FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-812

 

 

UNITED TECHNOLOGIES CORPORATION

 

 

 

DELAWARE   06-0570975

One Financial Plaza, Hartford, Connecticut 06103

(860) 728-7000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x.    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x.    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨.    No  x.

At September 30, 2010 there were 923,407,094 shares of Common Stock outstanding.

 

 

 


Table of Contents

 

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

Quarter Ended September 30, 2010

 

     Page  

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements:

     3   

Condensed Consolidated Statement of Operations for the quarters ended September 30, 2010 and 2009

     3   

Condensed Consolidated Statement of Operations for the nine months ended September 30, 2010 and 2009

     4   

Condensed Consolidated Balance Sheet at September 30, 2010 and December 31, 2009

     5   

Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2010 and 2009

     6   

Notes to Condensed Consolidated Financial Statements

     7   

Report of Independent Registered Public Accounting Firm

     25   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     43   

Item 4. Controls and Procedures

     43   

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

     44   

Item 1A. Risk Factors

     44   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     48   

Item 6. Exhibits

     49   

SIGNATURES

     50   

EXHIBIT INDEX

     51   

United Technologies Corporation and its subsidiaries’ names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or tradenames of United Technologies Corporation and its subsidiaries. Names, abbreviations of names, logos, and products and service designators of other companies are either the registered or unregistered trademarks or tradenames of their respective owners. As used herein, the terms “we,” “us,” “our” or “UTC,” unless the context otherwise requires, mean United Technologies Corporation and its subsidiaries.

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

     Quarter Ended September 30,  

(in millions, except per share amounts)

   2010     2009  

Revenues:

    

Product sales

   $ 9,771     $ 9,398  

Service sales

     3,849       3,789  

Other (expense) income, net

     (93     188  
                
     13,527       13,375  
                

Costs and Expenses:

    

Cost of products sold

     7,124       7,353  

Cost of services sold

     2,543       2,483  

Research and development

     433       344  

Selling, general and administrative

     1,478       1,424  
                

Operating profit

     1,949       1,771  

Interest expense

     182       170  
                

Income before income taxes

     1,767       1,601  

Income tax expense

     468       456  
                

Net income

     1,299       1,145  

Less: Noncontrolling interest in subsidiaries’ earnings

     101       87  
                

Net income attributable to common shareowners

   $ 1,198     $ 1,058  
                

Earnings Per Share of Common Stock:

    

Basic

   $ 1.32     $ 1.15  

Diluted

   $ 1.30     $ 1.14  

Dividends Per Share of Common Stock

   $ .43     $ .39  

Weighted average number of shares outstanding:

    

Basic shares

     906       917  

Diluted shares

     919       929  

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

     Nine Months Ended September 30,  

(in millions, except per share amounts)

   2010      2009  

Revenues:

     

Product sales

   $ 28,123      $ 27,387  

Service sales

     11,339        11,059  

Other income, net

     46        374  
                 
     39,508        38,820  
                 

Costs and Expenses:

     

Cost of products sold

     20,949        21,220  

Cost of services sold

     7,465        7,324  

Research and development

     1,289        1,137  

Selling, general and administrative

     4,393        4,481  
                 

Operating profit

     5,412        4,658  

Interest expense

     560        522  
                 

Income before income taxes

     4,852        4,136  

Income tax expense

     1,394        1,126  
                 

Net income

     3,458        3,010  

Less: Noncontrolling interest in subsidiaries’ earnings

     284        254  
                 

Net income attributable to common shareowners

   $ 3,174      $ 2,756  
                 

Earnings Per Share of Common Stock:

     

Basic

   $ 3.49      $ 3.00  

Diluted

   $ 3.43      $ 2.97  

Dividends Per Share of Common Stock

   $ 1.28      $ 1.16  

Weighted average number of shares outstanding:

     

Basic shares

     910        918  

Diluted shares

     925        928  

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 

(in millions)

   September 30,
2010
    December 31,
2009
 
Assets     

Cash and cash equivalents

   $ 5,731     $ 4,449  

Accounts receivable, net

     8,731       8,469  

Inventories and contracts in progress, net

     8,430       7,509  

Future income tax benefits, current

     1,603       1,689  

Other assets, current

     842       1,078  
                

Total Current Assets

     25,337       23,194  
                

Customer financing assets

     1,098       1,047  

Future income tax benefits

     2,308       2,102  

Fixed assets

     15,796       15,677  

Less: Accumulated depreciation

     (9,648     (9,313
                

Fixed assets, net

     6,148       6,364  
                

Goodwill

     17,422       16,298  

Intangible assets, net

     4,070       3,538  

Other assets

     4,266       3,219  
                

Total Assets

   $ 60,649     $ 55,762  
                
Liabilities and Equity     

Short-term borrowings

   $ 2,137     $ 254  

Accounts payable

     4,964       4,634  

Accrued liabilities

     12,425       11,792  

Long-term debt currently due

     94       1,233  
                

Total Current Liabilities

     19,620       17,913  
                

Long-term debt

     10,071       8,257  

Future pension and postretirement benefit obligations

     3,927       4,150  

Other long-term liabilities

     4,460       4,054  
                

Total Liabilities

     38,078       34,374  
                

Redeemable noncontrolling interest

     318       389  

Shareowners’ Equity:

    

Common Stock

     12,316       11,746  

Treasury Stock

     (16,920     (15,408

Retained earnings

     29,384       27,396  

Unearned ESOP shares

     (169     (181

Accumulated other comprehensive loss

     (3,357     (3,487
                

Total Shareowners’ Equity

     21,254       20,066  

Noncontrolling interest

     999       933  
                

Total Equity

     22,253       20,999  
                

Total Liabilities and Equity

   $ 60,649     $ 55,762  
                

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended September 30,  

(in millions)

   2010     2009  

Operating Activities:

    

Net income attributable to common shareowners

   $ 3,174     $ 2,756  

Noncontrolling interest in subsidiaries’ earnings

     284       254  
                

Net income

     3,458       3,010  

Adjustments to reconcile net income to net cash flows provided by operating activities:

    

Depreciation and amortization

     1,008       925  

Deferred income tax (benefit) provision

     (123     36  

Stock compensation cost

     112       110  

Change in:

    

Accounts receivable

     (169     981  

Inventories and contracts in progress

     (932     145  

Other current assets

     (46     (58

Accounts payable and accrued liabilities

     1,178       (784

Global pension contributions*

     (699     (633

Other operating activities, net

     443       146  
                

Net cash flows provided by operating activities

     4,230       3,878  
                

Investing Activities:

    

Capital expenditures

     (479     (501

Investments in businesses

     (2,551     (557

Dispositions of businesses

     200       107  

Increase in customer financing assets, net

     (29     (36

Other investing activities, net

     173       256  
                

Net cash flows used in investing activities

     (2,686     (731
                

Financing Activities:

    

Issuance (repayment) of long-term debt, net

     610       (965

Increase (decrease) in short-term borrowings, net

     1,882       (72

Common Stock issued under employee stock plans

     211       212  

Dividends paid on Common Stock

     (1,114     (1,018

Repurchase of Common Stock

     (1,644     (780

Other financing activities, net

     (253     (285
                

Net cash flows used in financing activities

     (308     (2,908
                

Effect of foreign exchange rate changes on cash and cash equivalents

     46       66  
                

Net increase in cash and cash equivalents

     1,282       305  

Cash and cash equivalents, beginning of year

     4,449       4,327  
                

Cash and cash equivalents, end of period

   $ 5,731     $ 4,632  
                

 

* Non-cash activities include contributions of UTC Common Stock of $250 million to domestic defined benefit pension plans in the second quarter of 2010. There were no contributions of UTC Common Stock in 2009.

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Condensed Consolidated Financial Statements at September 30, 2010 and for the quarters and nine months ended September 30, 2010 and 2009 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our Annual Report to Shareowners (2009 Annual Report) incorporated by reference to our Annual Report on Form 10-K for calendar year 2009 (2009 Form 10-K).

Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets

Business Acquisitions and Dispositions. During the first nine months of 2010, our investment in business acquisitions was approximately $2.6 billion, including debt assumed of $32 million, principally reflecting the acquisitions of the General Electric (GE) Security business, and an equity stake in Clipper Windpower Plc (Clipper). On March 1, 2010, we completed the acquisition of the GE Security business for approximately $1.8 billion, including debt assumed of $32 million. The GE Security business supplies security and fire safety technologies for commercial and residential applications through a broad product portfolio that includes fire detection and life safety systems, intrusion alarms, and video surveillance and access control systems. This business is being integrated into our UTC Fire & Security segment during the course of 2010, and will enhance UTC Fire & Security’s geographic diversity with the strong North American presence and increased product and technology offerings of GE Security. In connection with the acquisition of GE Security, we recorded approximately $600 million of identifiable intangible assets and $1.1 billion of goodwill. The goodwill recorded reflects synergies expected to be realized through the combination of GE Security’s products, resources and management talent with those of the existing UTC Fire & Security business to enhance competitiveness, accelerate the development of certain product offerings, drive improved operational performance and secure additional service channels. Additionally, the combined businesses will allow for significant improvements to the cost structure through the rationalization of general and administrative expenditures as well as research and development efforts.

In January 2010, we completed the acquisition of a 49.5% equity stake in Clipper, a California-based wind turbine manufacturer that trades on the AIM London Stock Exchange. This investment is intended to expand our power generation portfolio and allow us to enter the wind power market by leveraging our expertise in blade technology, turbines and gearbox design. The total cost was £166 million (approximately $270 million) for the purchase of 84.3 million newly issued shares and 21.8 million shares from existing shareowners. We have accounted for this investment under the equity method of accounting. Subsequent to the initial purchase, we increased our investment to 49.9%. During the quarter ended September 30, 2010, we recorded a $159 million other-than-temporary impairment charge, on our equity investment in Clipper, in order to write-down our investment to market value as of September 30, 2010. This impairment is recorded within Other income, net on our Condensed Consolidated Statement of Operations.

In October 2010, we reached agreement with the management and independent members of the board of directors of Clipper on the terms of a cash offer to acquire all remaining shares of Clipper. The acquisition will be implemented by way of a court-approved scheme of arrangement under the UK Companies Act 2006, and remains subject to customary closing conditions and the approval of Clipper’s shareholders. Under the terms of the agreement, the acquisition is valued at 65 pence per share or £70 million (approximately $112 million). In connection with the agreement, we have also agreed to provide to Clipper’s operating subsidiary a loan facility permitting borrowings of up to $50 million for the period prior to closing of the acquisition. The facility would be guaranteed by Clipper and the operating subsidiary would grant a lien over certain of its assets subject to approval of Clipper shareholders.

During the quarter ended June 30, 2010, we recorded approximately $86 million of asset impairment charges, for assets that have met the held-for-sale criteria, related primarily to the expected disposition of businesses within both Carrier and Hamilton Sundstrand. These asset impairment charges are recorded within Cost of products sold on our Condensed Consolidated Statement of Operations. The asset impairment charges include a $58 million charge related to the expected disposition of a business associated with Carrier’s ongoing portfolio transformation to a higher returns business and a $28 million charge at Hamilton Sundstrand related primarily to the expected disposition of an aerospace business as part of Hamilton Sundstrand’s efforts to implement low cost sourcing initiatives.

Goodwill. Changes in our goodwill balances for the first nine months of 2010 were as follows:

 

(in millions)

   Balance as of
January 1, 2010
     Goodwill resulting  from
business combinations
     Foreign currency
translation  and other
    Balance as of
September 30, 2010
 

Otis

   $ 1,382      $ 99      $ (8   $ 1,473  

Carrier

     3,252        14        (85     3,181  

UTC Fire & Security

     5,641        1,115        (64     6,692  

Pratt & Whitney

     1,237        —           (11     1,226  

Hamilton Sundstrand

     4,496        1        (17     4,480  

Sikorsky

     250        81        (1     330  
                                  

Total Segments

     16,258        1,310        (186     17,382  

Eliminations and other

     40        —           —          40  
                                  

Total

   $ 16,298      $ 1,310      $ (186   $ 17,422  
                                  

 

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Intangible Assets. Identifiable intangible assets are comprised of the following:

 

     September 30, 2010     December 31, 2009  

(in millions)

   Gross Amount      Accumulated
Amortization
    Gross Amount      Accumulated
Amortization
 

Amortized:

          

Service portfolios

   $ 1,950      $ (911   $ 1,814      $ (833

Patents and trademarks

     440        (144     369        (120

Other, principally customer relationships

     3,148        (1,161     2,624        (1,047
                                  
     5,538        (2,216     4,807        (2,000
                                  

Unamortized:

          

Trademarks and other

     748        —          731        —     
                                  

Total

   $ 6,286      $ (2,216   $ 5,538      $ (2,000
                                  

Amortization of intangible assets for the quarter and nine months ended September 30, 2010 was $104 million and $283 million, respectively, compared with $88 million and $259 million for the same periods of 2009. Amortization of these intangible assets for 2010 through 2014 is expected to approximate $305 million per year.

Note 2: Earnings Per Share

 

     Quarter Ended September 30,      Nine Months Ended September 30,  

(in millions, except per share amounts)

   2010      2009      2010      2009  

Net income attributable to common shareowners

   $ 1,198      $ 1,058      $ 3,174      $ 2,756  
                                   

Basic weighted average number of shares outstanding

     906        917        910        918  

Stock awards

     13        12        15        10  
                                   

Diluted weighted average number of shares outstanding

     919        929        925        928  
                                   

Earnings Per Share of Common Stock:

           

Basic

   $ 1.32      $ 1.15      $ 3.49      $ 3.00  

Diluted

   $ 1.30      $ 1.14      $ 3.43      $ 2.97  

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period. These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would be antidilutive. The number of stock awards excluded from the computation was 12.7 million and 12.6 million for the quarter and nine months ended September 30, 2010, respectively. For the quarter and nine months ended September 30, 2009, the number of stock awards excluded from the computation was 15.2 million and 35.7 million, respectively.

 

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Note 3: Inventories and Contracts in Progress

 

(in millions)

   September 30, 2010     December 31, 2009  

Raw materials

   $ 1,251     $ 1,281  

Work-in-process

     3,762       3,097  

Finished goods

     3,110       2,889  

Contracts in progress

     6,505       6,479  
                
     14,628       13,746  

Less:

    

Progress payments, secured by lien, on U.S. Government contracts

     (299     (264

Billings on contracts in progress

     (5,899     (5,973
                
   $ 8,430     $ 7,509  
                

As of September 30, 2010 and December 31, 2009, the above inventory balances include capitalized contract development costs of $801 million and $862 million, respectively, related to certain aerospace programs. These capitalized costs are liquidated as production units are delivered to the customer. The capitalized contract development costs within inventory principally relate to costs capitalized on Sikorsky’s CH-148 contract with the Canadian government. The CH-148 is a derivative of the H-92, a military variant of the S-92.

Note 4: Borrowings and Lines of Credit

 

(in millions)

   September 30, 2010      December 31, 2009  

Commercial paper

   $ 1,945      $ —     

Other borrowings

     192        254  
                 

Total short-term borrowings

   $ 2,137      $     254  
                 

At September 30, 2010, we had committed credit agreements from banks permitting aggregate borrowings of up to $2.5 billion under a $1.5 billion revolving credit agreement and a $1.0 billion multicurrency revolving credit agreement, both of which are available for general funding purposes, including acquisitions. As of September 30, 2010, there were no borrowings under either of these revolving credit agreements, which expire in October 2011 and November 2011, respectively. The undrawn portions under both of these agreements are also available to serve as backup facilities for the issuance of commercial paper. We generally use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions and repurchases of our common stock.

 

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Long-term debt consists of the following:

 

(in millions)

   September 30, 2010     December 31, 2009  

4.375% notes due 2010*

   $ —        $ 600  

7.125% notes due 2010*

     —          500  

6.350% notes due 2011*

     —          500  

6.100% notes due 2012*

     500       500  

4.875% notes due 2015*

     1,200       1,200  

5.375% notes due 2017*

     1,000       1,000  

6.125% notes due 2019*

     1,250       1,250  

8.875% notes due 2019

     272       272  

4.500% notes due 2020*

     1,250       —     

8.750% notes due 2021

     250       250  

6.700% notes due 2028

     400       400  

7.500% notes due 2029*

     550       550  

5.400% notes due 2035*

     600       600  

6.050% notes due 2036*

     600       600  

6.125% notes due 2038*

     1,000       1,000  

5.700% notes due 2040*

     1,000       —     

Project financing obligations

     125       158  

Other (including capitalized leases)

     168       110  
                

Total long-term debt

     10,165       9,490  

Less current portion

     (94     (1,233
                

Long-term debt, net of current portion

   $ 10,071     $ 8,257  
                

 

  * We may redeem some or all of these series of notes at any time at a redemption price in U.S. dollars equal to the greater of 100% of the principal amount outstanding of the applicable series of notes to be redeemed, or the sum of the present values of the remaining scheduled payments of principal and interest on the applicable series of notes to be redeemed. The discounts applied on such redemptions are based on a semiannual calculation at an adjusted treasury rate plus 10-50 basis points. The redemption price will also include interest accrued to the date of redemption on the principal balance of the notes being redeemed.

In February 2010, we issued two series of fixed rate notes that pay interest semiannually, in arrears, on April 15 and October 15 of each year beginning October 15, 2010. The $1.25 billion principal amount of fixed rate notes bears interest at a rate equal to 4.500% per year and matures on April 15, 2020. The $1.0 billion principal amount of fixed rate notes bears interest at a rate equal to 5.700% per year and matures on April 15, 2040. The proceeds from these notes were used primarily to fund a portion of the GE Security business acquisition, and to repay commercial paper borrowings.

In May 2010, we repaid the entire $600 million outstanding principal amount of our 4.375% notes at maturity. In June 2010, we redeemed the entire $500 million outstanding principal amount of our 7.125% notes that were due November 15, 2010. In September 2010, we redeemed the entire $500 million outstanding principal amount of our 6.350% notes that were due March 1, 2011.

We have an existing universal shelf registration statement filed with the Securities and Exchange Commission (SEC) for an indeterminate amount of securities for future issuance, subject to our internal limitations on the amount of debt to be issued under this shelf registration statement.

Note 5: Income Taxes

We conduct business globally and, as a result, UTC or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Belgium, Canada, China, France, Germany, Hong Kong, Italy, Japan, South Korea, Singapore, Spain, the United Kingdom and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 1998.

 

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In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest has also been recognized. Interest accrued in relation to unrecognized tax benefits is recorded in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense.

It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change within a range of a net increase of $30 million to a net decrease of $130 million resulting from additional worldwide uncertain tax positions, from the re-evaluation of current uncertain tax positions arising from developments in examinations, in appeals, or in the courts, or from the closure of tax statutes. Not included in the range is €198 million (approximately $264 million) of tax benefits that we have claimed related to a 1998 German reorganization. These tax benefits are currently being reviewed by the German Tax Office in the course of an audit of tax years 1999 to 2000. In 2008 the German Federal Tax Court denied benefits to another taxpayer in a case involving a German tax law relevant to our reorganization. The determination of the German Federal Tax Court on this other matter was appealed to the European Court of Justice (ECJ) to determine if the underlying German tax law is violative of European Union (EU) principles. On September 17, 2009 the ECJ issued an opinion in this case that is generally favorable to the other taxpayer and referred the case back to the German Federal Tax Court for further consideration of certain related issues. In May 2010, the German Federal Tax Court released its decision, in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development. After consideration of the ECJ decision and the latest German Federal Tax Court decision, we continue to believe that it is more likely than not that the relevant German tax law is violative of EU principles and we have not accrued tax expense for this matter. As we continue to monitor developments related to this matter, it may become necessary for us to accrue tax expense and related interest.

In 2009, the Internal Revenue Service (IRS) Examination Division completed its review of tax years 2004 and 2005, and certain proposed tax adjustments, with which the Company did not agree, were transferred to the IRS Appeals Division for resolution discussions. The Company expects these resolution discussions to be ongoing into 2011. In 2009, the IRS Examination Division also commenced review activity of tax years 2006, 2007 and 2008, which is expected to continue through 2011.

The effective tax rate for the quarter ended September 30, 2010 has decreased as compared to the same period of 2009. This decrease is largely driven by a $102 million net tax benefit associated with management’s intention to repatriate additional high tax dividends for the current year to the U.S. in 2010 as a result of recent U.S. tax legislation. This net tax benefit was partially offset by the non-deductibility of impairment charges, primarily driven by a $159 million other-than-temporary impairment charge on our equity investment in Clipper, and the tax effects of net gains from dispositions associated with Carrier’s ongoing portfolio transformation to a higher returns business. The effective tax rate for the quarter ended September 30, 2009 reflects the tax effects of the previously disclosed Carrier and Watsco transaction and a $32 million adverse tax impact associated with a foreign reorganization, net of the reduction to tax expense relating to the re-evaluation of our tax liabilities and contingencies based on global examination activity in the quarter.

The effective tax rate for the nine months ended September 30, 2010 increased as compared to the same period of 2009 as a result of the adverse impact from the health care legislation related to the Medicare Part D program in the first quarter of 2010, the net tax effects of asset impairment charges in the second quarter of 2010 and the impact from items disclosed above that were recorded in the quarter ended September 30, 2010. The effective tax rate for the nine months ended September 30, 2009 reflects a $25 million favorable tax impact in the first quarter of 2009 related to the formation of a commercial venture, the non-taxability in the second quarter of 2009 of a gain recognized at Otis and the net adverse impacts of the third quarter 2009 items disclosed above.

Note 6: Employee Benefit Plans

Pension and Postretirement Plans. We sponsor both funded and unfunded domestic and foreign defined pension and other postretirement benefit plans, and defined contribution plans. Contributions to these plans were as follows:

 

     Quarter Ended September 30,      Nine Months Ended September 30,  

(in millions)

   2010      2009      2010      2009  

Defined Benefit Plans

   $ 438      $ 182      $ 949      $ 633  
                                   

Defined Contribution Plans

   $ 46      $ 43      $ 142      $ 144  
                                   

 

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In the first nine months of 2010, we made contributions of $801 million to our domestic defined benefit pension plans, including $350 million in the third quarter of 2010. Included in the total domestic contributions made through the first nine months of 2010 is a $250 million contribution of UTC common stock in the second quarter of 2010. In the first nine months of 2009, we made contributions of $551 million to our domestic defined benefit pension plans, including $150 million which was contributed in the third quarter of 2009. There were no contributions of UTC common stock to our domestic defined benefit pension plans in 2009.

The following tables illustrate the components of net periodic benefit cost for our defined pension and other postretirement benefit plans:

 

     Pension Benefits
Quarter Ended
September 30,
    Other Postretirement Benefits
Quarter Ended

September 30,
 

(in millions)

   2010     2009     2010     2009  

Service cost

   $ 99     $ 108     $ 1     $ —     

Interest cost

     321       324       11       12  

Expected return on plan assets

     (430     (416     —          (1

Amortization

     (4     14       (1     —     

Recognized actuarial net loss

     71       56       —          —     

Net settlement and curtailment loss

     —          84       —          —     
                                

Total net periodic benefit cost

   $ 57     $ 170     $ 11     $ 11  
                                
     Pension Benefits
Nine Months Ended
September 30,
    Other Postretirement Benefits
Nine Months Ended
September 30,
 

(in millions)

   2010     2009     2010     2009  

Service cost

   $ 297     $ 322     $ 2     $ 2  

Interest cost

     963       959       34       37  

Expected return on plan assets

     (1,289     (1,218     —          (1

Amortization

     (12     42       (2     (2

Recognized actuarial net loss (gain)

     213       168       (1     (2

Net settlement and curtailment loss

     17       101       —          —     
                                

Total net periodic benefit cost

   $ 189     $ 374     $ 33     $ 34  
                                

Note 7: Restructuring and Other Costs

During the first nine months of 2010, we recorded net pre-tax restructuring and other costs and reversals in our business segments totaling $210 million for new and ongoing restructuring actions as follows:

 

(in millions)

      

Otis

   $ 40  

Carrier

     32  

UTC Fire & Security

     53  

Pratt & Whitney

     48  

Hamilton Sundstrand

     11  

Sikorsky

     14  

Eliminations and other

     12  
        

Total

   $ 210  
        

The net costs included $122 million recorded in cost of sales, $87 million in selling, general and administrative expenses and $1 million in other income, net. As described below, these costs primarily relate to actions initiated during 2010 and 2009.

2010 Actions. During the first nine months of 2010, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and consolidation of field operations. We recorded net pre-tax restructuring and other costs totaling $178 million, including $96 million in cost of sales and $82 million in selling, general and administrative expenses.

 

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We expect the actions initiated in the first nine months of 2010 to result in net workforce reductions of approximately 3,300 hourly and salaried employees, the exiting of approximately 3.0 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of September 30, 2010, we have completed net workforce reductions of approximately 1,300 employees. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2010 and 2011. 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 2010 restructuring actions:

 

(in millions)

   Severance     Asset
Write-Downs
    Facility Exit and
Lease  Termination
Costs
    Total  

Restructuring accruals at June 30, 2010

   $ 71     $ —        $ 4     $ 75  

Net pre-tax restructuring costs

     48       2       7       57  

Utilization

     (18     (2     (7     (27
                                

Balance at September 30, 2010

   $ 101     $ —        $ 4     $ 105  
                                

The following table summarizes expected, incurred and remaining costs for the 2010 restructuring actions by type:

 

(in millions)

   Severance     Asset
Write-Downs
    Facility Exit and
Lease Termination

Costs
    Total  

Expected costs

   $ 186     $ 14     $ 62     $ 262  

Costs incurred - quarter ended March 31, 2010

     (42     —          (7     (49

Costs incurred - quarter ended June 30, 2010

     (58     (12     (2     (72

Costs incurred - quarter ended September 30, 2010

     (48     (2     (7     (57
                                

Balance at September 30, 2010

   $ 38     $ —        $ 46     $ 84  
                                

The following table summarizes expected, incurred and remaining costs for the 2010 restructuring actions by segment:

 

(in millions)

   Expected Costs      Costs Incurred
Quarter  Ended
March 31, 2010
    Costs Incurred
Quarter  Ended
June 30, 2010
    Costs Incurred
Quarter  Ended
September 30, 2010
    Remaining
Costs at
September 30, 2010
 

Otis

   $ 60      $ (11   $ (15   $ (16   $ 18  

Carrier

     60        (8     (17     (5     30  

UTC Fire & Security

     67        (9     (13     (21     24  

Pratt & Whitney

     35        (19     (4     (6     6  

Hamilton Sundstrand

     10        (2     (5     —          3  

Sikorsky

     18        —          (7     (8     3  

Eliminations and other

     12        —          (11     (1     —     
                                         

Total

   $ 262      $ (49   $ (72   $ (57   $ 84  
                                         

2009 Actions. During the first nine months of 2010, we recorded net pre-tax restructuring and other costs and reversals totaling $43 million for restructuring actions initiated in 2009, including $26 million in cost of sales, $16 million in selling, general and administrative expenses and $1 million in other income, net. The 2009 actions relate to ongoing cost reduction efforts, including workforce reductions, the consolidation of field operations and the consolidation of repair and overhaul operations.

As of September 30, 2010, we have completed net workforce reductions of approximately 13,300 employees of an expected 14,600 employees, and have exited 1.2 million net square feet of facilities of an expected 4.6 million net square feet. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2010 and 2011.

As previously disclosed, in September 2009, Pratt & Whitney announced plans to close a Connecticut repair facility by the second quarter of 2010 and a Connecticut engine overhaul facility by early 2011. The International Association of Machinists (IAM) subsequently filed a lawsuit in U.S. District Court alleging that Pratt & Whitney’s decision to close these facilities and transfer certain work to other facilities breached the terms of its collective bargaining agreement with the IAM and seeking to enjoin Pratt & Whitney

 

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from moving the work for the duration of the collective bargaining agreement. In February 2010, the District Court issued a judgment enjoining Pratt & Whitney from closing the facilities and transferring the work for the duration of the current collective bargaining agreement, which expires on December 5, 2010. Pratt & Whitney subsequently appealed the decision. On July 8, 2010, the Second Circuit Court of Appeals upheld the District Court’s decision. Pratt & Whitney is reviewing this decision and considering its impact on Pratt & Whitney’s operations. Pratt & Whitney recorded $53 million of restructuring costs in 2009 and $6 million of restructuring costs in 2010 associated with these planned closures. We do not believe that resolution of this matter will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.

The following table summarizes the accrual balances and utilization by cost type for the 2009 restructuring actions:

 

(in millions)

   Severance     Asset
Write-Downs
     Facility Exit  and
Lease Termination
Costs
    Total  

Restructuring accruals at June 30, 2010

   $ 182     $ —         $ 21     $ 203  

Net pre-tax restructuring costs

     (4     —           12       8  

Utilization

     (36     —           (12     (48
                                 

Balance at September 30, 2010

   $ 142     $ —         $ 21     $ 163  
                                 

The following table summarizes expected, incurred and remaining costs for the 2009 restructuring actions by type:

 

(in millions)

   Severance     Asset
Write-Downs
    Facility Exit  and
Lease Termination
Costs
    Total  

Expected costs

   $ 703     $ 74     $ 108     $ 885  

Costs incurred through December 31, 2009

     (680     (69     (53     (802

Costs incurred - quarter ended March 31, 2010

     (9     (3     (7     (19

Costs incurred - quarter ended June 30, 2010

     —          (2     (14     (16

Costs incurred - quarter ended September 30, 2010

     4       —          (12     (8
                                

Remaining costs at September 30, 2010

   $ 18     $ —        $ 22     $ 40  
                                

The following table summarizes expected, incurred and remaining costs for the 2009 restructuring actions by segment:

 

(in millions)

   Expected Costs      Costs  Incurred
through
December 31, 2009
    Costs Incurred
Quarter  Ended
March 31, 2010
    Costs Incurred
Quarter  Ended
June 30, 2010
    Costs Incurred
Quarter  Ended
September 30, 2010
    Remaining
Costs at
September 30, 2010
 

Otis

   $ 155      $ (157   $ —        $ (2   $ 4     $ —     

Carrier

     232        (205     (10     (1     (1     15  

UTC Fire & Security

     114        (103     (1     (6     (3     1  

Pratt & Whitney

     210        (174     (8     (5     (7     16  

Hamilton Sundstrand

     102        (90     —          (2     (2     8  

Sikorsky

     6        (7     —          —          1       —     

Eliminations and other

     63        (63     —          —          —          —     

General corporate expenses

     3        (3     —          —          —          —     
                                                 

Total

   $ 885      $ (802   $ (19   $ (16   $ (8   $ 40  
                                                 

2008 Actions. As of September 30, 2010, we have approximately $18 million of accrual balances remaining related to 2008 actions.

 

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Note 8: Financial Instruments

We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures.

By nature, all financial instruments involve market and credit risks. We enter into derivative and other financial instruments with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. We limit counterparty exposure and concentration of risk by diversifying counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.

Foreign Currency Forward Contracts. We manage our foreign currency transaction risks to acceptable limits through the use of derivatives that hedge forecasted cash flows associated with foreign currency transaction exposures, which are accounted for as cash flow hedges, as deemed appropriate. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria of the Derivatives and Hedging Topic of the FASB ASC, the changes in the derivatives’ fair values are not included in current earnings but are included in Accumulated Other Comprehensive Loss. These changes in fair value will subsequently be reclassified into earnings as a component of product sales or expenses, as applicable, when the forecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period it occurs.

To the extent the hedge accounting criteria are not met, the foreign currency forward contracts are utilized as economic hedges and changes in the fair value of these contracts are recorded currently in earnings in the period in which they occur. These include hedges that are used to reduce exchange rate risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (e.g. payables, receivables) and other economic hedges where the hedge accounting criteria were not met.

The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $8.9 billion and $9.0 billion at September 30, 2010 and December 31, 2009, respectively.

Commodity Forward Contracts. We enter into commodity forward contracts to reduce the risk of fluctuations in the price we pay for certain commodities (e.g., nickel) which are used directly in the production of our products, or are components of the products we procure to use in the production of our products. These hedges are economic hedges and the changes in fair value of these contracts are recorded currently in earnings in the period in which they occur. The fair value and outstanding notional amount of contracts hedging commodity exposures were insignificant at September 30, 2010 and December 31, 2009, respectively.

 

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The following table summarizes the fair value of derivative instruments as of September 30, 2010 and December 31, 2009:

 

(in millions)

  

Balance Sheet Asset Location    

   September 30, 2010      December 31, 2009  

Derivatives designated as hedging instruments:

        

Foreign Exchange Contracts

   Other assets, current    $ 105      $ 107  

Foreign Exchange Contracts

   Other assets      20        33  
                    
        125        140  
                    

Derivatives not designated as hedging instruments:

        

Foreign Exchange Contracts

   Other assets, current      56        113  

Foreign Exchange Contracts

   Other assets      6        5  
                    
        62        118  
                    

Total Asset Derivative Contracts

      $ 187      $ 258  
                    
     

Balance Sheet Liability Location    

             

Derivatives designated as hedging instruments:

        

Foreign Exchange Contracts

   Accrued liabilities    $ 5      $ 31  

Foreign Exchange Contracts

   Other long-term liabilities      4        4  
                    
        9        35  
                    

Derivatives not designated as hedging instruments:

        

Foreign Exchange Contracts

   Accrued liabilities      79        106  

Foreign Exchange Contracts

   Other long-term liabilities      3        3  
                    
        82        109  
                    

Total Liability Derivative Contracts

      $ 91      $ 144  
                    

The impact from foreign exchange derivative instruments that qualified as cash flow hedges was as follows:

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(in millions)

   2010      2009     2010      2009  

Gain recorded in Accumulated other comprehensive loss

   $ 63      $ 148     $ 44      $ 150  

Gain (loss) reclassified from Accumulated other comprehensive loss into Product sales (effective portion)

     35        (39     76        (138

Loss recognized in Other income, net on derivatives (ineffective portion)

     —           —          —           (5

Assuming current market conditions continue, a $75 million pre-tax gain is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At September 30, 2010, all derivative contracts accounted for as cash flow hedges mature by February 2013.

The effect on the Condensed Consolidated Statement of Operations from foreign exchange contracts not designated as hedging instruments was as follows:

 

     Quarter Ended September 30,      Nine Months Ended September 30,  

(in millions)

   2010      2009      2010      2009  

Gain (loss) recognized in Other income, net

   $ 107      $ 17      $ 131      $ (31

Fair Value Disclosure. The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The Topic indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability, and also defines fair value based upon an exit price model.

 

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During the three and nine months ended September 30, 2010, we had certain non-recurring measurements resulting in impairment charges of $159 million and $245 million, respectively. During the three months ended September 30, 2010, we recorded an other-than-temporary impairment charge on our equity investment in Clipper of $159 million, which had a previous carrying value of approximately $248 million. This impairment was determined by comparing the carrying value of the investment to the closing market value of the shares on September 30, 2010. As previously disclosed, during the quarter ended June 30, 2010, we recorded approximately $86 million of asset impairment charges related primarily to the expected disposition of certain businesses within both Carrier and Hamilton Sundstrand. For additional discussion refer to Note 1 to the Condensed Consolidated Financial Statements.

Valuation Hierarchy. The Fair Value Measurements and Disclosure Topic of the FASB ASC establishes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-6, “Improving Disclosures about Fair Value Measurements,” which requires interim disclosures regarding significant transfers in and out of Level 1 and Level 2 fair value measurements. Additionally, this ASU requires disclosure for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements. These disclosures are required for fair value measurements that fall in either Level 2 or Level 3. Further, the ASU requires separate presentation of Level 3 activity for the fair value measurements. We adopted the interim disclosure requirements under this Topic during the quarter ended March 31, 2010, with the exception of the separate presentation in the Level 3 activity rollforward, which is not effective until fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2010 and December 31, 2009:

 

(in millions)

   Total Carrying
Value at

September 30, 2010
     Quoted price in
active markets

(Level 1)
     Significant other
observable inputs

(Level 2)
     Unobservable
inputs

(Level 3)
 

Available-for-sale securities

   $ 700      $ 700      $ —         $ —     

Derivative assets

     187        —           187        —     

Derivative liabilities

     91        —           91        —     

(in millions)

   Total Carrying
Value at

December 31, 2009
     Quoted price in
active markets

(Level 1)
     Significant other
observable inputs

(Level 2)
     Unobservable
inputs

(Level 3)
 

Available-for-sale securities

   $ 664      $ 664      $ —         $ —     

Derivative assets

     258        —           258        —     

Derivative liabilities

     144        —           144        —     

Valuation Techniques. Our available for sale securities include equity investments that are traded in active markets, either domestically or internationally. They are measured at fair value using closing stock prices from active markets and are classified within Level 1 of the valuation hierarchy. Our derivative assets and liabilities include foreign exchange contracts and commodity derivatives that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. Based on our continued ability to trade securities and enter into forward contracts, we consider the markets for our fair value instruments to be active. As of September 30, 2010, there were no significant transfers in and out of Level 1 and Level 2.

As of September 30, 2010, 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.

 

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The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value at September 30, 2010 and December 31, 2009:

 

     September 30, 2010     December 31, 2009  

(in millions)

   Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Long-term receivables

   $ 358     $ 318     $ 430     $ 408  

Customer financing notes receivable

     337       279       350       264  

Long-term debt (excluding capitalized leases)

     (10,108     (11,993     (9,442     (10,361

The above fair values were computed based on comparable transactions, quoted market prices, discounted future cash flows or an estimate of the amount to be received or paid to terminate or settle the agreement, as applicable. Differences from carrying amounts are attributable to interest and or credit rate changes subsequent to when the transaction occurred. The fair values of Cash and cash equivalents, Accounts receivable, net, Short-term borrowings, and Accounts payable approximate the carrying amounts due to the short-term maturities of these instruments.

We have outstanding financing and rental commitments totaling approximately $1.1 billion at September 30, 2010. Risks associated with changes in interest rates on these commitments are mitigated by the fact that interest rates are variable during the commitment term and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair values of these financings are expected to equal the amounts funded. The fair values of the commitments themselves are not readily determinable and are not considered significant.

 

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Note 9: Shareowners’ Equity and Noncontrolling Interest

A summary of the changes in Shareowners’ Equity and Noncontrolling interest comprising total equity for the quarters and nine months ended September 30, 2010 and 2009 is provided below:

 

      Quarter Ended September 30,  
     2010     2009  

(in millions)

   Shareowners’
Equity
    Noncontrolling
Interest
    Total
Equity
    Shareowners’
Equity
    Noncontrolling
Interest
    Total
Equity
 

Equity, beginning of period

   $ 19,933     $ 982     $ 20,915     $ 17,236     $ 851     $ 18,087  

Comprehensive income for the period:

            

Net income

     1,198       101       1,299       1,058       87       1,145  

Other comprehensive income:

            

Foreign currency translation, net

     808       45       853       473       38       511  

Increases in unrealized gains from available-for-sale securities, net

     25       —          25       63       —          63  

Cash flow hedging gains

     25       —          25       136       —          136  

Change in pension and post-retirement benefit plans, net

     23       —          23       11       —          11  
                                                

Total other comprehensive income

     881       45       926       683       38       721  
                                                

Total comprehensive income for the period

     2,079       146       2,225       1,741       125       1,866  

Common Stock issued under employee plans

     113       —          113       177       —          177  

Common Stock repurchased

     (490     —          (490     (430     —          (430

Dividends on Common Stock

     (370     —          (370     (339     —          (339

Dividends on ESOP Common Stock

     (16     —          (16     (14     —          (14

Dividends attributable to noncontrolling interest

     —          (86     (86     —          (53     (53

Purchase of subsidiary shares from noncontrolling interest

     —          (8     (8     (37     (14     (51

Sale of subsidiary shares in noncontrolling interest

     —          9       9       —          —          —     

Acquisition of noncontrolling interest

     —          —          —          —          6       6  

Disposition of noncontrolling interest

     —          (18     (18     —          —          —     

Redeemable noncontrolling interest in subsidiaries’ earnings

     —          (6     (6     —          (5     (5

Redeemable noncontrolling interest in total other comprehensive income

     —          (20     (20     —          14       14  

Change in redemption value of put options

     5       —          5       2       —          2  
                                                

Equity, end of period

   $ 21,254     $ 999     $ 22,253     $ 18,336     $ 924     $ 19,260  
                                                

 

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     Nine Months Ended September 30,  
     2010     2009  

(in millions)

   Shareowners’
Equity
    Noncontrolling
Interest
    Total
Equity
    Shareowners’
Equity
    Noncontrolling
Interest
    Total
Equity
 

Equity, beginning of period

   $ 20,066     $ 933     $ 20,999     $ 15,763     $ 918     $ 16,681  

Comprehensive income for the period:

            

Net income

     3,174       284       3,458       2,756       254       3,010  

Other comprehensive income (loss):

            

Foreign currency translation, net

     11       (3     8       937       12       949  

Increases in unrealized gains from available-for-sale securities, net

     33       —          33       93       —          93  

Cash flow hedging (losses) gains

     (18     —          (18     208       —          208  

Change in pension and post-retirement benefit plans, net

     104       —          104       87       —          87  
                                                

Total other comprehensive income (loss)

     130       (3     127       1,325       12       1,337  
                                                

Total comprehensive income for the period

     3,304       281       3,585       4,081       266       4,347  

Common Stock issued under employee plans

     439       —          439       397       —          397  

Common Stock repurchased

     (1,650     —          (1,650     (780     —          (780

Common Stock contributed to pension plans

     250       —          250       —          —          —     

Dividends on Common Stock

     (1,114     —          (1,114     (1,018     —          (1,018

Dividends on ESOP Common Stock

     (47     —          (47     (44     —          (44

Dividends attributable to noncontrolling interest

     —          (233     (233     —          (244     (244

Purchase of subsidiary shares from noncontrolling interest

     (2     (12     (14     (64     (24     (88

Sale of subsidiary shares in noncontrolling interest

     —          36       36       —          —          —     

Acquisition of noncontrolling interest

     —          29       29       —          23       23  

Disposition of noncontrolling interest

     —          (18     (18     —          —          —     

Redeemable noncontrolling interest in subsidiaries’ earnings

     —          (22     (22     —          (13     (13

Redeemable noncontrolling interest in total other comprehensive income (loss)

     —          5       5       —          (2     (2

Change in redemption value of put options

     8       —          8       1       —          1  
                                                

Equity, end of period

   $ 21,254     $ 999     $ 22,253     $ 18,336     $ 924     $ 19,260  
                                                

During 2009, we adopted the FASB ASU for redeemable equity instruments, applicable for all noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests). The standards require redeemable noncontrolling interests to be reported in the mezzanine section of the balance sheet, between liabilities and equity, at the greater of redemption value or initial carrying value. As a result of this adoption, we have retroactively reclassified “Redeemable noncontrolling interests” in the mezzanine section of the balance sheet and have increased them to redemption value, where required, resulting in a $387 million reclassification from total equity at September 30, 2009.

 

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A summary of the changes in Redeemable noncontrolling interest recorded in the mezzanine section of the balance sheet for the quarters and nine months ended September 30, 2010 and 2009 is provided below:

 

    Quarter Ended September 30,     Nine Months Ended September 30,  

(in millions)

  2010     2009     2010     2009  

Redeemable noncontrolling interest, beginning of period

  $ 311     $ 319     $ 389     $ 245  

Net income

    6       5       22       13  

Foreign currency translation, net

    20       (14     (5     2  

Dividends attributable to noncontrolling interest

    (3     (6     (16     (15

Acquisition of noncontrolling interest

    —          85       12       143  

Purchase of subsidiary shares from noncontrolling interest

    —          —          (65     —     

Disposition of noncontrolling interest

    (11     —          (11     —     

Change in redemption value of put options

    (5     (2     (8     (1
                               

Redeemable noncontrolling interest, end of period

  $ 318     $ 387     $ 318     $ 387  
                               

Consistent with the requirements under the Business Combinations Topic of the FASB ASC and the accounting for noncontrolling interests in consolidated financial statements, changes in noncontrolling interests that do not result in a change of control and where there is a difference between fair value and carrying value are accounted for as equity transactions. A summary of these changes in ownership interests in subsidiaries and the effect on shareowners’ equity for the quarters and nine months ended September 30, 2010 and 2009 is provided below:

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(in millions)

   2010      2009     2010     2009  

Net income attributable to common shareowners

   $ 1,198      $ 1,058     $ 3,174     $ 2,756  
                                 

Transfers to noncontrolling interests - Decrease in common stock for purchase of subsidiary shares

     —           (37     (2     (64
                                 

Change from net income attributable to common shareowners and transfers to noncontrolling interests

   $ 1,198      $ 1,021     $ 3,172     $ 2,692  
                                 

Note 10: Guarantees

We extend a variety of financial, market value and product performance guarantees to third parties. There have been no material changes to guarantees outstanding since December 31, 2009.

The changes in the carrying amount of service and product warranties and product performance guarantees for the nine months ended September 30, 2010 and 2009 are as follows:

 

(in millions)

   2010     2009  

Balance as of January 1

   $ 1,072     $ 1,136  

Warranties and performance guarantees issued

     310       275  

Settlements made

     (271     (312

Other

     (6     (24
                

Balance as of September 30

   $ 1,105     $ 1,075  
                

Note 11: Collaborative Arrangements

In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into certain collaboration arrangements in which costs, revenues and risks are shared. Revenues generated from engine programs, spare parts sales, and aftermarket business under collaboration arrangements are recorded as earned in our financial statements. Amounts attributable to our collaborative partners for their share of revenues 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 of the collaborator’s share of program costs is recorded as a reduction of the related expense item at that time. As of September 30, 2010, the collaborators’ interests in all commercial engine programs ranged from 12% to 48%. Pratt & Whitney directs those programs and is the principal participant in all existing collaborative arrangements. There are no individually significant collaborative arrangements and none of the partners exceed 31% share in an individual program.

 

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Note 12: Contingent Liabilities

Summarized below are the matters previously described in Note 16 of the Notes to the Consolidated Financial Statements in our 2009 Annual Report, incorporated by reference in our 2009 Form 10-K, updated as applicable.

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. We accrue for the costs of environmental investigatory, remediation, operating and maintenance costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site, including existing technology, current laws and regulations and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. For sites with multiple responsible parties, we consider our likely proportionate share of the anticipated remediation costs and the ability of the other parties to fulfill their obligations in establishing a provision for those costs. We discount liabilities with fixed or reliably determinable future cash payments. We do not reduce accrued environmental liabilities by potential insurance reimbursements. We periodically reassess these accrued amounts. We believe that the likelihood of incurring losses materially in excess of amounts accrued is remote.

Government. We are now, and believe that in light of the current U.S. government contracting environment we will continue to be, the subject of one or more U.S. government investigations. If we or one of our business units were charged with wrongdoing as a result of any of these investigations or other government investigations (including violations of certain environmental or export laws) the U.S. government could suspend us from bidding on or receiving awards of new U.S. government contracts pending the completion of legal proceedings. If convicted or found liable, the U.S. government could fine and debar us from new U.S. government contracting for a period generally not to exceed three years. The U.S. government could void any contracts found to be tainted by fraud.

Our contracts with the U.S. government are also subject to audits. Like many defense contractors, we have received audit reports, which recommend that certain contract prices should be reduced to comply with various government regulations. Some of these audit reports involve substantial amounts. We have made voluntary refunds in those cases we believe appropriate and continue to litigate certain other cases. In addition, we accrue for liabilities associated with those matters that are probable and can be reasonably estimated. The most likely settlement amount to be incurred is accrued based upon a range of estimates. Where no amount within a range of estimates is more likely, then we accrue the minimum amount.

As previously disclosed, the Department of Justice (DOJ) sued us in 1999 in the U.S. District Court for the Southern District of Ohio, claiming that Pratt & Whitney violated the civil False Claims Act and common law. This lawsuit relates to the “Fighter Engine Competition” between Pratt & Whitney’s F100 engine and General Electric’s F110 engine. The DOJ alleges that the government overpaid for F100 engines under contracts awarded by the U.S. Air Force in fiscal years 1985 through 1990 because Pratt & Whitney inflated its estimated costs for some purchased parts and withheld data that would have revealed the overstatements. At trial of this matter, completed in December 2004, the government claimed Pratt & Whitney’s liability to be $624 million. On August 1, 2008, the trial court judge held that the Air Force had not suffered any actual damages because Pratt & Whitney had made significant price concessions. However, the trial court judge found that Pratt & Whitney violated the False Claims Act due to inaccurate statements contained in the 1983 offer. In the absence of actual damages, the trial court judge awarded the DOJ the maximum civil penalty of $7.09 million, or $10,000 for each of the 709 invoices Pratt & Whitney submitted in 1989 and later under the contracts. Both the DOJ and UTC have appealed the decision. Should the government ultimately prevail, the outcome of this matter could result in a material effect on our results of operations in the period in which a liability would be recognized or cash flows for the period in which damages would be paid.

As previously disclosed, in December 2008, the Department of Defense (DOD) issued a contract claim against Sikorsky to recover overpayments the DOD alleges it has incurred since 2003 in connection with cost accounting changes approved by the DOD and implemented by Sikorsky in 1999 and 2006. These changes relate to the calculation of material overhead rates in government contracts. The DOD claimed that Sikorsky’s liability is approximately $87 million (including interest through September 2010). We believe this claim is without merit and Sikorsky filed an appeal in December 2009 with the U.S. Court of Federal Claims.

Other. On August 27, 2010, Rolls-Royce plc (Rolls-Royce) sued Pratt & Whitney in the U.S. District Court for the Eastern District of Virginia, alleging that fan blades on certain engines manufactured by Pratt & Whitney infringe a patent held by Rolls-Royce. Rolls-Royce seeks damages in an unspecified amount plus interest, an injunction, a finding of willful infringement, and attorneys’ fees. We intend to vigorously defend the case and do not believe that resolution of this matter will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition. On September 27, 2010, Pratt & Whitney filed a

 

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complaint against Rolls-Royce in the U.S. District Court for the District of Connecticut alleging that various acts of Rolls-Royce directed at Pratt & Whitney violate the Connecticut Unfair Trade Practices Act and Section 43 of the Lanham Act, and constitute tortious interference with business expectancy or contractual relations with respect to Pratt & Whitney’s relationships with airlines, aircraft manufacturers and a joint venture partner. Pratt & Whitney’s complaint also seeks a declaratory judgment that the Rolls-Royce patent is invalid and unenforceable and that Pratt & Whitney’s fan blades do not infringe it.

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 have accrued for environmental investigatory, remediation, operating and maintenance costs, performance guarantees and other litigation and claims based on our estimate of the probable outcome of these matters. While it is possible that the outcome of these matters may differ from the recorded liability, we believe that resolution of these matters will not have a material impact on our competitive position, results of operations, cash flows or financial condition.

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.

Except as otherwise noted above, we do not believe that resolution of any of these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition. All forward-looking statements concerning the possible or anticipated outcome of environmental, investigatory and litigation matters involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. For further information as to these risks and uncertainties, see “Cautionary Note Concerning Factors That May Affect Future Results” and Part III, Item 1A, “Risk Factors” in this Form 10-Q.

Note 13: Segment Financial Data

Our operations are classified into six principal segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. The segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services.

Results for the quarters and nine months ended September 30, 2010 and 2009 are as follows:

 

Quarter Ended September 30,    Revenues     Operating Profits     Operating Profit Margins  

(in millions)

   2010     2009     2010     2009     2010     2009  

Otis

   $ 2,914     $ 2,962     $ 678     $ 633       23.3     21.4

Carrier

     2,964       3,007       380       312       12.8     10.4

UTC Fire & Security

     1,657       1,383       187       149       11.3     10.8

Pratt & Whitney

     3,250       3,031       547       444       16.8     14.6

Hamilton Sundstrand

     1,419       1,400       255       247       18.0     17.6

Sikorsky

     1,548       1,648       163       157       10.5     9.5
                                                

Total segments

     13,752       13,431       2,210       1,942       16.1     14.5

Eliminations and other

     (225     (56     (178     (98    

General corporate expenses

     —          —          (83     (73    
                                                

Consolidated

   $ 13,527     $ 13,375     $ 1,949     $ 1,771       14.4     13.2
                                                

 

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Nine Months Ended September 30,    Revenues     Operating Profits     Operating Profit Margins  

(in millions)

   2010     2009     2010     2009     2010     2009  

Otis

   $ 8,483     $ 8,579     $ 1,915     $ 1,770       22.6     20.6

Carrier

     8,528       8,594       852       594       10.0     6.9

UTC Fire & Security

     4,695       3,999       478       297       10.2     7.4

Pratt & Whitney

     9,440       9,322       1,505       1,347       15.9     14.4

Hamilton Sundstrand

     4,147       4,183       680       626       16.4     15.0

Sikorsky

     4,605       4,371       477       406       10.4     9.3
                                                

Total segments

     39,898       39,048       5,907       5,040       14.8     12.9

Eliminations and other

     (390     (228     (242     (142    

General corporate expenses

     —          —          (253     (240    
                                                

Consolidated

   $ 39,508     $ 38,820     $ 5,412     $ 4,658       13.7     12.0
                                                

See Note 7 to the Condensed Consolidated Financial Statements for a discussion of restructuring and other costs included in segment operating results.

Note 14: Accounting Pronouncements

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require disclosure of the significant judgments made and changes to those judgments and how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. We have evaluated this new ASU and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements.” This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance includes factors to help companies determine what software elements are considered “essential to the functionality.” The amendments will subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. We have evaluated this new ASU and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In April 2010, the FASB issued ASU No. 2010-17, “Milestone Method of Revenue Recognition.” This ASU allows entities to make a policy election to use the milestone method of revenue recognition and provides guidance on defining a milestone and guidance on the criteria that should be met for applying the milestone method. The scope of this ASU is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, information about substantive milestones and factors considered in the determination. The amendments in this ASU are effective prospectively to milestones achieved in fiscal years, and interim periods within those years, beginning after June 15, 2010. Early application and retrospective application are permitted. We have evaluated this new ASU and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In July 2010, the FASB issued ASU No. 2010-20, “Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU intends to enhance a financial statement user’s ability to evaluate the entity’s credit risk exposures and adequacy of its allowance for credit losses by requiring additional disclosure about the nature of credit risk inherent in the portfolio of receivables, factors and methodologies used in estimating the allowance for credit losses and activity that occurs during a period for both finance receivables and allowance for credit losses. The scope of this ASU is limited to financing receivables, excluding short-term trade accounts receivable and receivables measured at fair value or lower of cost or fair value. The guidance provides definitions of a finance receivable, portfolio segment, class of finance receivable, and credit quality indicator. This ASU also makes significant changes to the disclosure requirements, including further disaggregation of the information presented based on portfolio segment or class of finance receivable. The disclosures as of the end of a reporting period are effective in fiscal years, and interim periods within those years, ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual periods beginning on or after December 15, 2010. Comparative disclosures are required for the periods ending after initial adoption. We are currently evaluating this new ASU.

 

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With respect to the unaudited condensed consolidated financial information of UTC for the quarters and nine months ended September 30, 2010 and 2009, PricewaterhouseCoopers LLP (PricewaterhouseCoopers) reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated October 25, 2010, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the Act) for its report on the unaudited condensed consolidated financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareowners of United Technologies Corporation:

We have reviewed the accompanying condensed consolidated balance sheet of United Technologies Corporation and its subsidiaries (the “Corporation”) as of September 30, 2010, and the related condensed consolidated statement of operations for the three-month and nine-month periods ended September 30, 2010 and 2009 and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2010 and 2009. This interim financial information is the responsibility of the Corporation’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2009, and the related consolidated statements of operations, of cash flows and of changes in equity for the year then ended (not presented herein), and in our report dated February 11, 2010 (which included an explanatory paragraph with respect to the Corporation’s change in the manner of accounting for defined benefit pension and other postretirement plans, uncertain tax positions, business combinations, noncontrolling interests and collaborative arrangements and the manner in which it discloses fair value, derivative and hedging activities, subsequent events and fair value of financial instruments), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2009, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

October 25, 2010

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

We conduct our business through six principal segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Otis, Carrier and UTC Fire & Security are collectively referred to as the “commercial businesses,” while Pratt & Whitney, Hamilton Sundstrand and Sikorsky are collectively referred to as the “aerospace businesses.” The current status of significant factors impacting our business environment in 2010 is discussed below. For additional discussion, refer to the “Business Overview” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2009 Annual Report, which is incorporated by reference in our 2009 Form 10-K.

General

As worldwide businesses, our operations can be affected by industrial, economic and political factors on both a regional and global level. To limit the impact of any one industry, or the economy of any single country on our consolidated operating results, our strategy has been, and continues to be, the maintenance of a balanced and diversified portfolio of businesses. Our businesses include both commercial and aerospace operations, original equipment manufacturing (OEM) and extensive related aftermarket parts and services businesses, as well as the combination of shorter cycles in our commercial businesses, particularly Carrier, and longer cycles in our aerospace businesses. Our customers include companies in the private sector and governments, and our businesses reflect an extensive geographic diversification that has evolved with the continued globalization of world economies.

The global economy, which experienced a downturn throughout 2009, has continued to show signs of gradual improvement through the first nine months of 2010. However, although some economic indicators continue to trend positively, the overall rate of global recovery experienced to date has been mixed. The global airline industry continues to gain traction as airlines kept capacity additions well below air traffic growth leading to higher yields and capacity utilization. Commercial construction markets, however, remain generally weak, with strength in some emerging markets. Despite the uneven global recovery, our order rates remain robust with a few exceptions. Commercial aerospace spares orders at Pratt & Whitney and Hamilton Sundstrand increased 35% and 13%, respectively, in the third quarter of 2010 compared to the same period of 2009. This is consistent with our expectation of higher commercial aerospace aftermarket revenues in the second half of 2010. Carrier’s U.S. residential heating, ventilating, and air conditioning (HVAC) shipments declined in the third quarter of 2010 as a result of consumer spending related weakness, while orders at Hamilton Sundstrand’s short-cycle industrial businesses continue to grow. Orders in our long cycle businesses were mixed, as Otis new equipment orders were essentially flat, while both global new equipment orders at Carrier commercial HVAC and total orders at UTC Fire & Security each grew year-over-year in the third quarter of 2010. These improvements contributed to organic revenue growth of 3% in the third quarter of 2010. For the full year, we continue to expect organic revenue growth to be approximately 2%.

Total revenues increased 1% in the third quarter of 2010, as compared to the same period of 2009. This primarily reflects organic revenue growth (3%) partially offset by the impact of net adverse non-recurring items year-over-year, as further discussed below within “Results of Continuing Operations.” The beneficial impact from net acquisitions (1%) was offset by unfavorable foreign currency translation (1%). Along with the revenue increase, consolidated operating profit increased 10% in the third quarter of 2010, as compared with the same period of 2009. This year-over-year improvement reflects an increase in operational profit (11%) driven by higher volumes combined with the beneficial impact from our continued focus on cost reduction and previously initiated restructuring actions, as well as contributions from net acquisitions (2%), and the impact of currency hedges net of foreign currency translation (net combined 1%). The beneficial impact of lower restructuring costs (10%) was more than offset by the adverse impact of year-over-year non-recurring items, as further discussed below. For the remainder of the year, we expect operating performance to remain strong; however, we expect some adverse impacts on the rate of earnings growth, particularly from slower economic growth, tougher comparisons versus the prior year for Carrier, adverse foreign currency translation and higher research and development costs. Given the unevenness of the global economic recovery experienced to date, we will continue to focus on reducing structural costs to position us to grow earnings and drive margin expansion in 2011 and beyond.

Commercial Businesses

Our commercial businesses generally serve customers in the worldwide commercial and residential property industries, although Carrier also serves customers in the commercial and transport refrigeration industries. Revenues in the commercial businesses are 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, tightening credit markets and other global and political factors. Carrier’s financial performance can also be influenced by production and utilization of transport equipment, and for its residential business, weather conditions. To ensure adequate supply of Carrier products in the distribution channel, Carrier customarily offers its customers incentives to purchase products.

 

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Revenues at Otis decreased 1% in the first nine months of 2010 as lower volume (3%) was partially offset by the favorable impact of foreign currency translation (2%). The revenue decrease was due to a decline in new equipment sales, impacted by a weaker opening new equipment backlog, and partially offset by continued growth in contractual maintenance revenues. New equipment orders increased 6% (4% excluding the favorable impact of foreign currency translation) for the first nine months of 2010, as compared to the same period of 2009, primarily due to strong order growth in China and Europe, partially offset by continued weakness in North America. Pricing remained under pressure in all of Otis’ major markets.

Although total revenues at Carrier declined in the first nine months of 2010, compared to the same period of 2009, Carrier experienced organic revenue growth of 5% during the nine month period, as certain businesses benefited from strengthening market conditions, particularly the transport refrigeration business. In the third quarter of 2010, this continued strength in the transport refrigeration business as well as in the Asian and Latin American HVAC markets more than offset weakness in shipments of U.S. residential systems and led to organic revenue growth of 7% in the third quarter of 2010, compared to the same period of 2009. Additionally, Carrier commercial HVAC global new equipment orders increased 3% in the quarter, year-over-year. Carrier continued its transformation to a higher returns business, as evidenced by strong operating profit margin expansion in the third quarter of 2010.

UTC Fire & Security experienced a 17% increase in revenues in the first nine months of 2010, compared to the same period of 2009. This increase was driven primarily by the impact of net acquisitions, principally GE Security, partially offset by organic revenue contraction. Although organic revenue contracted in the first nine months of 2010, compared to the same period of 2009, revenues increased 1% organically in the third quarter of 2010, driven by the products businesses. Orders grew in the third quarter of 2010, as compared with the same period of 2009, reflecting strong orders in Asia, as well as in the global product businesses.

Aerospace Businesses

The aerospace businesses serve both commercial and government aerospace customers. In addition, elements of Pratt & Whitney and Hamilton Sundstrand also serve customers in the industrial markets. Revenue passenger miles (RPMs), U.S. government military and space spending, and the general economic health of airline carriers are all barometers for our aerospace businesses. Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits.

As noted previously, the global airline industry continues to gain traction as airlines have kept capacity additions well below air traffic growth leading to higher yields and capacity utilization. Airline traffic continued to grow year-over-year, and as a result we expect RPMs to grow approximately 6% worldwide in 2010. Orders of shorter cycle commercial aerospace spares grew year-over-year in the third quarter of 2010, with 35% growth in Pratt & Whitney’s large commercial spares orders and a 13% increase in Hamilton Sundstrand’s commercial spares orders. The improvement in commercial aerospace aftermarket order rates are in line with our expectation of higher commercial aerospace aftermarket revenues in the second half of 2010.

Although total revenues at Sikorsky decreased in the third quarter of 2010, as compared to the same period of 2009, due to the mix and timing of aircraft deliveries, Sikorsky continued to benefit from U.S. government spending. With the robust government demand, Sikorsky’s military backlog remains very strong.

Acquisition and Disposition Activity

Our growth strategy contemplates acquisitions. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated, and anticipated synergies or cost savings are achieved. During the first nine months of 2010, our investment in business acquisitions was approximately $2.6 billion, including debt assumed of $32 million, and principally reflected the acquisition of the GE Security business and an equity stake in Clipper Windpower Plc (Clipper). The remainder of our investment in businesses for the first nine months of 2010 consisted of a number of small acquisitions in both our commercial and aerospace businesses. We recorded the excess of the purchase price over the estimated fair value of the assets acquired as an increase in goodwill. As a result of acquisition activity, goodwill increased approximately $1.3 billion in the first nine months of 2010.

On March 1, 2010, we completed the acquisition of the GE Security business for approximately $1.8 billion, including debt assumed of $32 million. The GE Security business supplies security and fire safety technologies for commercial and residential applications through a broad product portfolio that includes fire detection and life safety systems, intrusion alarms, and video surveillance and access control systems. This business is being integrated into our UTC Fire & Security segment during the course of 2010, and will enhance UTC Fire & Security’s geographic diversity with the strong North American presence and increased product and technology offerings of GE Security. In connection with this transaction, we recorded approximately $600 million of identifiable intangible assets and $1.1 billion of goodwill. The goodwill recorded reflects synergies expected to be realized through the combination of GE Security’s products, resources and management talent with those of the existing UTC Fire & Security business to enhance competitiveness, accelerate the development of certain product offerings, drive improved operational performance and secure

additional service channels. Additionally, the combined businesses will allow for significant improvements to the cost structure through the rationalization of general and administrative expenditures as well as research and development efforts.

 

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In January 2010, we completed the acquisition of a 49.5% equity stake in Clipper, a California-based wind turbine manufacturer that trades on the AIM London Stock Exchange. This investment is intended to expand our power generation portfolio and allow us to enter the wind power market by leveraging our expertise in blade technology, turbines and gearbox design. The total cost was £166 million (approximately $270 million) for the purchase of 84.3 million newly issued shares and 21.8 million shares from existing shareowners. We have accounted for this investment under the equity method of accounting. Subsequent to the initial purchase, we increased our investment to 49.9%. During the quarter ended September 30, 2010, we recorded a $159 million other-than-temporary impairment charge, on our equity investment in Clipper, in order to write-down our investment to market value as of September 30, 2010. This impairment is recorded within Other income, net on our Condensed Consolidated Statement of Operations.

In October 2010, we reached agreement with the management and independent members of the board of directors of Clipper on the terms of a cash offer to acquire all remaining shares of Clipper. The acquisition will be implemented by way of a court-approved scheme of arrangement under the UK Companies Act 2006, and remains subject to customary closing conditions and the approval of Clipper’s shareholders. Under the terms of the agreement, the acquisition is valued at 65 pence per share or £70 million (approximately $112 million). In connection with the agreement, we have also agreed to provide to Clipper’s operating subsidiary a loan facility permitting borrowings of up to $50 million for the period prior to closing of the acquisition. The facility would be guaranteed by Clipper and the operating subsidiary would grant a lien over certain of its assets subject to approval of Clipper shareholders.

During the quarter ended June 30, 2010, we recorded approximately $86 million of asset impairment charges, for assets that have met the held-for-sale criteria, related primarily to the expected disposition of businesses within both Carrier and Hamilton Sundstrand. These asset impairment charges are recorded within Cost of products sold on our Condensed Consolidated Statement of Operations. The asset impairment charges include a $58 million charge related to the expected disposition of a business associated with Carrier’s ongoing portfolio transformation to a higher returns business and a $28 million charge at Hamilton Sundstrand related primarily to the expected disposition of an aerospace business as part of Hamilton Sundstrand’s efforts to implement low cost sourcing initiatives.

We expect to invest approximately $3.0 billion in acquisitions for 2010, including those investments made during the first nine months of 2010, although this will depend upon the timing, availability and the appropriate value of potential acquisition opportunities.

Other

Government legislation, policies and regulations can have a negative impact on our worldwide operations. Government regulation of refrigerants and energy efficiency standards, elevator safety codes and fire protection regulations are important to our commercial businesses. Government and market-driven safety and performance regulations, restrictions on aircraft engine noise and emissions and government procurement practices can impact our aerospace and defense businesses.

Commercial airline financial distress/consolidation, global economic conditions, changes in raw material and commodity prices, interest rates, foreign currency exchange rates and energy costs create uncertainties that could impact our earnings outlook for the remainder of 2010. See Part II, Item 1A, “Risk Factors” in this Form 10-Q for further discussion.

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. We believe 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in our 2009 Annual Report, incorporated by reference in our 2009 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting estimates during the first nine months of 2010.

 

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RESULTS OF CONTINUING OPERATIONS

Revenues

 

     Quarter Ended September 30,            Nine Months Ended September 30,         

(in millions)

   2010     2009      % change     2010      2009      % change  

Sales

   $ 13,620     $ 13,187        3.3   $ 39,462      $ 38,446        2.6

Other income, net

     (93     188        (149.5 )%      46        374        (87.7 )% 
                                                   

Total revenues

   $ 13,527     $ 13,375        1.1   $ 39,508      $ 38,820        1.8
                                                   

Revenues in the third quarter of 2010, as compared to the same period of 2009, grew 3% organically. The adverse impacts of unfavorable foreign currency translation (1%) combined with net adverse non-recurring items (2%) recorded in Other income, net were partially offset by the beneficial impact from net acquisitions (1%). The increase in organic revenue largely reflects growth at Carrier and Pratt & Whitney. The growth at Carrier was driven primarily by continuing strength in the transport refrigeration business while a strong commercial aftermarket recovery contributed to the growth at Pratt & Whitney. Organic revenue growth also reflects the year-over-year beneficial impact of currency hedges at Pratt & Whitney Canada (P&WC). These organic revenue increases were partially offset by organic revenue contraction at Sikorsky.

Revenues for the first nine months of 2010, as compared to the same period of 2009, grew 1% organically. The favorable impact from foreign currency translation (1%) combined with the beneficial impact from net acquisitions (1%) more than offset the net adverse impact of one time items (1%) recorded in Other income, net. Organic revenue growth principally reflects growth at Carrier and Sikorsky, partially offset by organic contraction at Otis. Carrier’s organic revenue growth was driven by continuing strength in the transport refrigeration business, while Sikorsky’s growth was attributable to higher military revenues. The organic contraction at Otis was due to a decrease in new equipment sales.

The decline in Other income, net for the third quarter of 2010, as compared with the same period of 2009, primarily reflects the impact from a $159 million other-than-temporary impairment charge, recorded in the third quarter of 2010, on our equity investment in Clipper in order to bring the investment to market value. Lower equity income at Carrier as a result of an approximately $30 million valuation allowance charge in the third quarter of 2010 related to a unconsolidated foreign venture was partially offset by $24 million of net gains from dispositions associated with Carrier’s ongoing portfolio transformation. Also contributing to the year-over-year decline in Other income, net is the absence of a $57 million gain at Carrier as a result of the contribution of a majority of its U.S. residential sales and distribution businesses into a new venture and favorable pretax interest income adjustments of approximately $17 million related to global tax examination activity, both in the third quarter of 2009, and costs in the third quarter of 2010 associated with the early redemption of long-term debt.

The decline in Other income, net for the first nine months of 2010, as compared to the same period of 2009, reflects the impact from third quarter items noted above as well as the absence of a $52 million non-taxable gain recognized at Otis in the second quarter of 2009. This prior year gain related to the re-measurement to fair value of a previously held equity interest in a joint venture following the purchase of a controlling interest in that joint venture. The remaining year-over-year variance for the first nine months of 2010 is primarily attributable to a $24 million favorable pre-tax interest adjustment associated with the resolution of an uncertain temporary tax item recorded in the second quarter of 2010, partially offset by the costs associated with the early redemption of long-term debt during the 2010 period.

Gross Margin

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(in millions)

   2010     2009     2010     2009  

Gross margin

   $ 3,953     $ 3,351     $ 11,048     $ 9,902  

Percentage of sales

     29.0     25.4     28.0     25.8

The increases in gross margin as a percentage of sales for both the third quarter of 2010 and the first nine months of 2010, as compared to 2009, were primarily driven by increased volumes and lower cost of sales resulting from continued focus on cost reductions, savings from previously initiated restructuring actions and net operational efficiencies. The improvement also reflects the beneficial impact from net acquisitions. The increase in gross margin as a percentage of sales in the third quarter of 2010 also reflects the beneficial impact of lower year-over-year restructuring costs (100 basis points). Similarly, the increase in gross margin as a

 

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percentage of sales for the first nine months of 2010 also reflects the beneficial impact of lower year-over-year restructuring charges (60 basis points) partially offset by the adverse impact of asset impairment charges (20 basis points) recorded in the second quarter of 2010 related to expected disposition activity at both Carrier and Hamilton Sundstrand.

Research and Development

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2010     2009     2010     2009  

(in millions)

   Amount      % of sales     Amount      % of sales     Amount      % of sales     Amount      % of sales  

Company-funded

   $ 433        3.2   $ 344        2.6   $ 1,289        3.3   $ 1,137        3.0

Customer-funded

     450        3.3     550        4.2     1,427        3.6     1,583        4.1
                                                                    

Total

   $ 883        6.5   $ 894        6.8   $ 2,716        6.9   $ 2,720        7.1
                                                                    

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 product family at Pratt & Whitney, the Boeing 787 program at Hamilton Sundstrand, and various engine programs at P&WC. The increase in year-over-year company-funded research and development in both the quarter ended and nine months ended September 30, 2010, as compared to the same periods of 2009, primarily reflects increases at the aerospace businesses as they continue to ramp up new product development programs and the incremental impact to UTC Fire & Security of the recent acquisition of the GE Security business. Company-funded research and development spending for the full year 2010 is now expected to increase by approximately $225 million from 2009 levels primarily due to incremental investments in the next generation product family at Pratt & Whitney, including the PurePower PW1000G engine, multiple new programs at Hamilton Sundstrand, and the impact of research and development activities at the recently acquired GE Security business.

The decrease in customer-funded research and development in the third quarter and first nine months of 2010, compared to the same periods in 2009 was primarily driven by a decrease at Pratt & Whitney related to a reduction in development spending on the Joint Strike Fighter program.

Selling, General and Administrative

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(in millions)

   2010     2009     2010     2009  

Selling, general and administrative expenses

   $ 1,478     $ 1,424     $ 4,393     $ 4,481  

Percentage of sales

     10.9     10.8     11.1     11.7

The increase in selling, general and administrative expenses in the third quarter of 2010, as compared to the same period of 2009, is due primarily to the impact from recent acquisitions, particularly the acquisition of GE Security, partially offset by lower restructuring costs, the impact of cost reductions and the impact from restructuring and cost saving initiatives undertaken in 2009 in anticipation of adverse economic conditions.

The decrease in selling, general and administrative expenses in the first nine months of 2010, as compared to the same period of 2009, is due primarily to a continued focus on cost reduction and the impact from restructuring and cost saving initiatives undertaken in 2009 in anticipation of adverse economic conditions, partially offset by the impact from recent acquisitions. As a percentage of sales, the 60 basis point year-over-year decrease primarily reflects the impact of lower restructuring costs.

Interest Expense

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(in millions)

   2010     2009     2010     2009  

Interest expense

   $ 182     $ 170     $ 560     $ 522  

Average interest rate

     5.4     5.6     5.6     5.8

 

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The increase in interest expense in the third quarter of 2010 as compared to the same period of 2009 largely reflects the impact of higher average borrowings. Interest expense on our long-term debt increased as a result of the issuance of two series of fixed rate long-term notes totaling $2.25 billion in February 2010 (see further discussion in the “Liquidity and Financial Condition” section). This impact was partially offset by the absence of interest associated with the repayment at maturity in May 2010 of our $600 million of 4.375% notes due 2010 and the early redemption in June 2010 of the entire $500 million outstanding principal amount of our 7.125% notes that were due November 15, 2010.

Similar to the third quarter of 2010, the increase in interest expense for the first nine months of 2010, as compared to the same period of the prior year, reflects the impact of higher average borrowings. Aside from the impact of debt repayments noted above, the additional interest associated with the issuance of the long-term debt in February 2010 was also partially offset by the absence of interest related to the repayment in June 2009 of our $400 million of 6.500% notes due 2009. Interest expense also reflects the lower cost associated with our commercial paper borrowings.

Income Taxes

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
      2010     2009     2010     2009  

Effective tax rate

     26.5     28.5     28.7     27.2

The effective tax rate for the quarter ended September 30, 2010 has decreased as compared to the same period of 2009. This decrease is largely driven by a net $102 million tax benefit associated with management’s intention to repatriate additional high tax dividends from the current year to the U.S. in 2010 as a result of recent U.S. tax legislation. This net benefit was partially offset by the non-deductibility of impairment charges, primarily driven by a $159 million other-than-temporary impairment charge on our equity investment in Clipper, and the tax effects of net gains from dispositions associated with Carrier’s ongoing portfolio transformation. The effective tax rate for the quarter ended September 30, 2009 reflects the tax effects of the previously disclosed Carrier and Watsco transaction and a $32 million adverse tax impact associated with a foreign reorganization, net of the reduction to tax expense relating to the re-evaluation of our tax liabilities and contingencies based on global examination activity in the quarter.

The effective tax rate for the nine months ended September 30, 2010 increased as compared to the same period of 2009 as a result of the adverse impact from the health care legislation related to the Medicare Part D program in the first quarter of 2010, the net tax effects of asset impairment charges in the second quarter of 2010 and the impact from items disclosed above that were recorded in the quarter ended September 30, 2010. The effective tax rate for the nine months ended September 30, 2009 reflects a $25 million favorable tax impact in the first quarter of 2009 related to the formation of a commercial venture, the non-taxability in the second quarter of 2009 of a gain recognized at Otis and the net adverse impacts of the third quarter 2009 items disclosed above.

The effective tax rate for the full year of 2010 is expected to be approximately 27%, before the impact of any discrete events. We expect our effective tax rate in 2011 to be approximately 31%, depending on the outcome of various legislative tax matters and before the impact of any discrete events.

Net Income

 

     Quarter Ended September 30,      Nine Months Ended September 30,  

(in millions, except per share amounts)

   2010      2009      2010      2009  

Net income

   $ 1,299      $ 1,145      $ 3,458      $ 3,010  

Less: Noncontrolling interest in subsidiaries’ earnings

     101        87        284        254  
                                   

Net income attributable to common shareowners

   $ 1,198      $ 1,058      $ 3,174      $ 2,756  
                                   

Diluted earnings per share

   $ 1.30      $ 1.14      $ 3.43      $ 2.97  

Although the average foreign exchange rate of the U.S. dollar was stronger in the third quarter of 2010, as compared to the same period of 2009, against certain currencies such as the Euro, the impact of foreign currency generated a positive impact of $.02 per diluted share on our operational performance in the third quarter of 2010. This year-over-year impact primarily represents the beneficial impact of hedging which more than offset adverse foreign currency translation at P&WC. At P&WC, the weakness of the

 

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U.S. dollar in the third quarter of 2010 generated an adverse foreign currency translation impact as the majority of P&WC’s revenues are denominated in U.S. dollars, while a significant portion of its costs are incurred in local currencies. 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 P&WC. As a result of hedging programs currently in place, P&WC’s 2010 full year operating results will include a beneficial impact of hedging, net of foreign currency translation, of at least $150 million. For additional discussion of hedging, refer to Note 8 to the Condensed Consolidated Financial Statements.

Diluted earnings per share for the third quarter of 2010 include a net charge of $.09 per share from restructuring and non-recurring items. These non-recurring items include the previously noted $159 million other-than-temporary impairment charge on our equity investment in Clipper, partially offset by $24 million of net gains from dispositions related to Carrier’s ongoing portfolio transformation, and a $102 million net tax benefit associated with management’s intention to repatriate additional high tax dividends from the current year to the U.S. in 2010 as a result of recent U.S. tax legislation. We expect to initiate additional restructuring actions during the remainder of 2010. Including trailing costs from previously announced restructuring actions, we now expect a net $.28 charge to diluted earnings per share for anticipated restructuring costs and non-recurring items for the full year 2010. Except for those restructuring actions initiated during the first nine months of 2010, no specific plans for significant other actions have been finalized at this time. Diluted earnings per share for the third quarter of 2010 were also favorably impacted by approximately $.03 per share as a result of the shares repurchased since July 1, 2009 under our share repurchase program.

Restructuring and Other Costs

During the first nine months of 2010, we recorded pre-tax restructuring and other costs totaling $210 million for new and ongoing restructuring actions as follows:

 

(in millions)

      

Otis

   $ 40  

Carrier

     32  

UTC Fire & Security

     53  

Pratt & Whitney

     48  

Hamilton Sundstrand

     11  

Sikorsky

     14  

Eliminations and other

     12  
        

Total

   $ 210  
        

The net costs included $122 million recorded in cost of sales, $87 million in selling, general and administrative expenses and $1 million in other income, net. As described below, these costs primarily relate to actions initiated during 2010 and 2009.

2010 Actions. During the first nine months of 2010, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We recorded net pre-tax restructuring and other costs totaling $178 million as follows: Otis $42 million, Carrier $30 million, UTC Fire & Security $43 million, Pratt & Whitney $29 million, Hamilton Sundstrand $7 million, Sikorsky $15 million and Eliminations and other $12 million. The charges included $96 million in cost of sales and $82 million in selling, general and administrative expenses. Those costs included $148 million for severance and related employee termination costs, $14 million for asset write-downs and $16 million for facility exit and lease termination costs.

We expect the 2010 actions that were initiated in the first nine months to result in net workforce reductions of approximately 3,300 hourly and salaried employees, the exiting of approximately 3.0 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of September 30, 2010, we have completed net workforce reductions of approximately 1,300 employees. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2010 and 2011. Approximately 85% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During the first nine months of 2010, we had cash outflows of approximately $59 million related to the 2010 actions. We expect to incur additional restructuring and other costs of $84 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 $200 million annually.

2009 Actions. During the first nine months of 2010, we recorded net pre-tax restructuring and other costs and reversals totaling $43 million for restructuring actions initiated in 2009. The 2009 actions relate to ongoing cost reduction efforts, including workforce reductions, the consolidation of field operations and the consolidation of repair and overhaul operations. We recorded the charges for the first nine months of 2010 as follows: Otis $(2) million, Carrier $12 million, UTC Fire & Security $10 million, Pratt & Whitney

 

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$20 million, Hamilton Sundstrand $4 million and Sikorsky $(1) million. The charges included $26 million in cost of sales, $16 million in selling, general and administrative expenses and $1 million in other income, net. Those costs included $5 million for severance and related employee termination costs, $5 million for asset write-downs and $33 million for facility exit and lease termination costs.

We expect the 2009 actions to result in net workforce reductions of approximately 14,600 hourly and salaried employees, the exiting of approximately 4.6 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of September 30, 2010, we have completed net workforce reductions of approximately 13,300 employees and exited 1.2 million net square feet of facilities. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2010 and 2011. Approximately 60% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During the first nine months of 2010, we had cash outflows of approximately $180 million related to the 2009 actions. We expect to incur additional restructuring and other costs of $40 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 $700 million annually.

In September 2009, Pratt & Whitney announced plans to close a repair facility and an engine overhaul facility in Connecticut. For additional information concerning litigation related to this matter, refer to Note 7 to the Condensed Consolidated Financial Statements.

Additional 2010 Actions. We expect to initiate additional restructuring actions during the remainder of 2010. Except for those actions described above, no specific plans for significant other actions have been finalized at this time.

Segment Review

Segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. Adjustments to reconcile segment reporting to the consolidated results for the quarters ended September 30, 2010 and 2009 are included in “Eliminations and other” below, which also includes certain small subsidiaries.

Results for the quarters ended September 30, 2010 and 2009 are as follows:

 

     Revenues     Operating Profits     Operating Profit Margins  

(in millions)

   2010     2009     2010     2009     2010     2009  

Otis

   $ 2,914     $ 2,962     $ 678     $ 633       23.3     21.4

Carrier

     2,964       3,007       380       312       12.8     10.4

UTC Fire & Security

     1,657       1,383       187       149       11.3     10.8

Pratt & Whitney

     3,250       3,031       547       444       16.8     14.6

Hamilton Sundstrand

     1,419       1,400       255       247       18.0     17.6

Sikorsky

     1,548       1,648       163       157       10.5     9.5
                                                

Total segments

     13,752       13,431       2,210       1,942       16.1     14.5

Eliminations and other

     (225     (56     (178     (98    

General corporate expenses

     —          —          (83     (73    
                                                

Consolidated

   $ 13,527     $ 13,375     $ 1,949     $ 1,771       14.4     13.2
                                                

 

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Third quarter 2010 and 2009 restructuring and other costs included in consolidated operating profit totaled $58 million and $231 million, respectively, as follows:

 

     Quarter Ended September 30,  

(in millions)

   2010     2009  

Otis

   $ 12     $ 52  

Carrier

     (1     43  

UTC Fire & Security

     24       7  

Pratt & Whitney

     13       57  

Hamilton Sundstrand

     2       13  

Sikorsky

     7       —     

Eliminations and other

     1       59  
                

Total

   $ 58     $ 231  
                

Results for the nine months ended September 30, 2010 and 2009 are as follows:

 

     Revenues     Operating Profits     Operating Profit Margins  

(in millions)

   2010     2009     2010     2009     2010     2009  

Otis

   $ 8,483     $ 8,579     $ 1,915     $ 1,770       22.6     20.6

Carrier

     8,528       8,594       852       594       10.0     6.9

UTC Fire & Security

     4,695       3,999       478       297       10.2     7.4

Pratt & Whitney

     9,440       9,322       1,505       1,347       15.9     14.4

Hamilton Sundstrand

     4,147       4,183       680       626       16.4     15.0

Sikorsky

     4,605       4,371       477       406       10.4     9.3
                                                

Total segments

     39,898       39,048       5,907       5,040       14.8     12.9

Eliminations and other

     (390     (228     (242     (142    

General corporate expenses

     —          —          (253     (240    
                                                

Consolidated

   $ 39,508     $ 38,820     $ 5,412     $ 4,658       13.7     12.0
                                                

For the first nine months of 2010 and 2009, restructuring and other costs included in consolidated operating profit totaled $210 million and $695 million, respectively, as follows:

 

     Nine Months Ended September 30,  

(in millions)

   2010      2009  

Otis

   $ 40      $ 131  

Carrier

     32        139  

UTC Fire & Security

     53        107  

Pratt & Whitney

     48        177  

Hamilton Sundstrand

     11        69  

Sikorsky

     14        7  

Eliminations and other

     12        62  

General corporate expenses

     —           3  
                 

Totals

   $ 210      $ 695  
                 

 

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The tables and segment discussions that follow address the factors that contributed to the year-over-year changes in revenues and operating profits:

Otis –

 

    Factors Contributing to Total % Change Year-Over-Year  in:  
    Quarter Ended September 30, 2010     Nine Months Ended September 30, 2010  
    Revenues     Operating Profits     Revenues     Operating Profits  

Organic revenue / Operational operating profit

    (1 )%      5     (3 )%      6

Foreign currency translation

    (2 )%      (4 )%      2     1

Acquisitions and divestitures, net

    1     —          1     —     

Restructuring and other costs

    —          6     —          5

Other

    —          —          (1 )%      (4 )% 
                               

Total % change

    (2 )%      7     (1 )%      8
                               

Quarter Ended September 30, 2010 Compared with Quarter Ended September 30, 2009

Revenues decreased $48 million (2%) in the third quarter of 2010, compared with the same period of 2009. The organic revenue decline in the quarter was due to a decrease in new equipment sales, as growth in China, the Middle East, and certain other emerging markets was more than offset by declines in North America. The decrease in new equipment sales was partially offset by growth in the contractual maintenance and repair businesses.

Operating profits increased $45 million (7%) in the third quarter of 2010, compared with the same period of 2009. The operational profit increase in the quarter was due to benefits from higher service volume globally and ongoing cost reduction programs, which more than offset the impact of lower new equipment volume and pricing.

Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009

Revenues decreased $96 million (1%) in the first nine months of 2010, compared with the same period of 2009. The organic revenue decline was due to a decrease in new equipment sales in North America and Europe, partially offset by a strong rebound in China. The decrease in new equipment sales was partially offset by continued growth in the service business. The decrease contributed by “Other” primarily reflects the absence of a $52 million gain recognized in the second quarter of 2009.

Operating profits increased $145 million (8%) in the first nine months of 2010, compared with the same period of 2009. Operational profit improvement was due to benefits from higher maintenance volume and the benefits of aggressive cost reduction programs. The decrease contributed by “Other” primarily reflects the absence of a $52 million gain recognized in the second quarter of 2009.

Carrier –

 

    Factors Contributing to Total % Change Year-Over-Year  in:  
    Quarter Ended September 30, 2010     Nine Months Ended September 30, 2010  
    Revenues     Operating Profits     Revenues     Operating Profits  

Organic revenue / Operational operating profit

    7     29     5     46

Foreign currency translation

    (1 )%      (2 )%          —     

Acquisitions and divestitures, net

    (5 )%      1     (6 )%      2

Restructuring and other costs

    —          14     —          18

Other

    (2 )%      (20 )%      (1 )%      (23 )% 
                               

Total % change

    (1 )%      22     (1 )%      43
                               

Quarter Ended September 30, 2010 Compared with Quarter Ended September 30, 2009

Revenues decreased $43 million (1%) in the third quarter of 2010, compared with the same period of 2009. Organic revenue growth was driven primarily by improvement in the transport refrigeration and Asian and Latin American HVAC markets, offset slightly by weakness in the U.S. residential systems market. The decrease contributed by “Other” reflects the year-over-year net impact of transactions resulting from dispositions associated with Carrier’s ongoing portfolio transformation, including the absence of a $57 million gain recognized in July 2009 from the contribution of the majority of the U.S. Residential Sales and Distribution business into a new venture formed with Watsco, and an approximately $30 million valuation allowance charge, reflected within equity income, in the third quarter of 2010 related to a unconsolidated foreign venture.

 

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Operating profits increased $68 million (22%) in the third quarter of 2010, compared with the same period of 2009. The carry-over benefits of cost reduction and restructuring together with strong conversion on organic revenue growth, particularly in the higher margin transport refrigeration business, drove the operational profit improvement. These benefits (combined 36%) were partially offset by increased commodity costs (7%). The decrease contributed by “Other” reflects the year-over-year net impact of transactions resulting from dispositions associated with Carrier’s ongoing portfolio transformation, including the absence of a prior year gain recognized from the transaction with Watsco, and an approximately $30 million valuation allowance charge, reflected within equity income, in the third quarter of 2010 related to a unconsolidated foreign venture.

Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009

Revenues decreased $66 million (1%) in the first nine months of 2010, compared with the same period of 2009. Organic revenue growth was driven by improvement in the transport refrigeration, Asian and Latin America HVAC, and U.S. residential systems markets, partially offset by a decline in both the U.S. and European commercial HVAC equipment markets. The decrease contributed by “Acquisitions and divestitures, net” in the first nine months of 2010 reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months, including the transaction in the third quarter of 2009 with Watsco. The decrease contributed by “Other” primarily reflects the year-over-year net impact of transactions resulting from dispositions associated with Carrier’s ongoing portfolio transformation, including the absence of a prior year gain recognized from the transaction with Watsco, as well as an approximately $30 million valuation allowance charge, reflected within equity income, in the third quarter of 2010 related to a unconsolidated foreign venture.

Operating profits increased $258 million (43%) in the first nine months of 2010, compared with the same period of 2009. The carry-over benefits of cost reduction and restructuring together with strong conversion on organic revenue growth, particularly in the higher margin transport refrigeration business, largely drove the operational profit improvement. These benefits (combined 49%) were partially offset by increased commodity costs (3%). The decrease contributed by “Other” primarily reflects the year-over-year net impact of transactions resulting from dispositions associated with Carrier’s ongoing portfolio transformation, including the absence of a prior year gain recognized from the transaction with Watsco, as well as an approximately $30 million valuation allowance charge, reflected within equity income, in the third quarter of 2010 related to a unconsolidated foreign venture. Additionally, included within “Other” is an approximately $58 million asset impairment charge recorded in the second quarter of 2010 associated with the expected disposition of a business.

UTC Fire & Security –

 

     Factors Contributing to Total % Change Year-Over-Year in:  
     Quarter Ended September 30, 2010     Nine Months Ended September 30, 2010  
     Revenues     Operating Profits     Revenues     Operating Profits  

Organic revenue / Operational operating profit

     1     7     (4 )%      (1 )% 

Foreign currency translation

     (2 )%      (1 )%      2     4

Acquisitions and divestitures, net

     21     31     19     40

Restructuring and other costs

     —          (11 )%      —          18
                                

Total % change

     20     26     17     61
                                

Quarter Ended September 30, 2010 Compared with Quarter Ended September 30, 2009

Revenues increased $274 million (20%) in the third quarter of 2010, compared with the same period of 2009. Organically, the revenue growth was driven primarily from the products businesses, with the service and install businesses flat year-over-year. Geographically, within the service and install businesses, the Americas and Europe experienced weakness in the third quarter of 2010 as a result of poor economic conditions. This was partially offset by growth in Asia, particularly China. The increase contributed by “Acquisitions and divestitures, net” primarily reflects the impact from the acquisition in March 2010 of the GE Security business.

Operating profits increased $38 million (26%) in the third quarter of 2010, compared with the same period of 2009. The operational profit improvement reflects the continuing benefits of productivity initiatives, integration of field operations and restructuring. The increase contributed by “Acquisitions and divestitures, net” primarily reflects the impact from the acquisition in March 2010 of the GE Security business.

 

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Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009

Revenues increased $696 million (17%) in the first nine months of 2010, compared with the same period of 2009. Organically, the revenue contraction was driven by declines in the service and install (3%) and products (1%) businesses. Geographically, within the service and install businesses, the Americas and Europe experienced weakness in the first nine months of 2010 as a result of poor economic conditions. The increase contributed by “Acquisitions and divestitures, net” principally reflects the net year-over-year impact from acquisition and divestitures completed in the preceding twelve months, led by the acquisition in March 2010 of the GE Security business.

Operating profits increased $181 million (61%) in the first nine months of 2010, compared with the same period of 2009. The operational profit decline reflects the impact of organic volume contraction, mostly offset by the continuing benefits of productivity initiatives, integration of field operations and restructuring. The increase contributed by “Acquisitions and divestitures, net” primarily reflects the acquisition in March 2010 of the GE Security business.

Pratt & Whitney –

 

     Factors Contributing to Total % Change Year-Over-Year in:  
     Quarter Ended September 30, 2010     Nine Months Ended September 30, 2010  
     Revenues     Operating Profits     Revenues     Operating Profits  

Organic revenue* / Operational operating profit*

     4     3     (3 )%      (5 )% 

Foreign currency (including P&WC net hedging)*

     4     13     4     9

Restructuring and other costs

     —           10     —          10

Other

     (1 )%      (3 )%      —          (2 )% 
                                

Total % change

       7     23       1     12
                                

 

* As discussed further in the “Business Overview” and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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 revenue/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.

Quarter Ended September 30, 2010 Compared with Quarter Ended September 30, 2009

Revenues increased $219 million (7%) in the third quarter of 2010, compared with the same period of 2009. Organic revenue growth primarily reflects the impact from higher commercial aftermarket volumes (6%). Declines at Pratt & Whitney Power Systems (1%) and Pratt & Whitney Rocketdyne (1%) were partially offset by higher military revenues to account for the majority of the remaining year-over-year change. The impact from foreign currency reflects the beneficial transactional impact of foreign exchange hedging at P&WC.

Operating profits increased $103 million (23%) in the third quarter of 2010, compared with the same period of 2009. The operational profit increase was primarily driven by profits associated with the higher volumes noted above, partially offset by the absence of the net beneficial impact of terminating or otherwise settling certain contracts (13%) in 2009, and an increase in research and development costs (4%) year-over-year.

Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009

Revenues increased $118 million (1%) in the first nine months of 2010, compared with the same period of 2009. The decrease in organic revenues is primarily attributable to decreased engine volumes at P&WC (4%). The impact from foreign currency reflects the beneficial transactional impact of foreign exchange hedging at P&WC.

Operating profits increased $158 million (12%) in the first nine months of 2010, compared with the same period of 2009. The operational profit decline was primarily driven by lower profits associated with decreased engine volumes at P&WC (6%) and the impact of higher research and development costs (2%) year-over-year, partially offset by higher profit contribution associated with increased military engine volumes (3%).

 

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Hamilton Sundstrand –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended September 30, 2010     Nine Months Ended September 30, 2010  
     Revenues     Operating Profits     Revenues     Operating Profits  

Organic revenue / Operational operating profit

     4     8     (1 )%      7

Foreign currency translation

     (1 )%      (1 )%      —          —     

Acquisitions and divestitures, net

     —          (1 )%      —          —     

Restructuring and other costs

     —          4     —          9

Other

     (2 )%      (7 )%      —          (7 )% 
                                

Total % change

     1     3     (1 )%      9
                                

Quarter Ended September 30, 2010 Compared with Quarter Ended September 30, 2009

Revenues increased $19 million (1%) in the third quarter of 2010, compared with the same period of 2009. The organic revenue growth reflects volume increase in both the industrial (3%) and aerospace (1%) businesses. The growth within aerospace was due to an increase in the OEM business (2%), with a slight decrease in aftermarket driven by the military business. The decrease contributed by “Other” primarily reflects the absence of a gain from the sale of a business in 2009.

Operating profits increased $8 million (3%) in the third quarter of 2010, compared with the same period of 2009. The increase in operational profit reflects an increase in both the industrial (6%) and aerospace (2%) businesses. The increase within aerospace was due to an increase in the OEM business (2%), while the aftermarket business was relatively flat. Favorable OEM operating profit was primarily offset by higher research and development costs (15%). The decrease contributed by “Other” primarily reflects the absence of a gain from the sale of a business in 2009.

Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009

Revenues decreased $36 million (1%) in the first nine months of 2010, compared with the same period of 2009. The organic revenue contraction reflects a decline in the aerospace businesses (2%), partially offset by an increase in the industrial businesses (1%). The decrease within aerospace was attributable to a decline in OEM (2%), while aftermarket was relatively flat.

Operating profits increased $54 million (9%) in the first nine months of 2010, compared with the same period of 2009. The increase in operational profit reflects an increase in the industrial businesses (8%) partially offset by a decrease in the aerospace businesses (1%). Within aerospace, a decline within the OEM business (4%) was partially offset by an increase in the aftermarket business (3%). The year-over-year change in OEM primarily reflects higher research and development costs (6%). The decrease contributed by “Other” primarily reflects the absence of a gain from the sale of a business in 2009 and the impact of asset impairment charges recorded in the second quarter of 2010.

Sikorsky –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended September 30, 2010     Nine Months Ended September 30, 2010  
     Revenues     Operating Profits     Revenues     Operating Profits  

Organic revenue / Operational operating profit

     (6 )%      9     5     13

Acquisitions and divestitures, net

     —          (1 )%      —          (2 )% 

Restructuring and other costs

     —          (4 )%      —          (2 )% 

Other

     —          —          —          8
                                

Total % change

     (6 )%      4     5     17
                                

Quarter Ended September 30, 2010 Compared with Quarter Ended September 30, 2009

Revenues decreased $100 million (6%) in the third quarter of 2010, compared with the same period of 2009. The organic revenue decline was primarily driven by a different mix of aircraft deliveries year-over-year, including lower foreign military sales and less favorable commercial aircraft configurations. This year-over-year impact was partially offset by increased aftermarket and higher U.S. military aircraft volumes in the current quarter.

Operating profits increased $6 million (4%) in the third quarter of 2010, compared with the same period of 2009. The operational profit improvement was primarily attributable to increased military aircraft deliveries (11%), partially offset by less

 

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favorable commercial aircraft configuration mix (7%). The remainder of the operational profit change primarily reflects increased volume in aftermarket support, partially offset by increased research and development costs. The 1% decrease within “Acquisitions and divestitures, net” reflects start-up costs of an equity investment in the United Arab Emirates in 2010.

Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009

Revenues increased $234 million (5%) in the first nine months of 2010, compared with the same period of 2009. Organic revenue growth was primarily attributable to an increase in military revenues (7%), which was partially offset by the impact on revenues from fewer aircraft deliveries from commercial operations (3%) due to commercial market weakness. The remainder of the increase reflects higher volume in aftermarket support.

Operating profits increased $71 million (17%) in the first nine months of 2010, compared with the same period of 2009. The operational profit improvement was primarily attributable to increased aircraft deliveries and more favorable mix of aircraft within military operations (17%), partially offset by reduced operational profit from commercial operations (6%) due primarily to commercial market weakness. Operational profit growth from aftermarket support and lower manufacturing costs more than offset increased research and development costs year-over-year. The 2% decrease within “Acquisitions and divestitures, net” reflects start-up costs of an equity investment in the United Arab Emirates in 2010. The 8% increase contributed by “Other” primarily reflects the absence of prior year costs associated with a union contract ratified in the first quarter of 2009.

Eliminations and other –

The year-over-year change in revenues for the third quarter of 2010, as compared with the same period of 2009, primarily reflects the current quarter $159 million other-than-temporary impairment charge on our equity investment in Clipper. The year-over-year change in operating profit for the third quarter of 2010, as compared with the same period of 2009, primarily reflects the previously disclosed impairment charge on our equity investment in Clipper, partially offset by the net impact from the absence of certain items in the third quarter of 2009. These items include restructuring costs related to the curtailment of our domestic pension plans ($59 million) and inventory reserves and project related reserves recorded at UTC Power, partially offset by favorable interest adjustments related to global tax examination activity in 2009.

The year-over-year change in revenues in the first nine months of 2010, as compared to the same period of 2009, primarily reflects the impact of the previously noted impairment charge on our equity investment in Clipper, the cost impact in 2010 from the early redemption of long-term debt and losses associated with our equity investment in Clipper. These adverse impacts were partially offset by the $24 million favorable pretax interest adjustment associated with the resolution of an uncertain temporary tax item in the second quarter of 2010. The year-over-year change in operating profit in the first nine months of 2010, as compared to the same period of 2009, primarily reflects the impacts noted above for the third quarter year-over-year. These adverse impacts were partially offset by the $24 million favorable pretax interest adjustment associated with the resolution of an uncertain temporary tax item in the second quarter of 2010.

LIQUIDITY AND FINANCIAL CONDITION

 

(in millions)

   September 30,
2010
    December 31,
2009
    September 30,
2009
 

Cash and cash equivalents

   $ 5,731     $ 4,449     $ 4,632  

Total debt

     12,302       9,744       10,432  

Net debt (total debt less cash and cash equivalents)

     6,571       5,295       5,800  

Total equity

     22,253       20,999       19,260  

Total capitalization (debt plus equity)

     34,555       30,743       29,692  

Net capitalization (debt plus equity less cash and cash equivalents)

     28,824       26,294       25,060  

Debt to total capitalization

     36     32     35

Net debt to net capitalization

     23     20     23

 

Note 1    During 2009, we adopted the FASB Accounting Standards Update (ASU) for redeemable equity instruments, applicable for all noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests). The standards require redeemable noncontrolling interests to be reported in the mezzanine section of the balance sheet, between liabilities and equity, at the greater of redemption value or initial carrying value. As a result of this adoption, we have retroactively reclassified “Redeemable noncontrolling interests” in the mezzanine section of the balance sheet and have increased them to redemption value, where required, resulting in a $387 million reclassification from total equity at September 30, 2009. Additional discussion of the accounting for redeemable noncontrolling interests is included in Note 9 to the Condensed Consolidated Financial Statements.

 

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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, which, after netting out capital expenditures, we target to equal or exceed net income attributable to common shareowners. For the full year of 2010, we expect operating cash flows less capital expenditures to exceed net income attributable to common shareowners. 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, and the ability to attract long-term capital at satisfactory terms.

Distress in the financial markets over the last several years has had an adverse impact on financial markets including, among other things, extreme volatility in security prices, diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. We have assessed the implications of these factors on our current business, are closely monitoring the impact on our customers and suppliers, and have determined that while there has been some impact to working capital, overall there has not been a significant effect on our financial position, results of operations or liquidity during the first nine months of 2010. Our pension plans have not experienced any significant impact on liquidity or counterparty exposure due to the volatility in the credit markets. Due to the substantial improvement in equity markets during the course of 2009, our domestic pension funds experienced a positive return on assets of approximately 21% in 2009. During the first nine months of 2010, the return on our domestic pension funds was approximately 11%. As a result of the positive returns experienced during 2009, as well as additional funding during 2009 and a change to the final average earnings formula, pension expense in 2010 has been lower than 2009 levels.

Approximately 89% of our domestic pension plans are invested in readily-liquid investments, including equity, fixed income, asset-backed receivables and structured products. The balance of our domestic pension plans (11%) is invested in less-liquid but market-valued investments, including real estate and private equity.

As discussed further below, our strong debt ratings and financial position have historically enabled us to issue long-term debt at favorable market rates, including our issuance of $2.25 billion of long-term debt in February 2010. In May 2010, we repaid the entire $600 million outstanding principal amount of our 4.375% notes at maturity. In June 2010, we redeemed the entire $500 million outstanding principal amount of our 7.125% notes that were due November 15, 2010 and in September 2010, we redeemed the entire $500 million outstanding principal amount of our 6.350% notes that were due March 1, 2011. Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing debt-to-total-capitalization level as well as our current credit standing.

We continue to have access to the commercial paper markets and our existing credit facilities, and expect to continue to generate strong operating cash flows. While the impact of continued market volatility cannot be predicted, we believe we have sufficient operating flexibility, cash reserves and funding sources to maintain adequate amounts of liquidity and to meet our future operating cash needs.

Most of our cash is denominated in foreign currencies. We manage our worldwide cash requirements by considering available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations. We will continue to transfer cash from those subsidiaries to UTC and to other international subsidiaries when it is cost effective to do so.

On occasion, we are required to maintain cash deposits with certain banks in respect to contractual obligations related to acquisitions or divestitures or other legal obligations. As of September 30, 2009, $79 million of restricted cash was reported in current assets in the Condensed Consolidated Balance Sheet. Restricted cash as of September 30, 2010 was not significant.

Cash Flow - Operating Activities

 

     Nine Months Ended September 30,  

(in millions)

   2010      2009  

Net cash flows provided by operating activities

   $ 4,230      $ 3,878  

The increase in cash generated from operating activities in the first nine months of 2010 as compared with the same period in 2009 is due largely to the increase in net income attributable to common shareowners, partially offset by higher working capital cash requirements. During the first nine months of 2010, working capital was a source of cash of $31 million compared to a source of cash of $284 million during the first nine months of 2009, a year-over-year decrease of $253 million. This decline was primarily driven by higher accounts receivable due to improved sales volumes, partially offset by lower tax payments. Increased inventory was more than offset by increased accounts payable.

 

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The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. We can contribute cash or company stock to our plans at our discretion. We made $551 million of cash contributions and contributed $250 million in UTC common stock to our domestic defined benefit pension plans and $148 million of cash contributions to our foreign pension plans in the first nine months of 2010. We expect to make total contributions of approximately $1 billion to our domestic defined benefit pension plans during the year, inclusive of the contribution of UTC common stock in the second quarter of 2010. Expected contributions to