOR rate as of December 31, 2019 was approximately 1.908%.
4 Rockwell Collins debt which remained outstanding following the Merger.
5 The project financing obligations included in the table above are associated with the sale of rights to unbilled revenues related to the ongoing activity of an entity owned by Carrier.
We had no debt issuances during 2019 and the following issuances of debt in 2018:
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
Description of Notes
|
Aggregate Principal Balance
|
|
August 16, 2018:
|
3.350% notes due 20211
|
$
|
1,000
|
|
|
|
3.650% notes due 20231
|
2,250
|
|
|
|
3.950% notes due 20251
|
1,500
|
|
|
|
4.125% notes due 20281
|
3,000
|
|
|
|
4.450% notes due 20381
|
750
|
|
|
|
4.625% notes due 20482
|
1,750
|
|
|
|
LIBOR plus 0.65% floating rate notes due 20211
|
750
|
|
|
|
|
|
|
May 18, 2018:
|
1.150% notes due 20243
|
€
|
750
|
|
|
|
2.150% notes due 20303
|
500
|
|
|
|
EURIBOR plus 0.20% floating rate notes due 20203
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 The net proceeds received from these debt issuances were used to partially finance the cash consideration portion of the purchase price for Rockwell Collins and fees, expenses and other amounts related to the acquisition of Rockwell Collins.
2 The net proceeds from these debt issuances were used to fund the repayment of commercial paper and for other general corporate purposes.
3 The net proceeds received from these debt issuances were used for general corporate purposes.
We made the following repayments of debt in 2019 and 2018:
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Repayment Date
|
Description of Notes
|
Aggregate Principal Balance
|
|
November 15, 2019
|
8.875% notes
|
$
|
271
|
|
|
|
|
|
|
November 13, 2019
|
EURIBOR plus 0.15% floating rate notes
|
€
|
750
|
|
|
|
|
|
|
November 1, 2019:
|
LIBOR plus 0.350% floating rate notes
|
$
|
350
|
|
|
|
1.500% notes
|
$
|
650
|
|
|
|
|
|
|
July 15, 2019:
|
1.950% notes1
|
$
|
300
|
|
|
|
5.250% notes1
|
$
|
300
|
|
|
|
|
|
|
December 14, 2018
|
Variable-rate term loan due 2020 (1 month LIBOR plus 1.25%)1
|
$
|
482
|
|
|
|
|
|
|
May 4, 2018
|
1.778% junior subordinated notes
|
$
|
1,100
|
|
|
|
|
|
February 22, 2018
|
EURIBOR plus 0.80% floating rate notes
|
€
|
750
|
|
|
|
|
|
|
February 1, 2018
|
6.80% notes
|
$
|
99
|
|
|
|
|
|
|
|
|
|
1 These notes and term loan were assumed in connection with the Rockwell Collins acquisition and subsequently repaid.
The percentage of total short-term borrowings and long-term debt at variable interest rates was 9% and 10% at December 31, 2019 and 2018, respectively. Interest rates on our commercial paper borrowings are considered variable due to their short-term duration and high-frequency of turnover.
The average maturity of our long-term debt at December 31, 2019 is approximately 10 years. The schedule of principal payments required on long-term debt for the next five years and thereafter is:
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
2020
|
$
|
3,496
|
|
|
2021
|
4,142
|
|
|
2022
|
3,919
|
|
|
2023
|
3,501
|
|
|
2024
|
2,592
|
|
|
Thereafter
|
23,949
|
|
|
Total
|
$
|
41,599
|
|
On September 27, 2019 we filed a universal shelf registration statement with the SEC for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of debt to be issued under the shelf registration statement.
NOTE 10: ACCUMULATED OTHER COMPREHENSIVE INCOME
A summary of the changes in each component of Accumulated other comprehensive (loss) income, net of tax for the years ended December 31, 2019 and 2018 is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Foreign
Currency
Translation
|
|
Defined Benefit
Pension and
Postretirement
Plans
|
|
Unrealized Gains
(Losses) on
Available-for-
Sale Securities
|
|
Unrealized
Hedging
(Losses)
Gains
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Balance at December 31, 2017
|
|
$
|
(2,950)
|
|
|
$
|
(4,652)
|
|
|
$
|
5
|
|
|
$
|
72
|
|
|
$
|
(7,525)
|
|
|
Other comprehensive income before reclassifications, net
|
|
(486)
|
|
|
(1,736)
|
|
|
—
|
|
|
(307)
|
|
|
(2,529)
|
|
|
Amounts reclassified, pre-tax
|
|
(2)
|
|
|
344
|
|
|
—
|
|
|
(16)
|
|
|
326
|
|
|
Tax (expense) benefit
|
|
(4)
|
|
|
326
|
|
|
—
|
|
|
78
|
|
|
400
|
|
|
ASU 2016-01 adoption impact
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5)
|
|
|
$
|
—
|
|
|
$
|
(5)
|
|
|
Balance at December 31, 2018
|
|
$
|
(3,442)
|
|
|
$
|
(5,718)
|
|
|
$
|
—
|
|
|
$
|
(173)
|
|
|
$
|
(9,333)
|
|
|
Other comprehensive loss before reclassifications, net
|
|
280
|
|
|
(584)
|
|
|
—
|
|
|
(33)
|
|
|
(337)
|
|
|
Amounts reclassified, pre-tax
|
|
2
|
|
|
170
|
|
|
—
|
|
|
51
|
|
|
223
|
|
|
Tax (expense) benefit
|
|
(43)
|
|
|
97
|
|
|
—
|
|
|
(11)
|
|
|
43
|
|
|
ASU 2018-02 adoption impact
|
|
(8)
|
|
|
(737)
|
|
|
—
|
|
|
—
|
|
|
(745)
|
|
|
Balance at December 31, 2019
|
|
$
|
(3,211)
|
|
|
$
|
(6,772)
|
|
|
$
|
—
|
|
|
$
|
(166)
|
|
|
$
|
(10,149)
|
|
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). The new standard allows companies to reclassify to retained earnings the stranded tax effects in Accumulated other comprehensive income (AOCI) from the TCJA. We elected to reclassify the income tax effects of TCJA from AOCI of $745 million to retained earnings, effective January 1, 2019.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Upon adoption, investments that do not result in consolidation and are not accounted for under the equity method generally must be carried at fair value, with changes in fair value recognized in net income. We had approximately $5 million of unrealized gains on these securities recorded in Accumulated other comprehensive loss in our Consolidated Balance Sheet as of December 31, 2017. We adopted this standard effective January 1, 2018, with these amounts recorded directly to retained earnings as of that date.
Amounts reclassified that relate to our defined benefit pension and postretirement plans include the amortization of prior service costs and actuarial net losses recognized during each period presented. These costs are recorded as components of net periodic pension cost for each period presented. Additionally, during 2019, we recorded a curtailment gain of $98 million in the Consolidated Statement of Operations which is included within amounts reclassified related to our defined pension and postretirement plans (see Note 12 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 Consolidated Balance Sheet, between liabilities and equity, at the greater of redemption value or initial carrying value.
NOTE 11: INCOME TAXES
Income Before Income Taxes. The sources of income from continuing operations before income taxes are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
United States
|
$
|
3,207
|
|
|
$
|
3,630
|
|
|
$
|
2,990
|
|
|
Foreign
|
5,036
|
|
|
4,650
|
|
|
4,773
|
|
|
|
$
|
8,243
|
|
|
$
|
8,280
|
|
|
$
|
7,763
|
|
On December 22, 2017 Public Law 115-97 “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” was enacted. This law is commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA).
The Company no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. As such, in 2018 it recorded the international taxes associated with the future remittance of these earnings. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, UTC will continue to permanently reinvest these earnings. As of December 31, 2019, such undistributed earnings were approximately $21 billion, excluding other comprehensive income amounts. It is not practicable to estimate the amount of tax that might be payable on the remaining amounts.
Provision for Income Taxes. The income tax expense (benefit) for the years ended December 31, 2019, 2018 and 2017 consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
Federal
|
$
|
188
|
|
|
$
|
442
|
|
|
$
|
1,577
|
|
|
State
|
48
|
|
|
211
|
|
|
64
|
|
|
Foreign
|
2,024
|
|
|
1,238
|
|
|
1,140
|
|
|
|
2,260
|
|
|
1,891
|
|
|
2,781
|
|
|
Future:
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
Federal
|
111
|
|
|
57
|
|
|
(27)
|
|
|
State
|
52
|
|
|
62
|
|
|
84
|
|
|
Foreign
|
(128)
|
|
|
616
|
|
|
5
|
|
|
|
35
|
|
|
735
|
|
|
62
|
|
|
Income tax expense
|
$
|
2,295
|
|
|
$
|
2,626
|
|
|
$
|
2,843
|
|
|
Attributable to items credited (charged) to equity
|
$
|
40
|
|
|
$
|
501
|
|
|
$
|
(128)
|
|
Reconciliation of Effective Income Tax Rate. Differences between effective income tax rates and the statutory U.S. federal income tax rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Statutory U.S. federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
|
Tax related separation activities
|
8.8
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Tax on international activities
|
1.9
|
%
|
|
0.9
|
%
|
|
(6.4)
|
%
|
|
Tax audit settlements
|
(3.5)
|
%
|
|
—
|
%
|
|
(0.7)
|
%
|
|
U.S. tax reform
|
—
|
%
|
|
9.0
|
%
|
|
8.9
|
%
|
|
Other
|
(0.4)
|
%
|
|
0.8
|
%
|
|
(0.2)
|
%
|
|
Effective income tax rate
|
27.8
|
%
|
|
31.7
|
%
|
|
36.6
|
%
|
The 2019 effective tax rate includes $729 million of income taxes associated with the Company’s portfolio separation transactions, offset in part by amounts associated with the conclusion of the audit by the Examination Division of the Internal Revenue Service for the UTC 2014, 2015 and 2016 tax years, the filing by a subsidiary of the Company to participate in an amnesty program offered by the Italian Tax Authority.
The 2019 increase in the cost of U.S. and foreign tax on international activities is primarily attributable to the full phase-in of the TCJA provisions on the Company’s international subsidiaries. The increase in the benefit of other activities is primarily related to additional research and development credits and equity compensation deductions.
The 2018 effective tax rate reflects a net tax charge of $744 million for TCJA related adjustments. The amount is primarily associated with non-U.S. taxes that will become due when previously reinvested earnings of certain international subsidiaries are remitted. The 2018 and 2019 effective tax rate reconciliation reflects the corporate rate reduction enacted by the TCJA. The decrease in international activities is primarily related to higher international tax costs compared to the U.S. federal statutory rate.
The 2017 effective tax rate reflects a net tax charge of $690 million attributable to the passage of the TCJA. These 2017 provisional amounts, recorded as described in SAB 118, relate to U.S. income tax attributable to previously undistributed earnings of UTC’s international subsidiaries and equity investments, net of foreign tax credits, and the revaluation of U.S. deferred income taxes.
Deferred Tax Assets and Liabilities. Future income taxes represent the tax effects of transactions which are reported in different periods for tax and financial reporting purposes. These amounts consist of the tax effects of temporary differences between the tax and financial reporting balance sheets and tax carryforwards. Future income tax benefits and payables within the same tax paying component of a particular jurisdiction are offset for presentation in the Consolidated Balance Sheet.
The tax effects of temporary differences and tax carryforwards which gave rise to future income tax benefits and payables at December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Future income tax benefits:
|
|
|
|
|
Insurance and employee benefits
|
$
|
1,205
|
|
|
$
|
1,154
|
|
|
Other asset basis differences
|
829
|
|
|
1,013
|
|
|
Other liability basis differences
|
2,153
|
|
|
1,482
|
|
|
Tax loss carryforwards
|
622
|
|
|
583
|
|
|
Tax credit carryforwards
|
1,021
|
|
|
1,050
|
|
|
Valuation allowances
|
(616)
|
|
|
(605)
|
|
|
|
$
|
5,214
|
|
|
$
|
4,677
|
|
|
Future income taxes payable:
|
|
|
|
|
Intangible assets
|
$
|
4,293
|
|
|
$
|
4,462
|
|
|
Other asset basis differences
|
2,904
|
|
|
2,159
|
|
|
Other items, net
|
143
|
|
|
123
|
|
|
|
$
|
7,340
|
|
|
$
|
6,744
|
|
Valuation allowances have been established primarily for tax credit carryforwards, tax loss carryforwards, and certain foreign temporary differences to reduce the future income tax benefits to expected realizable amounts.
Tax Credit and Loss Carryforwards. At December 31, 2019, tax credit carryforwards, principally state and foreign, and tax loss carryforwards, principally state and foreign, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Tax Credit
Carryforwards
|
|
Tax Loss
Carryforwards
|
|
Expiration period:
|
|
|
|
|
2020-2024
|
$
|
59
|
|
|
$
|
393
|
|
|
2025-2029
|
27
|
|
|
179
|
|
|
2030-2039
|
336
|
|
|
394
|
|
|
Indefinite
|
599
|
|
|
2,218
|
|
|
Total
|
$
|
1,021
|
|
|
$
|
3,184
|
|
Unrecognized Tax Benefits. At December 31, 2019, we had gross tax-effected unrecognized tax benefits of $1,347 million, of which $1,338 million, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amounts
of unrecognized tax benefits and interest expense related to unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Balance at January 1
|
$
|
1,619
|
|
|
$
|
1,189
|
|
|
$
|
1,086
|
|
|
Additions for tax positions related to the current year
|
131
|
|
|
192
|
|
|
192
|
|
|
Additions for tax positions of prior years
|
73
|
|
|
344
|
|
|
73
|
|
|
Reductions for tax positions of prior years
|
(101)
|
|
|
(91)
|
|
|
(91)
|
|
|
Settlements
|
(375)
|
|
|
(15)
|
|
|
(71)
|
|
|
Balance at December 31
|
$
|
1,347
|
|
|
$
|
1,619
|
|
|
$
|
1,189
|
|
|
Gross interest expense related to unrecognized tax benefits
|
$
|
57
|
|
|
$
|
37
|
|
|
$
|
34
|
|
|
Total accrued interest balance at December 31
|
$
|
249
|
|
|
$
|
255
|
|
|
$
|
215
|
|
The 2018 amounts above include amounts related to the acquisition of Rockwell Collins.
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, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, Poland, Singapore, South Korea, Spain, Switzerland, 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 2009.
During 2019, the Company recognized a net gain of approximately $307 million, including pre-tax interest of approximately $56 million as a result of the conclusion of the IRS audit of the Company’s 2014, 2015 and 2016 tax years as well as an amnesty filing in Italy made to resolve certain tax litigation. The Company also recognized a non-cash gain of approximately $40 million, primarily tax, as a result of the closure of an IRS audit of the 2014 tax year of a subsidiary acquired as part of UTC’s acquisition of Rockwell Collins. This gain was partially offset by the unfavorable pre-tax impact of a reversal of a related indemnity asset of approximately $23 million. Finally, the Company recognized net non-cash gains of approximately $18 million, including pre-tax interest of approximately $5 million, as a result of various federal, state and non-US statute of limitations expirations and settlements with tax authorities.
During 2017, the Company recognized a noncash gain of approximately $64 million, including a pre-tax interest adjustment of $9 million, as a result of federal, state and non-U.S. tax year closures related to audit resolutions and the expiration of applicable statutes of limitation, including expiration of the U.S. federal income tax statute of limitations for UTC’s 2013 tax year.
The Examination Division of the Internal Revenue Service (IRS) is currently auditing Rockwell Collins fiscal tax years 2016 and 2017, prior to its acquisition by UTC, which will continue into 2020. Separately, the Examination Division of the IRS has notified the Company of its intention to commence an audit of UTC tax years 2017 and 2018 during the first half of 2020.
It is reasonably possible that a net reduction within the range of $50 million to $650 million of unrecognized tax benefits may occur over the next 12 months as a result of the contemplated separation of Carrier and Otis, 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.
See Note 18 "Contingent Liabilities" for discussion regarding uncertain tax positions, included in the above range, related to pending litigation with respect to certain deductions claimed in Germany.
NOTE 12: EMPLOYEE BENEFIT PLANS
We sponsor numerous domestic and foreign employee benefit plans, which are discussed below.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires an employer to report the service cost component of net periodic pension benefit cost in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period, with other cost components presented separately from the service cost component and outside of income from operations. This ASU also allows only the service cost component of net periodic pension benefit cost to be eligible for capitalization when applicable. This ASU was effective for years beginning after December 15, 2017. The Company adopted this standard on January 1, 2018 applying the presentation requirements retrospectively. We elected to apply the practical expedient, which allows us to reclassify amounts disclosed previously in the employee benefit plans note as the basis for applying retrospective presentation for comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. Provisions related to presentation of the service cost component eligibility for capitalization were applied prospectively.
The effect of the retrospective presentation change related to the net periodic benefit cost of our defined benefit pension and postretirement plans on our Consolidated Statement of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
(dollars in millions)
|
Previously Reported
|
|
Effect of Change Higher/(Lower)
|
|
As Revised
|
|
Cost of product sold
|
$
|
31,027
|
|
|
$
|
197
|
|
|
$
|
31,224
|
|
|
Cost of services sold
|
12,926
|
|
|
51
|
|
|
12,977
|
|
|
Research and development
|
2,387
|
|
|
40
|
|
|
2,427
|
|
|
Selling, general and administrative
|
6,183
|
|
|
246
|
|
|
6,429
|
|
|
|
|
|
|
|
|
|
Non-service pension (benefit)
|
—
|
|
|
(534)
|
|
|
(534)
|
|
Employee Savings Plans. We sponsor various employee savings plans. Our contributions to employer sponsored defined contribution plans were $549 million, $403 million and $351 million for 2019, 2018 and 2017, respectively.
Our non-union domestic employee savings plan uses an Employee Stock Ownership Plan (ESOP) for employer matching contributions. External borrowings were used by the ESOP to fund a portion of its purchase of ESOP stock from us. The external borrowings have been extinguished and only re-amortized loans remain between UTC and the ESOP Trust. As ESOP debt service payments are made, common stock is released from an unreleased shares account. ESOP debt may be prepaid or re-amortized to either increase or decrease the number of shares released so that the value of released shares equals the value of plan benefit. We may also, at our option, contribute additional common stock or cash to the ESOP.
Shares of common stock are allocated to employees' ESOP accounts at fair value on the date earned. Cash dividends on common stock held by the ESOP are used for debt service payments. Participants may choose to have their ESOP dividends reinvested or distributed in cash. Common stock allocated to ESOP participants is included in the average number of common shares outstanding for both basic and diluted earnings per share. At December 31, 2019, 23.4 million common shares had been allocated to employees, leaving 7.9 million unallocated common shares in the ESOP Trust, with an approximate fair value of $1.2 billion.
Pension Plans. We sponsor both funded and unfunded domestic and foreign defined benefit pension plans that cover a large number of our employees. Our largest plans are generally closed to new participants. Our plans use a December 31 measurement date consistent with our fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Change in Benefit Obligation:
|
|
|
|
|
Beginning balance
|
$
|
37,795
|
|
|
$
|
36,999
|
|
|
Service cost
|
359
|
|
|
372
|
|
|
Interest cost
|
1,340
|
|
|
1,117
|
|
|
Actuarial loss (gain)
|
4,651
|
|
|
(2,048)
|
|
|
Total benefits paid
|
(2,174)
|
|
|
(1,932)
|
|
|
Net settlement, curtailment and special termination benefits
|
(267)
|
|
|
(38)
|
|
|
Plan amendments
|
6
|
|
|
65
|
|
|
Business combinations
|
(6)
|
|
|
3,694
|
|
|
Other
|
127
|
|
|
(434)
|
|
|
Ending balance
|
$
|
41,831
|
|
|
$
|
37,795
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
Beginning balance
|
$
|
35,253
|
|
|
$
|
35,689
|
|
|
Actual return on plan assets
|
6,311
|
|
|
(1,667)
|
|
|
Employer contributions
|
207
|
|
|
238
|
|
|
Benefits paid
|
(2,174)
|
|
|
(1,932)
|
|
|
Settlements
|
(54)
|
|
|
(38)
|
|
|
Business combinations
|
(10)
|
|
|
3,355
|
|
|
Other
|
156
|
|
|
(392)
|
|
|
Ending balance
|
$
|
39,689
|
|
|
$
|
35,253
|
|
|
|
|
|
|
|
Funded Status:
|
|
|
|
|
Fair value of plan assets
|
$
|
39,689
|
|
|
$
|
35,253
|
|
|
Benefit obligations
|
(41,831)
|
|
|
(37,795)
|
|
|
Funded status of plan
|
$
|
(2,142)
|
|
|
$
|
(2,542)
|
|
|
|
|
|
|
|
Amounts Recognized in the Consolidated Balance Sheet Consist of:
|
|
|
|
|
Noncurrent assets
|
$
|
617
|
|
|
$
|
686
|
|
|
Current liability
|
(88)
|
|
|
(88)
|
|
|
Noncurrent liability
|
(2,671)
|
|
|
(3,140)
|
|
|
Net amount recognized
|
$
|
(2,142)
|
|
|
$
|
(2,542)
|
|
|
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Loss Consist of:
|
|
|
|
|
Net actuarial loss
|
$
|
8,910
|
|
|
$
|
8,606
|
|
|
Prior service cost
|
203
|
|
|
139
|
|
|
Net amount recognized
|
$
|
9,113
|
|
|
$
|
8,745
|
|
In September 2019, we amended our domestic pension plans to cease accrual of additional benefits for future service and compensation for non-union participants effective December 31, 2019. Beginning January 1, 2020, these participants will earn additional contributions under our domestic savings plan. We utilized the practical expedient and remeasured plan assets and pension benefit obligations for the affected pension plans as of the nearest month-end, August 31, 2019, resulting in a net actuarial loss of $425 million. This reflects a benefit obligation gain of $180 million resulting from the benefit plan change that was offset by remeasurement losses of $605 million. The remeasurement losses are driven by a reduction of 124 basis points in the projected benefit obligation (PBO) discount rate as of the remeasurement date compared to December 31, 2018, partially offset by actual asset returns of approximately 17% as of the remeasurement date.
In September 2019, we recorded a curtailment gain of $98 million in the Consolidated Statement of Operations, due to the recognition of previously unrecognized prior service credits for the affected pension plans. Additionally, as a result of the remeasurement, pension income (excluding curtailment) decreased by approximately $39 million for the year ended December 31, 2019.
The amounts included in "Other" in the above table primarily reflect the impact of foreign exchange translation, primarily for plans in the U.K. and Canada.
As part of the Rockwell acquisition on November 26, 2018, we assumed approximately $3.7 billion of pension projected benefit obligations and $3.4 billion of plan assets.
Qualified domestic pension plan benefits comprise approximately 75% of the projected benefit obligation. Benefits for union employees are generally based on a stated amount for each year of service. For non-union employees, benefits for service up to December 31, 2014 are generally based on an employee's years of service and compensation through December 31, 2014. Benefits for service after December 31, 2014 through December 31, 2019 are based on the existing cash balance formula that was adopted in 2003 for newly hired non-union employees and for other non-union employees who made a one-time voluntary election to have future benefit accruals determined under this formula. Certain foreign plans, which comprise approximately 24% of the projected benefit obligation, are considered defined benefit plans for accounting purposes. Nonqualified domestic pension plans provide supplementary retirement benefits to certain employees and are not a material component of the projected benefit obligation.
We made $25 million of cash contributions to our domestic defined benefit pension plans and made $93 million of cash contributions to our foreign defined benefit pension plans in 2019. In 2018, we made no cash contributions to our domestic defined benefit pension plans and made $147 million of cash contributions to our foreign defined benefit pension plans.
Information for pension plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Projected benefit obligation
|
$
|
39,267
|
|
|
$
|
25,884
|
|
|
Accumulated benefit obligation
|
38,816
|
|
|
25,455
|
|
|
Fair value of plan assets
|
36,530
|
|
|
22,803
|
|
Information for pension plans with projected benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Projected benefit obligation
|
$
|
39,680
|
|
|
$
|
28,591
|
|
|
Accumulated benefit obligation
|
39,178
|
|
|
27,968
|
|
|
Fair value of plan assets
|
36,921
|
|
|
25,362
|
|
The accumulated benefit obligation for all defined benefit pension plans was $41.3 billion and $37.0 billion at December 31, 2019 and 2018, respectively.
The components of the net periodic pension benefit are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Pension Benefits:
|
|
|
|
|
|
|
Service cost
|
$
|
359
|
|
|
$
|
372
|
|
|
$
|
374
|
|
|
Interest cost
|
1,340
|
|
|
1,117
|
|
|
1,120
|
|
|
Expected return on plan assets
|
(2,430)
|
|
|
(2,255)
|
|
|
(2,215)
|
|
|
Amortization of prior service cost (credit)
|
17
|
|
|
(41)
|
|
|
(36)
|
|
|
|
|
|
|
|
|
|
Recognized actuarial net loss
|
265
|
|
|
401
|
|
|
575
|
|
|
Net settlement, curtailment and special termination benefits (gain) loss
|
(54)
|
|
|
1
|
|
|
3
|
|
|
Net periodic pension benefit - employer
|
$
|
(503)
|
|
|
$
|
(405)
|
|
|
$
|
(179)
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive loss in 2019 are as follows:
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Current year actuarial loss
|
$
|
553
|
|
|
Amortization of actuarial loss
|
(265)
|
|
|
Current year prior service cost
|
6
|
|
|
Amortization of prior service cost
|
(17)
|
|
|
Net settlement and curtailment
|
57
|
|
|
Other
|
34
|
|
|
Total recognized in other comprehensive loss
|
$
|
368
|
|
|
Net recognized in net periodic pension benefit and other comprehensive loss
|
$
|
(135)
|
|
The amount included in "Other" in the above table primarily reflects the impact of foreign exchange translation, primarily for plans in the U.K. and Canada.
The estimated amount that will be amortized from accumulated other comprehensive loss into net periodic pension (benefit) cost in 2020 is as follows:
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Net actuarial loss
|
$
|
371
|
|
|
Prior service cost
|
51
|
|
|
|
$
|
422
|
|
Major assumptions used in determining the benefit obligation and net cost for pension plans are presented in the following table as weighted-averages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligation
|
|
|
|
Net Cost
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2017
|
|
Discount rate
|
|
|
|
|
|
|
|
|
|
|
|
PBO
|
|
3.0
|
%
|
|
4.0
|
%
|
|
3.9
|
%
|
|
3.4
|
%
|
|
3.8
|
%
|
|
Interest cost1
|
|
—
|
|
|
—
|
|
|
3.6
|
%
|
|
3.0
|
%
|
|
3.3
|
%
|
|
Service cost1
|
|
—
|
|
|
—
|
|
|
3.6
|
%
|
|
3.3
|
%
|
|
3.6
|
%
|
|
Salary scale
|
|
4.2
|
%
|
|
4.2
|
%
|
|
4.2
|
%
|
|
4.2
|
%
|
|
4.1
|
%
|
|
Expected return on plan assets
|
|
—
|
|
|
—
|
|
|
6.7
|
%
|
|
6.8
|
%
|
|
7.3
|
%
|
Note 1 The discount rates used to measure the service cost and interest cost applies to our significant plans. The PBO discount rate is used for the service cost and interest cost measurements for non-significant plans.
In determining the expected return on plan assets, we consider the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes, and economic and other indicators of future performance. In addition, we may consult with and consider the opinions of financial and other professionals in developing appropriate capital market assumptions. Return projections are also validated using a simulation model that incorporates yield curves, credit spreads and risk premiums to project long-term prospective returns.
The plans' investment management objectives include providing the liquidity and asset levels needed to meet current and future benefit payments, while maintaining a prudent degree of portfolio diversification considering interest rate risk and market volatility. Globally, investment strategies target a mix of 45% to 50% of growth seeking assets and 50% to 55% of income generating and hedging assets using a wide set of diversified asset types, fund strategies and investment managers. The growth seeking allocation consists of global public equities in developed and emerging countries, private equity, real estate and multi-asset class strategies. Growth assets include an enhanced alpha strategy that invests in publicly traded equity and fixed income securities, derivatives and foreign currency. Investments in private equity are primarily via limited partnership interests in buy-out strategies with smaller allocations to distressed debt funds. The real estate strategy is principally concentrated in directly held U.S. core investments with some smaller investments in international, value-added and opportunistic strategies. Within the income generating assets, the fixed income portfolio consists of mainly government and broadly diversified high quality corporate bonds.
The plans have continued their pension risk management techniques designed to reduce their interest rate risk. Specifically, the plans have incorporated liability hedging programs that include the adoption of a risk reduction objective as part of the long-term investment strategy. Under this objective the interest rate hedge is intended to increase as funded status improves. The hedging programs incorporate a range of assets and investment tools, each with varying interest rate sensitivities. As result of the improved funded status of the plans due to favorable asset returns and funding of the plans, the interest rate hedge increased significantly during 2017. The investment portfolios are currently hedging approximately 65% to 70% of the interest rate sensitivity of the pension plan liabilities.
As a result of the shift in the target asset mix to higher income generating and hedging assets and lower growth seeking assets, combined with reduced capital market assumptions for most asset classes, we will reduce the expected return on plan assets assumption for 2020 including the assumption of a 6.5% return on plan assets for our qualified domestic pension plans, down from 7.0% in 2019.
The fair values of pension plan assets at December 31, 2019 and 2018 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Quoted Prices in
Active Markets
For Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Not Subject to Leveling
|
|
Total
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
Public Equities
|
|
|
|
|
|
|
|
|
|
|
Global Equities
|
$
|
3,588
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,593
|
|
|
Global Equity Commingled Funds1
|
—
|
|
|
1,734
|
|
|
—
|
|
|
—
|
|
|
1,734
|
|
|
Enhanced Global Equities 2
|
322
|
|
|
393
|
|
|
—
|
|
|
—
|
|
|
715
|
|
|
Global Equity Funds at net asset value8
|
—
|
|
|
—
|
|
|
—
|
|
|
6,318
|
|
|
6,318
|
|
|
Private Equities 3,8
|
—
|
|
|
—
|
|
|
202
|
|
|
1,230
|
|
|
1,432
|
|
|
Fixed Income Securities
|
|
|
|
|
|
|
|
|
|
|
Governments
|
969
|
|
|
116
|
|
|
—
|
|
|
—
|
|
|
1,085
|
|
|
Corporate Bonds
|
1
|
|
|
13,059
|
|
|
5
|
|
|
—
|
|
|
13,065
|
|
|
Structured Products
|
—
|
|
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
Fixed Income Securities8
|
—
|
|
|
—
|
|
|
—
|
|
|
6,262
|
|
|
6,262
|
|
|
Real Estate 4,8
|
—
|
|
|
13
|
|
|
1,464
|
|
|
372
|
|
|
1,849
|
|
|
Other 5,8
|
—
|
|
|
343
|
|
|
—
|
|
|
2,834
|
|
|
3,177
|
|
|
Cash & Cash Equivalents 6,8
|
—
|
|
|
47
|
|
|
—
|
|
|
76
|
|
|
123
|
|
|
Subtotal
|
$
|
4,880
|
|
|
$
|
15,727
|
|
|
$
|
1,671
|
|
|
$
|
17,092
|
|
|
39,370
|
|
|
Other Assets & Liabilities7
|
|
|
|
|
|
|
|
|
319
|
|
|
Total at December 31, 2019
|
|
|
|
|
|
|
|
|
$
|
39,689
|
|
|
Public Equities
|
|
|
|
|
|
|
|
|
|
|
Global Equities
|
$
|
2,917
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,921
|
|
|
Global Equity Commingled Funds1
|
185
|
|
|
426
|
|
|
—
|
|
|
—
|
|
|
611
|
|
|
Enhanced Global Equities 2
|
79
|
|
|
605
|
|
|
—
|
|
|
—
|
|
|
684
|
|
|
Global Equity Funds at net asset value 8
|
—
|
|
|
—
|
|
|
—
|
|
|
7,386
|
|
|
7,386
|
|
|
Private Equities 3,8
|
—
|
|
|
—
|
|
|
133
|
|
|
1,194
|
|
|
1,327
|
|
|
Fixed Income Securities
|
|
|
|
|
|
|
|
|
|
|
|
Governments
|
1,789
|
|
|
162
|
|
|
—
|
|
|
—
|
|
|
1,951
|
|
|
Corporate Bonds
|
—
|
|
|
11,527
|
|
|
18
|
|
|
29
|
|
|
11,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income Securities8
|
—
|
|
|
—
|
|
|
—
|
|
|
3,599
|
|
|
3,599
|
|
|
Real Estate 4,8
|
—
|
|
|
13
|
|
|
1,387
|
|
|
429
|
|
|
1,829
|
|
|
Other 5,8
|
—
|
|
|
262
|
|
|
—
|
|
|
2,368
|
|
|
2,630
|
|
|
Cash & Cash Equivalents 6,8
|
—
|
|
|
220
|
|
|
—
|
|
|
138
|
|
|
358
|
|
|
Subtotal
|
$
|
4,970
|
|
|
$
|
13,219
|
|
|
$
|
1,538
|
|
|
$
|
15,143
|
|
|
34,870
|
|
|
Other Assets & Liabilities7
|
|
|
|
|
|
|
|
|
383
|
|
|
Total at December 31, 2018
|
|
|
|
|
|
|
|
|
$
|
35,253
|
|
Note 1 Represents commingled funds that invest primarily in common stocks.
Note 2 Represents enhanced equity separate account and commingled fund portfolios. A portion of the portfolio may include long-short market neutral and relative value strategies that invest in publicly traded, equity and fixed income securities, as well as derivatives of equity and fixed income securities and foreign currency.
Note 3 Represents limited partner investments with general partners that primarily invest in debt and equity.
Note 4 Represents investments in real estate including commingled funds and directly held properties.
Note 5 Represents insurance contracts and global balanced risk commingled funds consisting mainly of equity, bonds and some commodities.
Note 6 Represents short-term commercial paper, bonds and other cash or cash-like instruments.
Note 7 Represents trust receivables and payables that are not leveled.
Note 8 In accordance with ASU 2015-07, Fair Value Measurement (Topic 820), certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total pension benefits plan assets.
Derivatives in the plan are primarily used to manage risk and gain asset class exposure while still maintaining liquidity. Derivative instruments mainly consist of equity futures, interest rate futures, interest rate swaps and currency forward contracts.
Our common stock represents less than 1% of total plan assets at December 31, 2019 and 2018. We review our assets at least quarterly to ensure we are within the targeted asset allocation ranges and, if necessary, asset balances are adjusted back within target allocations. We employ a broadly diversified investment manager structure that includes diversification by active and passive management, style, capitalization, country, sector, industry and number of investment managers.
The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Private
Equities
|
|
Corporate
Bonds
|
|
Real
Estate
|
|
Total
|
|
Balance, December 31, 2017
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
1,446
|
|
|
$
|
1,492
|
|
|
Plan assets acquired
|
|
|
—
|
|
|
33
|
|
|
—
|
|
|
33
|
|
|
Realized (losses) gains
|
|
|
—
|
|
|
(1)
|
|
|
10
|
|
|
9
|
|
|
Unrealized gains relating to instruments still held in the reporting period
|
|
|
—
|
|
|
2
|
|
|
38
|
|
|
40
|
|
|
Purchases, sales, and settlements, net
|
|
|
87
|
|
|
(16)
|
|
|
(107)
|
|
|
(36)
|
|
|
Balance, December 31, 2018
|
|
|
133
|
|
|
18
|
|
|
1,387
|
|
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
(2)
|
|
|
Unrealized gains relating to instruments still held in the reporting period
|
|
|
32
|
|
|
—
|
|
|
27
|
|
|
59
|
|
|
Purchases, sales, and settlements, net
|
|
|
37
|
|
|
(13)
|
|
|
52
|
|
|
76
|
|
|
Balance, December 31, 2019
|
|
|
$
|
202
|
|
|
$
|
5
|
|
|
$
|
1,464
|
|
|
$
|
1,671
|
|
Quoted market prices are used to value investments when available. Investments in securities traded on exchanges, including listed futures and options, are valued at the last reported sale prices on the last business day of the year or, if not available, the last reported bid prices. Fixed income securities are primarily measured using a market approach pricing methodology, where observable prices are obtained by market transactions involving identical or comparable securities of issuers with similar credit ratings. Mortgages have been valued on the basis of their future principal and interest payments discounted at prevailing interest rates for similar investments. Investment contracts are valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations. Real estate investments are valued on a quarterly basis using discounted cash flow models which consider long-term lease estimates, future rental receipts and estimated residual values. Valuation estimates are supplemented by third-party appraisals on an annual basis.
Private equity limited partnerships are valued quarterly using discounted cash flows, earnings multiples and market multiples. Valuation adjustments reflect changes in operating results, financial condition, or prospects of the applicable portfolio company. Over-the-counter securities and government obligations are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes. Temporary cash investments are stated at cost, which approximates fair value.
As a result of the $1.9 billion contribution in 2017, we are not required to make additional contributions to our domestic defined benefit pension plans through the end of 2025. We expect to make total contributions of approximately $125 million to our global defined benefit pension plans in 2020. Contributions do not reflect benefits to be paid directly from corporate assets.
Benefit payments, including amounts to be paid from corporate assets, and reflecting expected future service, as appropriate, are expected to be paid as follows: $2,428 million in 2020, $2,230 million in 2021, $2,263 million in 2022, $2,289 million in 2023, $2,303 million in 2024, and $11,597 million from 2025 through 2029.
Postretirement Benefit Plans. We sponsor a number of postretirement benefit plans that provide health and life benefits to eligible retirees. Such benefits are provided primarily from domestic plans, which comprise approximately 84% of the benefit obligation. The postretirement plans are primarily unfunded. The assets we hold are invested in approximately 50% growth seeking assets and 50% income generating assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Change in Benefit Obligation:
|
|
|
|
|
Beginning balance
|
$
|
810
|
|
|
$
|
767
|
|
|
Service cost
|
2
|
|
|
2
|
|
|
Interest cost
|
31
|
|
|
26
|
|
|
Actuarial gain
|
(11)
|
|
|
(52)
|
|
|
Total benefits paid
|
(69)
|
|
|
(70)
|
|
|
Business combinations
|
—
|
|
|
186
|
|
|
Plan amendments
|
—
|
|
|
(43)
|
|
|
Other
|
2
|
|
|
(6)
|
|
|
Ending balance
|
$
|
765
|
|
|
$
|
810
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
Beginning balance
|
$
|
20
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Employer contributions
|
69
|
|
|
69
|
|
|
Benefits paid
|
(69)
|
|
|
(70)
|
|
|
Business combinations
|
—
|
|
|
20
|
|
|
Other
|
—
|
|
|
1
|
|
|
Ending balance
|
$
|
20
|
|
|
$
|
20
|
|
|
|
|
|
|
|
Funded Status:
|
|
|
|
|
Fair value of plan assets
|
$
|
20
|
|
|
$
|
20
|
|
|
Benefit obligations
|
(765)
|
|
|
(810)
|
|
|
Funded status of plan
|
$
|
(745)
|
|
|
$
|
(790)
|
|
|
|
|
|
|
|
Amounts Recognized in the Consolidated Balance Sheet Consist of:
|
|
|
|
|
Current liability
|
$
|
(47)
|
|
|
$
|
(61)
|
|
|
Noncurrent liability
|
(698)
|
|
|
(729)
|
|
|
Net amount recognized
|
$
|
(745)
|
|
|
$
|
(790)
|
|
|
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Loss Consist of:
|
|
|
|
|
Net actuarial gain
|
$
|
(181)
|
|
|
$
|
(184)
|
|
|
Prior service credit
|
(4)
|
|
|
(47)
|
|
|
Net amount recognized
|
$
|
(185)
|
|
|
$
|
(231)
|
|
As part of our acquisition of Rockwell on November 26, 2018, we assumed approximately $186 million of postretirement benefit obligations and $20 million of plan assets.
We modified the postretirement medical benefits provided to legacy Rockwell salaried employees by eliminating any company subsidy from retirements that occur after December 31, 2019. This resulted in a $43 million reduction in the benefit obligation as of November 26, 2018.
The components of net periodic benefit cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Other Postretirement Benefits:
|
|
|
|
|
|
|
Service cost
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
Interest cost
|
31
|
|
|
26
|
|
|
29
|
|
|
Expected return on plan assets
|
(1)
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service credit
|
(42)
|
|
|
(6)
|
|
|
(1)
|
|
|
Recognized actuarial net gain
|
(12)
|
|
|
(10)
|
|
|
(9)
|
|
|
|
|
|
|
|
|
|
Net periodic other postretirement (benefit) cost
|
$
|
(22)
|
|
|
$
|
12
|
|
|
$
|
21
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive loss in 2019 are as follows:
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Current year actuarial gain
|
$
|
(10)
|
|
|
|
|
|
Amortization of prior service credit
|
42
|
|
|
Amortization of actuarial net gain
|
12
|
|
|
Other
|
2
|
|
|
Total recognized in other comprehensive loss
|
$
|
46
|
|
|
Net recognized in net periodic other postretirement benefit cost and other comprehensive loss
|
$
|
24
|
|
The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2020 include actuarial net gains of $13 million and prior service credits of $3 million.
Major assumptions used in determining the benefit obligation and net cost for postretirement plans are presented in the following table as weighted-averages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligation
|
|
|
|
Net Cost
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2017
|
|
Discount rate
|
3.0
|
%
|
|
4.1
|
%
|
|
4.0
|
%
|
|
3.4
|
%
|
|
3.8
|
%
|
|
Expected return on assets
|
—
|
|
|
—
|
|
|
7.0
|
%
|
|
7.0
|
%
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed health care cost trend rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Health care cost trend rate assumed for next year
|
6.5
|
%
|
|
7.0
|
%
|
|
Rate that the cost trend rate gradually declines to
|
5.0
|
%
|
|
5.0
|
%
|
|
Year that the rate reaches the rate it is assumed to remain at
|
2026
|
|
2026
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 One-Percentage-Point
|
|
|
|
(dollars in millions)
|
Increase
|
|
Decrease
|
|
Effect on total service and interest cost
|
$
|
1
|
|
|
$
|
(1)
|
|
|
Effect on postretirement benefit obligation
|
25
|
|
|
(22)
|
|
Benefit payments, including net amounts to be paid from corporate assets and reflecting expected future service, as appropriate, are expected to be paid as follows: $67 million in 2020, $64 million in 2021, $60 million in 2022, $56 million in 2023, $53 million in 2024, and $210 million from 2025 through 2029.
Multiemployer Benefit Plans. We contribute to various domestic and foreign multiemployer defined benefit pension plans. The risks of participating in these multiemployer plans are different from single-employer plans in that assets contributed are pooled and may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. Lastly, if we choose to stop participating in some of our multiemployer plans, we may be required to pay those plans a withdrawal liability based on the underfunded status of the plan.
Our participation in these plans for the annual periods ended December 31 is outlined in the table below. Unless otherwise noted, the most recent Pension Protection Act (PPA) zone status available in 2019 and 2018 is for the plan's year-end at June 30, 2018, and June 30, 2017, respectively. The zone status is based on information that we received from the plan and is certified by the plan's actuary. Our significant plan is in the green zone which represents a plan that is at least 80% funded and does not require a financial improvement plan (FIP) or a rehabilitation plan (RP). An extended amortization provision of ten years is utilized to recognize investment gains or losses for our significant plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
Pension
Protection Act
Zone Status
|
|
|
|
FIP/
RP Status
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
|
EIN/Pension
Plan Number
|
|
2019
|
|
2018
|
|
Pending/
Implemented
|
|
2019
|
|
2018
|
|
2017
|
|
Surcharge
Imposed
|
|
Expiration Date of
Collective-Bargaining
Agreement
|
|
National Elevator Industry Pension Plan
|
|
23-2694291
|
|
Green
|
|
Green
|
|
No
|
|
$
|
127
|
|
|
$
|
120
|
|
|
$
|
114
|
|
|
No
|
|
July 8, 2022
|
|
Other funds
|
|
|
|
|
|
|
|
|
|
32
|
|
|
31
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
159
|
|
|
$
|
151
|
|
|
$
|
145
|
|
|
|
|
|
For the plan years ended June 30, 2018 and 2017, respectively, we were listed in the National Elevator Industry Pension Plan's Forms 5500 as providing more than 5% of the total contributions for the plan. At the date these financial statements were issued, Forms 5500 were not available for the plan year ending June 30, 2019.
In addition, we participate in several multiemployer arrangements that provide postretirement benefits other than pensions, with the National Elevator Industry Health Benefit Plan being the most significant. These arrangements generally provide medical and life benefits for eligible active employees and retirees and their dependents. Contributions to multiemployer plans that provide postretirement benefits other than pensions were $21 million, $20 million and $19 million for 2019, 2018 and 2017, respectively.
Stock-based Compensation. UTC's long-term incentive plans authorize various types of market and performance based incentive awards that may be granted to officers and employees. The UTC 2018 Long-Term Incentive Plan (the "2018 LTIP") was approved by shareholders on April 30, 2018 and its predecessor plan (the "Legacy LTIP"), was last amended on February 5, 2016. A total of 184 million shares have been authorized for issuance pursuant to awards under these Plans. There are 252,000 shares outstanding that were issued under the Rockwell Collins, Inc. 2015 Long-Term Incentive Plan. No new equity awards will be issued under that plan. As of December 31, 2019, approximately 42 million shares remain available for awards under the 2018 LTIP. No shares remain available for future awards under the Legacy LTIP. Neither plan contains an aggregate annual award limit, however, each Plan sets an annual award limit per participant. We expect that the shares awarded on an annual basis will range from 1.0% to 1.5% of shares outstanding. The 2018 LTIP will expire after all authorized shares have been awarded or April 30, 2028, whichever is sooner.
Under both Plans, the exercise price of awards is set on the grant date and may not be less than the fair market value per share on that date. Generally, stock appreciation rights and stock options have a term of ten years and a three-year vesting period, subject to limited exceptions. In the event of retirement, annual stock appreciation rights, stock options, and restricted stock units held for more than one year may become vested and exercisable, subject to certain terms and conditions. LTIP awards with performance-based vesting generally have a minimum three-year vesting period and vest based on actual performance against pre-established metrics. In the event of retirement, performance-based awards held for more than one year, remain eligible to vest based on actual performance relative to target metrics. We have historically repurchased shares of our common stock in an amount at least equal to the number of shares issued under our equity compensation arrangements and will continue to evaluate this policy in conjunction with our overall share repurchase program.
We measure the cost of all share-based payments, including stock options, at fair value on the grant date and recognize this cost in the Consolidated Statement of Operations, net of expected forfeitures, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Total compensation cost recognized
|
$
|
356
|
|
|
$
|
251
|
|
|
$
|
192
|
|
The associated future income tax benefit recognized was $66 million, $42 million and $38 million for the years ended December 31, 2019, 2018 and 2017, respectively. The amounts have been adjusted for the impact of the TCJA.
For the years ended December 31, 2019, 2018 and 2017, the amount of cash received from the exercise of stock options was $27 million, $36 million and $29 million, respectively, with an associated tax benefit realized of $75 million, $59 million and $100 million, respectively. In addition, for the years ended December 31, 2019, 2018 and 2017, the associated tax benefit realized from the vesting of performance share units and other restricted awards was $36 million, $13 million and $12 million, respectively.
At December 31, 2019, there was $291 million of total unrecognized compensation cost related to non-vested equity awards granted under long-term incentive plans. This cost is expected to be recognized ratably over a weighted-average period of 2.9 years.
A summary of the transactions under all long-term incentive plans for the year ended December 31, 2019 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
|
Stock Appreciation Rights
|
|
|
|
Performance Share Units
|
|
|
|
Other
Incentive
Shares/Units
|
|
(shares and units in thousands)
|
Shares
|
|
Average
Price*
|
|
Shares
|
|
Average
Price*
|
|
Units
|
|
Average
Price*
|
|
|
|
Outstanding at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
1,603
|
|
|
$
|
99.89
|
|
|
32,066
|
|
|
$
|
99.95
|
|
|
1,806
|
|
|
$
|
110.41
|
|
|
3,047
|
|
|
Granted
|
339
|
|
|
124.72
|
|
|
8,081
|
|
|
123.54
|
|
|
839
|
|
|
121.22
|
|
|
1,223
|
|
|
Ancillary**
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
101
|
|
|
95.28
|
|
|
—
|
|
|
Exercised / earned
|
(317)
|
|
|
88.61
|
|
|
(6,843)
|
|
|
84.44
|
|
|
(758)
|
|
|
95.28
|
|
|
(816)
|
|
|
Cancelled
|
(57)
|
|
|
121.69
|
|
|
(591)
|
|
|
122.76
|
|
|
(69)
|
|
|
118.21
|
|
|
(135)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
1,568
|
|
|
$
|
106.75
|
|
|
32,713
|
|
|
$
|
108.61
|
|
|
1,919
|
|
|
$
|
120.04
|
|
|
3,319
|
|
* weighted-average grant / exercise price
** ancillary shares earned based on actual performance achieved on the 2016 award
The weighted-average grant date fair value of stock options and stock appreciation rights granted during 2019, 2018 and 2017 was $20.81, $20.24 and $17.22, respectively. The weighted-average grant date fair value of performance share units, which vest upon achieving certain performance metrics, granted during 2019, 2018 and 2017 was $117.87, $131.55 and $111.00, respectively. The total fair value of awards vested during the years ended December 31, 2019, 2018 and 2017 was $211 million, $149 million and $138 million, respectively. The total intrinsic value (which is the amount by which the stock price exceeded the exercise price on the date of exercise) of stock options and stock appreciation rights exercised during the years ended December 31, 2019, 2018 and 2017 was $383 million, $283 million and $320 million, respectively. The total intrinsic value (which is the stock price at vesting) of performance share units and other restricted awards vested was $188 million, $74 million and $49 million during the years ended December 31, 2019, 2018 and 2017, respectively.
The following table summarizes information about equity awards outstanding that are vested and expected to vest as well as equity awards outstanding that are exercisable at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Awards Vested and Expected to Vest
|
|
|
|
|
|
|
|
Equity Awards That Are Exercisable
|
|
|
|
|
|
|
|
(shares in thousands; aggregate intrinsic value in millions)
|
|
Awards
|
|
Average
Price*
|
|
Aggregate
Intrinsic
Value
|
|
Remaining
Term**
|
|
Awards
|
|
Average
Price*
|
|
Aggregate
Intrinsic
Value
|
|
Remaining
Term**
|
|
Stock Options/Stock Appreciation Rights
|
|
33,769
|
|
|
$
|
107.58
|
|
|
$
|
1,424
|
|
|
5.9 years
|
|
19,285
|
|
|
$
|
96.56
|
|
|
$
|
1,026
|
|
|
4.0 years
|
|
Performance Share Units/Restricted Stock
|
|
5,514
|
|
|
—
|
|
|
826
|
|
|
2.1 years
|
|
|
|
|
|
|
|
|
* weighted-average exercise price per share
** weighted-average contractual remaining term in years
The fair value of each option award is estimated on the date of grant using a binomial lattice model. The following table indicates the assumptions used in estimating fair value for the years ended December 31, 2019, 2018 and 2017. Lattice-based option models incorporate ranges of assumptions for inputs; those ranges are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Expected volatility
|
|
18.8% - 19.7%
|
|
17.5% - 21.1%
|
|
19
|
%
|
|
Weighted-average volatility
|
|
20
|
%
|
|
18
|
%
|
|
19
|
%
|
|
Expected term (in years)
|
|
6.5 - 6.6
|
|
6.5 - 6.6
|
|
6.5
|
|
Expected dividend yield
|
|
2.4
|
%
|
|
2.2
|
%
|
|
2.4
|
%
|
|
Risk-free rate
|
|
2.3% - 2.7%
|
|
1.3% - 2.7%
|
|
0.5% - 2.5%
|
Expected volatilities are based on the returns of our stock, including implied volatilities from traded options on our stock for the binomial lattice model. We use historical data to estimate equity award exercise and employee termination behavior within the valuation model. The expected term represents an estimate of the period of time equity awards are expected to remain outstanding. The risk-free rate is based on the term structure of interest rates at the time of equity award grant.
NOTE 13: RESTRUCTURING COSTS
During 2019, we recorded net pre-tax restructuring costs totaling $425 million for new and ongoing restructuring actions. We recorded charges in the segments as follows:
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Otis
|
$
|
54
|
|
|
Carrier
|
126
|
|
|
Pratt & Whitney
|
133
|
|
|
Collins Aerospace Systems
|
106
|
|
|
Eliminations and other
|
6
|
|
|
|
|
|
|
|
|
Total
|
$
|
425
|
|
Restructuring charges incurred in 2019 primarily relate to actions initiated during 2019 and 2018, and were recorded as follows:
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Cost of sales
|
$
|
231
|
|
|
Selling, general & administrative
|
190
|
|
|
Non-service pension (benefit)
|
4
|
|
|
|
|
|
|
|
|
Total
|
$
|
425
|
|
2019 Actions. During 2019, we recorded net pre-tax restructuring costs totaling $321 million for restructuring actions initiated in 2019, consisting of $168 million in cost of sales and $153 million in selling, general and administrative expenses. The 2019 actions relate to ongoing cost reduction efforts, including workforce reductions and consolidation of field operations.
We are targeting to complete in 2020 and 2021 the majority of the remaining workforce and all facility related cost reduction actions initiated in 2019. 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 2019 restructuring actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Severance
|
|
|
|
Facility Exit & Other Costs
|
|
Total
|
|
Net pre-tax restructuring costs
|
$
|
298
|
|
|
|
|
$
|
23
|
|
|
$
|
321
|
|
|
Utilization, foreign exchange and other costs
|
(193)
|
|
|
|
|
(10)
|
|
|
(203)
|
|
|
Balance at December 31, 2019
|
$
|
105
|
|
|
|
|
$
|
13
|
|
|
$
|
118
|
|
The following table summarizes expected, incurred and remaining costs for the 2019 restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Expected Costs
|
|
Cost Incurred During 2019
|
|
Remaining Costs at December 31, 2019
|
|
Otis
|
$
|
65
|
|
|
$
|
(45)
|
|
|
$
|
20
|
|
|
Carrier
|
120
|
|
|
(110)
|
|
|
10
|
|
|
Pratt & Whitney
|
133
|
|
|
(133)
|
|
|
—
|
|
|
Collins Aerospace Systems
|
120
|
|
|
(27)
|
|
|
93
|
|
|
Eliminations and other
|
6
|
|
|
(6)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
444
|
|
|
$
|
(321)
|
|
|
$
|
123
|
|
2018 Actions. During 2019, we recorded net pre-tax restructuring costs totaling $46 million for restructuring actions initiated in 2018, consisting of $21 million in cost of sales and $25 million in selling, general and administrative expenses. The 2018 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. The following table summarizes the accrual balances and utilization by cost type for the 2018 restructuring actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Severance
|
|
|
|
Facility Exit
& Other
Costs
|
|
Total
|
|
Restructuring accruals at January 1, 2019
|
$
|
115
|
|
|
|
|
$
|
23
|
|
|
$
|
138
|
|
|
Net pre-tax restructuring costs
|
38
|
|
|
|
|
8
|
|
|
46
|
|
|
Utilization, foreign exchange and other costs
|
(132)
|
|
|
|
|
(29)
|
|
|
(161)
|
|
|
Balance at December 31, 2019
|
$
|
21
|
|
|
|
|
$
|
2
|
|
|
$
|
23
|
|
The following table summarizes expected, incurred and remaining costs for the 2018 programs by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Expected
Costs
|
|
Costs
Incurred
During
2018
|
|
Costs
Incurred
During
2019
|
|
Remaining
Costs at
December 31,
2019
|
|
Otis
|
$
|
57
|
|
|
$
|
(48)
|
|
|
$
|
(7)
|
|
|
$
|
2
|
|
|
Carrier
|
80
|
|
|
(64)
|
|
|
(16)
|
|
|
—
|
|
|
Pratt & Whitney
|
3
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
Collins Aerospace Systems
|
111
|
|
|
(87)
|
|
|
(23)
|
|
|
1
|
|
|
Eliminations and other
|
7
|
|
|
(5)
|
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
258
|
|
|
$
|
(207)
|
|
|
$
|
(46)
|
|
|
$
|
5
|
|
2017 and Prior Actions. During 2019, we recorded net pre-tax restructuring costs totaling $58 million for restructuring actions initiated in 2017 and prior. As of December 31, 2019, we have approximately $67 million of accrual balances remaining related to 2017 and prior actions.
NOTE 14: FINANCIAL INSTRUMENTS
We enter into derivative instruments primarily for risk management purposes, 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.
The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $17.8 billion and $20.1 billion at December 31, 2019 and 2018, respectively. Additional information pertaining to foreign exchange and hedging activities is included in Note 1.
The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Balance Sheet Location
|
December 31, 2019
|
|
December 31, 2018
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Foreign exchange contracts
|
Asset Derivatives:
|
|
|
|
|
|
|
Other assets, current
|
|
$
|
11
|
|
|
$
|
10
|
|
|
|
Other assets
|
|
13
|
|
|
12
|
|
|
|
Total asset derivatives
|
|
$
|
24
|
|
|
$
|
22
|
|
|
|
Liability Derivatives:
|
|
|
|
|
|
|
Accrued liabilities
|
|
(72)
|
|
|
(83)
|
|
|
|
Other long-term liabilities
|
|
(98)
|
|
|
(111)
|
|
|
|
Total liability derivatives
|
|
$
|
(170)
|
|
|
$
|
(194)
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Foreign exchange contracts
|
Asset Derivatives:
|
|
|
|
|
|
|
Other assets, current
|
|
27
|
|
|
44
|
|
|
|
Other assets
|
|
5
|
|
|
19
|
|
|
|
Total asset derivatives
|
|
$
|
32
|
|
|
$
|
63
|
|
|
|
Liability Derivatives:
|
|
|
|
|
|
|
Accrued liabilities
|
|
(116)
|
|
|
(89)
|
|
|
|
Other long-term liabilities
|
|
(1)
|
|
|
(3)
|
|
|
|
Total liability derivatives
|
|
$
|
(117)
|
|
|
$
|
(92)
|
|
The effect of cash flow hedging relationships on accumulated other comprehensive income for the years ended December 31, 2019 and 2018 are presented in the table below. The amounts of gain or (loss) are attributable to foreign exchange contract activity and are recorded as a component of Product sales when reclassified from accumulated other comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Loss recorded in Accumulated other comprehensive loss
|
$
|
(33)
|
|
|
$
|
(307)
|
|
|
Loss (Gain) reclassified from Accumulated other comprehensive loss into Product sales
|
$
|
51
|
|
|
$
|
(16)
|
|
The table above reflects the effect of cash flow hedging relationships on the Consolidated Statement of Operations for the years ended December 31, 2019 and 2018. The Company utilizes the critical terms match method in assessing derivatives for hedge effectiveness. Accordingly, the hedged items and derivatives designated as hedging instruments are highly effective.
We have approximately €4.2 billion of euro-denominated long-term debt, which qualifies as a net investment hedge against our investments in European businesses. As of December 31, 2019, the net investment hedge is deemed to be effective.
Assuming current market conditions continue, a $32 million pre-tax loss 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 December 31, 2019, all derivative contracts accounted for as cash flow hedges will mature by January 2024.
The effect of derivatives not designated as hedging instruments within Other income, net, on the Consolidated Statement of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Foreign exchange contracts
|
$
|
46
|
|
|
$
|
115
|
|
NOTE 15: FAIR VALUE MEASUREMENTS
In accordance with the provisions of ASC 820, the following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and nonrecurring basis in our Consolidated Balance Sheet as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
57
|
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative assets
|
56
|
|
|
—
|
|
|
56
|
|
|
—
|
|
|
Derivative liabilities
|
(287)
|
|
|
—
|
|
|
(287)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
51
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative assets
|
85
|
|
|
—
|
|
|
85
|
|
|
—
|
|
|
Derivative liabilities
|
(286)
|
|
|
—
|
|
|
(286)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Techniques. Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally, and are measured at fair value using closing stock prices from active markets. Our derivative assets and liabilities include foreign exchange contracts 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. As of December 31, 2019, there were no significant transfers in or out of Level 1 or Level 2.
As of December 31, 2019, 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 Consolidated Balance Sheet at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
|
(dollars in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Long-term receivables
|
$
|
344
|
|
|
$
|
347
|
|
|
$
|
334
|
|
|
$
|
314
|
|
|
Customer financing notes receivable
|
283
|
|
|
283
|
|
|
272
|
|
|
265
|
|
|
Short-term borrowings
|
(2,364)
|
|
|
(2,364)
|
|
|
(1,469)
|
|
|
(1,469)
|
|
|
Long-term debt (excluding finance leases)
|
(41,199)
|
|
|
(46,202)
|
|
|
(43,996)
|
|
|
(44,003)
|
|
|
Long-term liabilities
|
(336)
|
|
|
(322)
|
|
|
(508)
|
|
|
(467)
|
|
The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Consolidated Balance Sheet as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Long-term receivables
|
$
|
347
|
|
|
$
|
—
|
|
|
$
|
347
|
|
|
$
|
—
|
|
|
Customer financing notes receivable
|
283
|
|
|
—
|
|
|
283
|
|
|
—
|
|
|
Short-term borrowings
|
(2,364)
|
|
|
—
|
|
|
—
|
|
|
(2,364)
|
|
|
Long-term debt (excluding finance leases)
|
(46,202)
|
|
|
—
|
|
|
(45,802)
|
|
|
(400)
|
|
|
Long-term liabilities
|
(322)
|
|
|
—
|
|
|
(322)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Long-term receivables
|
$
|
314
|
|
|
$
|
—
|
|
|
$
|
314
|
|
|
$
|
—
|
|
|
Customer financing notes receivable
|
265
|
|
|
—
|
|
|
265
|
|
|
—
|
|
|
Short-term borrowings
|
(1,469)
|
|
|
—
|
|
|
(1,258)
|
|
|
(211)
|
|
|
Long-term debt (excluding finance leases)
|
(44,003)
|
|
|
—
|
|
|
(43,620)
|
|
|
(383)
|
|
|
Long-term liabilities
|
(467)
|
|
|
—
|
|
|
(467)
|
|
|
—
|
|
NOTE 16: VARIABLE INTEREST ENTITIES
Pratt & Whitney holds a 61% program share interest in the International Aero Engines AG (IAE) collaboration with MTU Aero Engines AG (MTU) and Japanese Aero Engines Corporation (JAEC) 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 engine program through involvement with the collaborators. Additionally, Pratt & Whitney, JAEC and MTU are participants in International Aero Engines, LLC (IAE LLC), whose business purpose is to coordinate the design, development, manufacturing and product support for the PW1100G-JM engine for the Airbus A320neo aircraft and the PW1400G-JM engine for the Irkut MC21 aircraft. Pratt & Whitney holds a 59% program share interest and a 59% ownership interest in IAE LLC. IAE and IAE LLC retain limited equity with the primary economics of the programs passed to the participants. As such, we have determined that IAE and IAE LLC are variable interest entities with Pratt & Whitney the primary beneficiary. IAE and IAE LLC have, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for variable interest entities in our Consolidated Balance Sheet as of December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Current assets
|
$
|
4,573
|
|
|
$
|
4,732
|
|
|
Noncurrent assets
|
1,919
|
|
|
1,600
|
|
|
Total assets
|
$
|
6,492
|
|
|
$
|
6,332
|
|
|
Current liabilities
|
$
|
4,916
|
|
|
$
|
4,946
|
|
|
Noncurrent liabilities
|
2,149
|
|
|
1,898
|
|
|
Total liabilities
|
$
|
7,065
|
|
|
$
|
6,844
|
|
NOTE 17: GUARANTEES
We extend a variety of financial, market value and product performance guarantees to third parties. As of December 31, 2019 and 2018, the following financial guarantees were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
|
(dollars in millions)
|
Maximum
Potential
Payment
|
|
Carrying
Amount of
Liability
|
|
Maximum
Potential
Payment
|
|
Carrying
Amount of
Liability
|
|
Commercial aerospace financing arrangements (see Note 4)
|
$
|
333
|
|
|
$
|
7
|
|
|
$
|
348
|
|
|
$
|
9
|
|
|
Credit facilities and debt obligations
|
—
|
|
|
—
|
|
|
116
|
|
|
—
|
|
|
Performance guarantees
|
48
|
|
|
—
|
|
|
55
|
|
|
5
|
|
We also have obligations arising from sales of certain businesses and assets, including those from representations and warranties and related indemnities for environmental, health and safety, tax and employment matters. The maximum potential payment related to these obligations is not a specified amount as a number of the obligations do not contain financial caps. The carrying amount of liabilities related to these obligations was $166 million and $175 million at December 31, 2019 and 2018, respectively. For additional information regarding the environmental indemnifications, see Note 18.
We accrue for costs associated with guarantees 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, and where no amount within a range of estimates is more likely, the minimum is accrued. In accordance with the Guarantees Topic of the FASB ASC, we record these liabilities at fair value.
We provide service and warranty policies on our products and extend performance and operating cost guarantees beyond our normal service and warranty policies on some of our products, particularly commercial aircraft engines. In addition, we
incur discretionary costs to service our products in connection with specific product performance issues. Liabilities for performance and operating cost guarantees are based upon future product performance and durability, and are largely estimated based upon historical experience. Adjustments are made to accruals as claim data and historical experience warrant. The changes in the carrying amount of service and product warranties and product performance guarantees for the years ended December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
Balance as of January 1
|
$
|
1,449
|
|
|
$
|
1,146
|
|
|
Warranties and performance guarantees issued
|
635
|
|
|
604
|
|
|
Settlements made
|
(512)
|
|
|
(493)
|
|
|
Other1
|
(24)
|
|
|
192
|
|
|
Balance as of December 31
|
$
|
1,548
|
|
|
$
|
1,449
|
|
1 Other in 2018 is driven by the Rockwell Collins acquisition.
NOTE 18: CONTINGENT LIABILITIES
Except as otherwise noted, while we are unable to predict the final outcome, based on information currently available, we do not believe that resolution of any of the following matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Environmental. Our operations are subject to environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over our foreign operations. As described in Note 1 to the Consolidated Financial Statements, we have accrued for the costs of environmental remediation activities, including but not limited to investigatory, remediation, operating and maintenance costs and performance guarantees, and periodically reassess these amounts. We believe that the likelihood of incurring losses materially in excess of amounts accrued is remote. As of December 31, 2019 and 2018, we had approximately $896 million and $830 million, respectively reserved for environmental remediation. Additional information pertaining to environmental matters is included in Note 1 to the Consolidated Financial Statements.
Government. In the ordinary course of business, the Company and its subsidiaries and our properties are subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations and threatened legal actions and proceedings. For example, 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. Such U.S. Government investigations often take years to complete and could result in administrative, civil or criminal liabilities, including repayments, fines, treble and other damages, forfeitures, restitution or penalties, or could lead to suspension or debarment of U.S. Government contracting privileges. For instance, 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 also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other seriously improper conduct. 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 recommending the reduction of certain contract prices because, for example, cost or pricing data or cost accounting practices used to price and negotiate those contracts may not have conformed to government regulations. Some of these audit reports recommend that certain payments be repaid, delayed, or withheld, and may involve substantial amounts. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and, in some cases, continue to negotiate and/or litigate. The Company may be, and has been, required to make payments into escrow of disputed liabilities while the related litigation is pending. If the litigation is resolved in the Company’s favor, any such payments will be returned to the Company with interest. 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.
Legal Proceedings.
Cost Accounting Standards Claims
As previously disclosed, in April 2019, a Divisional Administrative Contracting Officer (DACO) of the United States Defense Contract Management Agency (DCMA) asserted a claim against Pratt & Whitney to recover overpayments of approximately $1.73 billion plus interest (approximately $563 million through December 31, 2019). The claim is based on Pratt & Whitney's alleged noncompliance with cost accounting standards from January 1, 2007 to March 31, 2019, due to its method of allocating independent research and development costs to government contracts. Pratt & Whitney believes that the claim is without merit and filed an appeal to the Armed Services Board of Contract Appeals (ASBCA) on June 7, 2019.
As previously disclosed, in December 2013, a DCMA DACO asserted a claim against Pratt & Whitney to recover overpayments of approximately $177 million plus interest (approximately $98.4 million through December 31, 2019). The claim is based on Pratt & Whitney's alleged noncompliance with cost accounting standards from January 1, 2005 to December 31, 2012, due to its method of determining the cost of collaborator parts used in the calculation of material overhead costs for government contracts. In 2014, Pratt & Whitney filed an appeal to the ASBCA. An evidentiary hearing was held and completed in June 2019. The parties are now engaged in post-hearing briefing, and a decision from the ASBCA will follow. We continue to believe that the claim is without merit. In December 2018, a DCMA DACO issued a second claim against Pratt & Whitney that similarly alleges that its method of determining the cost of collaborator parts does not comply with the cost accounting standards for calendar years 2013 through 2017. This second claim demands payment of $269 million plus interest
(approximately $56.2 million through December 31, 2019), which we also believe is without merit and which Pratt & Whitney appealed to the ASBCA in January 2019.
German Tax Litigation
As previously disclosed, UTC has been involved in administrative review proceedings with the German Tax Office, which concern approximately €215 million (approximately $239 million) of tax benefits that we have claimed related to a 1998 reorganization of the corporate structure of Otis operations in Germany. Upon audit, these tax benefits were disallowed by the German Tax Office. UTC estimates interest associated with the aforementioned tax benefits is an additional approximately €118 million (approximately $131 million). On August 3, 2012, we filed suit in the local German Tax Court (Berlin-Brandenburg). In March 2016, the local German Tax Court dismissed our suit, and we appealed this decision to the German Federal Tax Court (FTC). Following a hearing on July 24, 2018, the FTC remanded the matter to the local German Tax Court for further proceedings. In 2015, UTC made tax and interest payments to German tax authorities of €275 million (approximately $300 million) in order to avoid additional interest accruals pending final resolution of this matter.
Asbestos Matters
As previously disclosed, like many other industrial companies, we and our subsidiaries have been named as defendants in lawsuits alleging personal injury as a result of exposure to asbestos integrated into certain of our products or business 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 dismissed without payment or were covered in full or in part by insurance or other forms of indemnity. Additional cases were litigated and settled without any insurance reimbursement. The amounts involved in asbestos related claims were not material individually or in the aggregate in any year.
The amounts recorded by UTC for asbestos-related liabilities are based on currently available information and assumptions that we believe are reasonable and are made with input from outside actuarial experts. The estimated range of total liabilities to resolve all pending and unasserted potential future asbestos claims through 2059 is approximately $330 million to $400 million. Where no amount within a range of estimates is more likely, the minimum is accrued. We have recorded the minimum amount of $330 million, which is principally recorded in Other long-term liabilities on our Consolidated Balance Sheet as of December 31, 2019. This amount is on a pre-tax basis, not discounted, and excludes the Company’s legal fees to defend the asbestos claims, which will continue to be expensed by the Company as they are incurred. In addition, the Company has an insurance recovery receivable for probable asbestos related recoveries of approximately $140 million, which is included primarily in Other assets on our Consolidated Balance Sheet as of December 31, 2019.
The amounts recorded by UTC for asbestos-related liabilities and insurance recoveries are based on currently available information and assumptions that we believe are reasonable. Our actual liabilities or insurance recoveries could be higher or lower than those recorded if actual results vary significantly from the assumptions. Key variables in these assumptions include the number and type of new claims to be filed each year, the outcomes or resolution of such claims, the average cost of resolution of each new claim, the amount of insurance available, allocation methodologies, the contractual terms with each insurer with whom we have reached settlements, the resolution of coverage issues with other excess insurance carriers with whom we have not yet achieved settlements, and the solvency risk with respect to our insurance carriers. Other factors that may affect our future liability include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, legal rulings that may be made by state and federal courts, and the passage of state or federal legislation. At the end of each year, the Company will evaluate all of these factors and, with input from an outside actuarial expert, make any necessary adjustments to both our estimated asbestos liabilities and insurance recoveries.
Other.
As described in Note 17 to the Consolidated Financial Statements, 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.
We also have other commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. 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. Of note, the design, development, production and support of new aerospace technologies is inherently complex and subject to risk. Since the PW1000G Geared TurboFan engine entered into service in 2016, technical issues have been identified and experienced with the engine, which is usual for new engines and new aerospace technologies. Pratt & Whitney has addressed these issues through various improvements and modifications. These issues have resulted in financial impacts, including increased warranty provisions, customer contract settlements, and reductions in contract performance estimates. Additional technical issues may
also arise in the normal course, which may result in financial impacts that could be material to the Company’s financial position, results of operations and cash flows.
In the ordinary course of business, the Company and its subsidiaries are also routinely defendants in, parties to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some of these proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries and could result in fines, penalties, compensatory or treble damages or non-monetary relief. 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.
NOTE 19: LEASES
ASU 2016-02, Leases (Topic 842) and its related amendments (collectively, the New Lease Accounting Standard) are effective for reporting periods beginning after December 15, 2018. We adopted the New Lease Accounting Standard effective January 1, 2019 and elected the modified retrospective approach in which results for periods before 2019 were not adjusted for the new standard and the cumulative effect of the change in accounting was recognized through retained earnings at the date of adoption.
We have elected certain of the practical expedients available under the New Lease Accounting Standard. We have applied the practical expedient which allows prospective transition to the New Lease Accounting Standard on January 1, 2019. Under the transition practical expedient, we did not reassess lease classification, embedded leases or initial direct costs. We have applied the practical expedient for short-term leases. We have lease agreements with lease and non-lease components. We have elected the practical expedients to combine these components for certain equipment leases. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease right-of-use assets and liabilities. The adoption of the New Lease Accounting Standard did not have a material effect on our Consolidated Statement of Operations or Consolidated Statement of Cash Flows. Upon adoption, we recorded a $2.6 billion right-of-use asset and a $2.7 billion lease liability. The adoption of the New Lease Accounting Standard had an immaterial impact on retained earnings.
Operating lease expense for the year ended December 31, 2019 was approximately $720 million.
Supplemental cash flow information related to operating leases was as follows:
|
|
|
|
|
|
|
|
(dollars in millions)
|
Year ended December 31, 2019
|
|
Operating cash flows used in the measurement of operating lease liabilities
|
$
|
746
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets obtained in exchange for operating lease obligations
|
416
|
|
|
|
|
Operating lease right-of-use assets and liabilities are reflected on our Consolidated Balance Sheet as follows:
|
|
|
|
|
|
|
|
(dollars in millions, except lease term and discount rate)
|
December 31, 2019
|
|
Operating lease right-of-use assets
|
$
|
2,599
|
|
|
|
|
|
Accrued liabilities
|
$
|
(544)
|
|
|
Operating lease liabilities
|
(2,144)
|
|
|
Total operating lease liabilities
|
$
|
(2,688)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental balance sheet information related to operating leases was as follows:
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Weighted Average Remaining Lease Term (in years)
|
7.9
|
|
|
|
|
Weighted Average Discount Rate
|
3.5
|
%
|
|
|
|
Undiscounted maturities of operating lease liabilities as of December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
2020
|
$
|
641
|
|
|
|
|
|
|
2021
|
542
|
|
|
|
|
|
|
2022
|
410
|
|
|
|
|
|
|
2023
|
306
|
|
|
|
|
|
|
2024
|
234
|
|
|
|
|
|
|
Thereafter
|
1,014
|
|
|
|
|
|
|
Total undiscounted lease payments
|
3,147
|
|
|
|
|
|
|
Less imputed interest
|
(459)
|
|
|
|
|
|
|
Total discounted lease payments
|
$
|
2,688
|
|
|
|
|
|
Prior to the adoption of the New Lease Accounting Standard, rental commitments on an undiscounted basis were approximately $2.9 billion at December 31, 2018 under long-term non-cancelable operating leases and were payable as follows: $683 million in 2019, $544 million in 2020, $407 million in 2021, $301 million in 2022, $235 million in 2023 and $746 million thereafter.
NOTE 20: SEGMENT FINANCIAL DATA
Our operations for the periods presented herein are classified into four principal segments. The segments are generally determined 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.
Otis products include elevators, escalators, moving walkways and service sold to customers in the commercial, residential and infrastructure property sectors around the world.
Carrier products and related services include HVAC and refrigeration systems, building controls and automation, fire and special hazard suppression systems and equipment, security monitoring and rapid response systems, provided to a diversified international customer base principally in the industrial, commercial and residential property and commercial transportation sectors.
Pratt & Whitney products include commercial, military, business jet and general aviation aircraft engines, parts and services sold to a diversified customer base, including international and domestic commercial airlines and aircraft leasing companies, aircraft manufacturers, and U.S. and foreign governments. Pratt & Whitney also provides product support and a full range of overhaul, repair and fleet management services.
Collins Aerospace Systems provides technologically advanced aerospace products and aftermarket service solutions for aircraft manufacturers, airlines, regional, business and general aviation markets, military and space operations. Products include electric power generation, power management and distribution systems, air data and aircraft sensing systems, engine control systems, intelligence, surveillance and reconnaissance systems, engine components, environmental control systems, fire and ice detection and protection systems, propeller systems, engine nacelle systems, including thrust reversers and mounting pylons, interior and exterior aircraft lighting, aircraft seating and cargo systems, actuation systems, landing systems, including landing gear, wheels and brakes, and space products and subsystems, integrated avionics systems, precision targeting, electronic warfare and range and training systems, flight controls, communications systems, navigation systems, oxygen systems, simulation and training systems, food and beverage preparation, storage and galley systems, lavatory and wastewater management systems. Aftermarket services include spare parts, overhaul and repair, engineering and technical support, training and fleet management solutions, and information management services.
We have reported our financial and operational results for the periods presented herein under the four principal segments noted above, consistent with how we have reviewed our business operations for decision-making purposes, resource allocation and performance assessment during 2019.
Segment Information. Total sales by segment include intersegment sales, which are generally made at prices approximating those that the selling entity is able to obtain on external sales. Segment information for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
Operating Profits
|
|
|
|
|
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
Otis
|
|
$
|
13,113
|
|
|
$
|
12,904
|
|
|
$
|
12,341
|
|
|
$
|
1,948
|
|
|
$
|
1,915
|
|
|
$
|
2,002
|
|
|
Carrier
|
|
18,608
|
|
|
18,922
|
|
|
17,812
|
|
|
2,697
|
|
|
3,777
|
|
|
3,165
|
|
|
Pratt & Whitney
|
|
20,892
|
|
|
19,397
|
|
|
16,160
|
|
|
1,668
|
|
|
1,269
|
|
|
1,300
|
|
|
Collins Aerospace Systems
|
|
26,028
|
|
|
16,634
|
|
|
14,691
|
|
|
4,100
|
|
|
2,303
|
|
|
2,191
|
|
|
Total segment
|
|
78,641
|
|
|
67,857
|
|
|
61,004
|
|
|
10,413
|
|
|
9,264
|
|
|
8,658
|
|
|
Eliminations and other
|
|
(1,595)
|
|
|
(1,356)
|
|
|
(1,167)
|
|
|
(932)
|
|
|
(236)
|
|
|
(81)
|
|
|
General corporate expenses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(515)
|
|
|
(475)
|
|
|
(439)
|
|
|
Consolidated
|
|
$
|
77,046
|
|
|
$
|
66,501
|
|
|
$
|
59,837
|
|
|
$
|
8,966
|
|
|
$
|
8,553
|
|
|
$
|
8,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
Depreciation & Amortization
|
|
|
|
|
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
Otis
|
|
$
|
9,973
|
|
|
$
|
9,374
|
|
|
$
|
9,421
|
|
|
$
|
145
|
|
|
$
|
172
|
|
|
$
|
133
|
|
|
$
|
337
|
|
|
$
|
190
|
|
|
$
|
177
|
|
|
Carrier
|
|
22,789
|
|
|
22,189
|
|
|
22,657
|
|
|
243
|
|
|
263
|
|
|
326
|
|
|
513
|
|
|
357
|
|
|
372
|
|
|
Pratt & Whitney
|
|
31,271
|
|
|
29,341
|
|
|
26,768
|
|
|
822
|
|
|
866
|
|
|
923
|
|
|
980
|
|
|
852
|
|
|
672
|
|
|
Collins Aerospace Systems
|
|
74,049
|
|
|
73,115
|
|
|
34,567
|
|
|
959
|
|
|
515
|
|
|
527
|
|
|
1,749
|
|
|
883
|
|
|
823
|
|
|
Total segment
|
|
138,082
|
|
|
134,019
|
|
|
93,413
|
|
|
2,169
|
|
|
1,816
|
|
|
1,909
|
|
|
3,579
|
|
|
2,282
|
|
|
2,044
|
|
|
Eliminations and other
|
|
1,634
|
|
|
192
|
|
|
3,507
|
|
|
87
|
|
|
86
|
|
|
105
|
|
|
204
|
|
|
151
|
|
|
96
|
|
|
Consolidated
|
|
$
|
139,716
|
|
|
$
|
134,211
|
|
|
$
|
96,920
|
|
|
$
|
2,256
|
|
|
$
|
1,902
|
|
|
$
|
2,014
|
|
|
$
|
3,783
|
|
|
$
|
2,433
|
|
|
$
|
2,140
|
|
Geographic External Sales and Operating Profit. Geographic external sales and operating profits are attributed to the geographic regions based on their location of origin. U.S. external sales include export sales to commercial customers outside the U.S. and sales to the U.S. Government, commercial and affiliated customers, which are known to be for resale to customers outside the U.S. Long-lived assets are net fixed assets attributed to the specific geographic regions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Net Sales
|
|
|
|
|
|
Operating Profits
|
|
|
|
|
|
Long-Lived Assets
|
|
|
|
|
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
United States Operations
|
|
$
|
48,288
|
|
|
$
|
39,481
|
|
|
$
|
33,912
|
|
|
$
|
5,505
|
|
|
$
|
4,941
|
|
|
$
|
4,126
|
|
|
$
|
7,498
|
|
|
$
|
7,111
|
|
|
$
|
5,323
|
|
|
International Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
13,664
|
|
|
12,857
|
|
|
11,879
|
|
|
2,476
|
|
|
2,141
|
|
|
1,959
|
|
|
1,889
|
|
|
1,908
|
|
|
1,817
|
|
|
Asia Pacific
|
|
9,391
|
|
|
8,847
|
|
|
8,770
|
|
|
1,662
|
|
|
1,476
|
|
|
1,491
|
|
|
1,359
|
|
|
1,349
|
|
|
1,113
|
|
|
Other
|
|
7,298
|
|
|
6,672
|
|
|
6,443
|
|
|
770
|
|
|
706
|
|
|
1,082
|
|
|
1,412
|
|
|
1,363
|
|
|
1,389
|
|
|
Eliminations and other
|
|
(1,595)
|
|
|
(1,356)
|
|
|
(1,167)
|
|
|
(1,447)
|
|
|
(711)
|
|
|
(520)
|
|
|
597
|
|
|
566
|
|
|
544
|
|
|
Consolidated
|
|
$
|
77,046
|
|
|
$
|
66,501
|
|
|
$
|
59,837
|
|
|
$
|
8,966
|
|
|
$
|
8,553
|
|
|
$
|
8,138
|
|
|
$
|
12,755
|
|
|
$
|
12,297
|
|
|
$
|
10,186
|
|
Sales from U.S. operations include export sales as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
2017
|
|
Europe
|
|
$
|
7,122
|
|
|
$
|
6,285
|
|
|
$
|
5,273
|
|
|
Asia Pacific
|
|
6,479
|
|
|
5,429
|
|
|
3,634
|
|
|
Other
|
|
3,847
|
|
|
2,514
|
|
|
2,217
|
|
|
Total
|
|
$
|
17,448
|
|
|
$
|
14,228
|
|
|
$
|
11,124
|
|
Sales by primary geographical market for the year ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Otis
|
|
Carrier
|
|
Pratt & Whitney
|
|
Collins Aerospace Systems
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
3,589
|
|
|
$
|
9,574
|
|
|
$
|
16,148
|
|
|
$
|
18,977
|
|
|
$
|
48,288
|
|
|
Europe
|
3,919
|
|
|
5,326
|
|
|
498
|
|
|
3,921
|
|
|
13,664
|
|
|
Asia Pacific
|
4,591
|
|
|
2,811
|
|
|
1,164
|
|
|
825
|
|
|
9,391
|
|
|
Other*
|
1,014
|
|
|
897
|
|
|
3,082
|
|
|
2,305
|
|
|
7,298
|
|
|
Total segment
|
$
|
13,113
|
|
|
$
|
18,608
|
|
|
$
|
20,892
|
|
|
$
|
26,028
|
|
|
$
|
78,641
|
|
|
Eliminations and other
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,595)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,046
|
|
Sales by primary geographical market for the year ended December 31, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Otis
|
|
Carrier
|
|
Pratt & Whitney
|
|
Collins Aerospace Systems
|
|
Total
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
3,433
|
|
|
$
|
9,402
|
|
|
$
|
14,852
|
|
|
$
|
11,794
|
|
|
$
|
39,481
|
|
|
Europe
|
4,055
|
|
|
5,710
|
|
|
594
|
|
|
2,498
|
|
|
12,857
|
|
|
Asia Pacific
|
4,354
|
|
|
2,849
|
|
|
1,277
|
|
|
367
|
|
|
8,847
|
|
|
Other*
|
1,062
|
|
|
961
|
|
|
2,674
|
|
|
1,975
|
|
|
6,672
|
|
|
Total segment
|
$
|
12,904
|
|
|
$
|
18,922
|
|
|
$
|
19,397
|
|
|
$
|
16,634
|
|
|
$
|
67,857
|
|
|
Eliminations and other
|
|
|
|
|
|
|
|
|
(1,356)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
$
|
66,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Other includes sales to other regions as well as intersegment sales.
Segment sales disaggregated by product type and product versus service for the year ended December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Otis
|
|
Carrier
|
|
Pratt & Whitney
|
|
Collins Aerospace Systems
|
|
Total
|
|
Product Type
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial, non aerospace
|
$
|
13,113
|
|
|
$
|
18,608
|
|
|
$
|
102
|
|
|
$
|
51
|
|
|
$
|
31,874
|
|
|
Commercial aerospace
|
—
|
|
|
—
|
|
|
14,516
|
|
|
19,005
|
|
|
33,521
|
|
|
Military aerospace
|
—
|
|
|
—
|
|
|
6,274
|
|
|
6,972
|
|
|
13,246
|
|
|
Total segment
|
$
|
13,113
|
|
|
$
|
18,608
|
|
|
$
|
20,892
|
|
|
$
|
26,028
|
|
|
$
|
78,641
|
|
|
Eliminations and other
|
|
|
|
|
|
|
|
|
(1,595)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
$
|
77,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Type
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
5,669
|
|
|
$
|
15,360
|
|
|
$
|
12,977
|
|
|
$
|
21,440
|
|
|
$
|
55,446
|
|
|
Service
|
7,444
|
|
|
3,248
|
|
|
7,915
|
|
|
4,588
|
|
|
23,195
|
|
|
Total segment
|
$
|
13,113
|
|
|
$
|
18,608
|
|
|
$
|
20,892
|
|
|
$
|
26,028
|
|
|
$
|
78,641
|
|
|
Eliminations and other
|
|
|
|
|
|
|
|
|
(1,595)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
$
|
77,046
|
|
Segment sales disaggregated by product type and product versus service for the year ended December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Otis
|
|
Carrier
|
|
Pratt & Whitney
|
|
Collins Aerospace Systems
|
|
Total
|
|
Product Type
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial, non aerospace
|
$
|
12,904
|
|
|
$
|
18,922
|
|
|
$
|
55
|
|
|
$
|
60
|
|
|
$
|
31,941
|
|
|
Commercial aerospace
|
—
|
|
|
—
|
|
|
14,027
|
|
|
12,564
|
|
|
26,591
|
|
|
Military aerospace
|
—
|
|
|
—
|
|
|
5,315
|
|
|
4,010
|
|
|
9,325
|
|
|
Total segment
|
$
|
12,904
|
|
|
$
|
18,922
|
|
|
$
|
19,397
|
|
|
$
|
16,634
|
|
|
$
|
67,857
|
|
|
Eliminations and other
|
|
|
|
|
|
|
|
|
(1,356)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
$
|
66,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Type
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
5,636
|
|
|
$
|
15,682
|
|
|
$
|
11,410
|
|
|
$
|
13,915
|
|
|
$
|
46,643
|
|
|
Service
|
7,268
|
|
|
3,240
|
|
|
7,987
|
|
|
2,719
|
|
|
21,214
|
|
|
Total segment
|
$
|
12,904
|
|
|
$
|
18,922
|
|
|
$
|
19,397
|
|
|
$
|
16,634
|
|
|
$
|
67,857
|
|
|
Eliminations and other
|
|
|
|
|
|
|
|
|
(1,356)
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
$
|
66,501
|
|
Major Customers. Net Sales include sales under prime contracts and subcontracts to the U.S. Government, primarily related to Pratt & Whitney and Collins Aerospace Systems products, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
2017
|
|
Pratt & Whitney
|
|
$
|
5,614
|
|
|
$
|
4,489
|
|
|
$
|
3,347
|
|
|
Collins Aerospace Systems
|
|
4,802
|
|
|
2,779
|
|
|
2,299
|
|
|
Other
|
|
227
|
|
|
175
|
|
|
152
|
|
|
Total
|
|
$
|
10,643
|
|
|
$
|
7,443
|
|
|
$
|
5,798
|
|
Sales to Airbus prior to discounts and incentives, primarily related to Pratt & Whitney and Collins Aerospace Systems products, were approximately $9,879 million, $10,025 million and $8,908 million for the years ended December 31, 2019, 2018 and 2017, respectively.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarters
|
|
|
|
|
|
|
|
2018 Quarters
|
|
|
|
|
|
|
(dollars in millions,
except per share amounts)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Net Sales
|
|
$
|
18,365
|
|
|
$
|
19,634
|
|
|
$
|
19,496
|
|
|
$
|
19,551
|
|
|
$
|
15,242
|
|
|
$
|
16,705
|
|
|
$
|
16,510
|
|
|
$
|
18,044
|
|
|
Gross margin
|
|
4,658
|
|
|
5,221
|
|
|
5,285
|
|
|
4,817
|
|
|
3,962
|
|
|
4,283
|
|
|
3,974
|
|
|
4,297
|
|
|
Net income attributable to common shareowners
|
|
1,346
|
|
|
1,900
|
|
|
1,148
|
|
|
1,143
|
|
|
1,297
|
|
|
2,048
|
|
|
1,238
|
|
|
686
|
|
|
Earnings per share of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic - net income
|
|
$
|
1.58
|
|
|
$
|
2.22
|
|
|
$
|
1.34
|
|
|
$
|
1.33
|
|
|
$
|
1.64
|
|
|
$
|
2.59
|
|
|
$
|
1.56
|
|
|
$
|
0.83
|
|
|
Diluted - net income
|
|
$
|
1.56
|
|
|
$
|
2.20
|
|
|
$
|
1.33
|
|
|
$
|
1.32
|
|
|
$
|
1.62
|
|
|
$
|
2.56
|
|
|
$
|
1.54
|
|
|
$
|
0.83
|
|
PERFORMANCE GRAPH (UNAUDITED)
The following graph presents the cumulative total shareholder return for the five years ending December 31, 2019 for our common stock, as compared to the Standard & Poor's 500 Stock Index and to the Dow Jones 30 Industrial Average. Our common stock price is a component of both indices. These figures assume that all dividends paid over the five-year period were reinvested, and that the starting value of each index and the investment in common stock was $100.00 on December 31, 2014.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
