SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 11, 1999
UNITED TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
001-00812 06-0570975
(Commission File No.) (IRS Employer Identification No.)
United Technologies Building
One Financial Plaza
Hartford, Connecticut 06101
(Address of principal executive offices, including ZIP code)
Registrant's telephone number, including area code
(860) 728-7000
N/A
(Former name or former address, if changed since last report)
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
Item 5. Other Events
As previously reported by the Registrant, in a Current Report on Form 8-K
dated March 16, 1999, United Technologies Corporation (the Corporation) entered
into an agreement to sell its UT Automotive unit to Lear Corporation. The sale
occurred on May 4, 1999. The financial statements for the three years in the
period ended December 31, 1998 have been restated to reflect UT Automotive as a
discontinued operation. The restated financial statements (together with other
restated financial information) are filed herewith as Exhibit 99.1.
On April 30, 1999, the Corporation announced a two-for-one stock split
payable on May 17, 1999, in the form of a stock dividend to shareowners of
record at the close of business on May 7, 1999. All common share and per share
amounts in these financial statements reflect the stock split.
Item 7. Financial Statements and Exhibits
Exhibit No. Exhibit
23 Consent of Independent Accountants.*
99.1 Restated financial statements for the three years in the period
ended December 31, 1998.*
99.2 Report of Independent Accountants on Financial Statement Schedule.*
99.3 Restated Financial Statement Schedule on Valuation and Qualifying
Accounts.*
99.4 Restated Statement re: Computation of per Share Earnings.*
99.5 Restated Statement re: Computation of Ratio of Earnings to Fixed
Charges.*
*Submitted electronically herewith.
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
UNITED TECHNOLOGIES CORPORATION
Dated: June 11, 1999 By: /s/ William H. Trachsel
William H. Trachsel
Senior Vice President, General Counsel and
Secretary
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (Nos. 333-26331,
333-74195 and 33-46916), in the Registration Statement on Form S-4 (No. 333-
77991), and in the Registration Statements on Form S-8 (Nos. 333-21853, 333-
18743, 333-21851, 33-57769, 33-45440, 33-11255, 33-26580, 33-26627, 33-28974,
33-51385, 33-58937, and 2-87322) of United Technologies Corporation of our
report dated January 21, 1999, except for Note 16, as to which the date is May
20, 1999, relating to the restated consolidated financial statements of United
Technologies Corporation for the three years in the period ended December 31,
1998 included in its Current Report on Form 8-K dated June 11, 1999 filed with
the Securities and Exchange Commission. We also consent to the incorporation by
reference of our report on the Financial Statement Schedule, which is included
as an exhibit to this Form 8-K.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
June 11, 1999
EXHIBIT 99.1
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
FIVE YEAR SUMMARY
1998 1997 1996 1995 1994
In Millions (except per share
and employee amounts)
FOR THE YEAR
Revenues $22,809 $21,288 $19,872 $19,418 $18,296
Research and development 1,168 1,069 1,014 865 892
Segment operating profit margin 9.6% 8.9% 8.6% 7.8% 7.3%
Income from continuing operations 1,157 962 788 651 488
Net income 1,255 1,072 906 750 585
Earnings per share:
Basic:
Continuing operations 2.47 1.98 1.57 1.27 0.93
Net earnings 2.68 2.22 1.81 1.47 1.12
Diluted:
Continuing operations 2.33 1.89 1.51 1.24 0.92
Net earnings 2.53 2.10 1.74 1.43 1.10
Cash dividends per common share 0.695 0.62 0.55 0.5125 0.475
Average number of shares of Common Stock
outstanding:
Basic 455.5 468.9 482.9 491.3 502.2
Diluted 494.8 507.1 517.2 519.0 526.0
Return on average common shareowners'
equity, after tax 28.6% 24.5% 21.1% 18.6% 15.4%
AT YEAR END
Working capital, excluding net investment
in discontinued operation $ 1,359 $ 1,712 $ 2,168 $ 2,065 $ 1,537
Total assets 17,768 15,697 15,566 14,819 14,577
Long-term debt, including current portion 1,669 1,389 1,506 1,713 2,005
Total debt 2,173 1,567 1,709 1,975 2,405
Debt to total capitalization 33% 28% 28% 33% 39%
Net debt (total debt less cash) 1,623 912 711 1,229 2,127
Net debt to total capitalization 27% 18% 14% 23% 36%
ESOP Preferred Stock, net 456 450 434 398 339
Shareowners' equity 4,378 4,073 4,306 4,021 3,752
Equity per common share 9.73 8.89 9.04 8.24 7.62
Number of employees (continuing operations) 134,400 130,400 123,800 119,800 117,100
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
POSITION
The Corporation's operations are classified into five principal operating
segments. Carrier and Otis serve customers in the commercial property and
residential housing industries. Pratt & Whitney and the Flight Systems segment,
which includes Sikorsky Aircraft and Hamilton Standard, serve commercial and
government customers in the aerospace industry. UT Automotive serves customers
in the automotive industry. The Corporation's segment operating results are
discussed in the Segment Review and Note 15 of Notes to Consolidated Financial
Statements.
On March 16, 1999, the Corporation announced an agreement to sell its UT
Automotive unit to Lear Corporation for $2.3 billion in cash. This transaction
was completed on May 4, 1999. The Corporation has restated its financial
statements presented herein to reflect UT Automotive as a discontinued operation
for all periods presented. On April 30, 1999, the Corporation announced a two-
for-one stock split payable on May 17, 1999 in the form of a stock dividend to
shareowners of record at the close of business on May 7, 1999. All common share
and per share amounts reflect the stock split.
BUSINESS ENVIRONMENT
As worldwide businesses, the Corporation's operations are affected by global
and regional economic factors. However, the diversity of the Corporation's
businesses and global market presence has helped limit the impact of any one
industry or the economy of any single country on the consolidated results.
Revenues from outside the U.S., including U.S. export sales, in dollars and as a
percentage of total segment revenues, are as follows:
In Millions of Dollars 1998 1997 1996 1998 1997 1996
Europe $ 4,252 $ 3,857 $ 3,868 16% 16% 16%
Asia Pacific 2,487 2,943 3,037 9% 12% 13%
Other 2,517 2,348 2,218 10% 9% 9%
U.S. Exports 4,097 3,840 2,962 16% 15% 13%
Continuing Operations 13,353 12,988 12,085 51% 52% 51%
Discontinued Operation 1,264 1,154 1,119 5% 5% 5%
International
Segment Revenues $14,617 $14,142 $13,204 56% 57% 56%
As part of its globalization strategy, the Corporation has invested in
businesses in emerging markets, including the People's Republic of China (PRC),
the former Soviet Union and other emerging nations, which carry higher levels of
currency, political and economic risks than investments in developed markets. At
December 31, 1998, the Corporation's net investment in any one of these
countries was less than 3% of consolidated equity.
The Asian economic crisis has significantly slowed growth in the region since
the latter part of 1997. Tightening of credit in Asia has restricted available
financing for new construction and slowed the completion of projects currently
underway, resulting in less activity compared to recent years. While recognizing
that the Asian economic downturn will continue beyond 1998, management believes
the long-term economic growth prospects of the region remain intact. Therefore,
the Corporation's Asian investment strategy continues to focus on the long-term
infrastructure requirements of the region.
OTIS is the world's largest elevator and escalator manufacturing and service
company. The elevator and escalator service market is an important aspect of
Otis' business. Otis is impacted by global and regional economic factors,
particularly fluctuations in commercial construction which affect new equipment
installations, and labor costs which can impact service and maintenance margins
on installed elevators and escalators. In 1998, 81% of Otis' revenues were
generated outside the U.S. Accordingly, changes in foreign currency exchange
rates can significantly affect the translation of Otis' operating results into
U.S. dollars for financial reporting purposes.
During 1998, U.S. office building construction starts were higher than the
prior year and commercial vacancy rates continued to improve. In Europe, Otis'
new equipment activity increased along with a growing base of service business.
Otis maintains a significant presence in the Asia Pacific region where economies
remained weak.
CARRIER is the world's largest manufacturer of commercial and residential
heating, ventilating and air conditioning (HVAC) systems and equipment. Carrier
also produces transport and commercial refrigeration equipment, and provides
after-market service and component sales. In late 1997, Carrier formed the
Refrigeration Operations group from the former Carrier Transicold business and
the newly acquired Commercial Refrigeration Operations. During 1998, 52% of
Carrier's revenues were generated by international operations and U.S. exports.
Accordingly, Carrier's results are impacted by a number of external factors
including commercial and residential construction activity worldwide, regional
economic and weather conditions and changes in foreign currency exchange rates.
U.S. residential housing and commercial construction starts increased in
1998, compared to 1997. Asian economies remained weak in 1998 while European
economies strengthened.
UT AUTOMOTIVE (UTA) develops and manufactures a wide variety of electrical
and interior trim systems and components for original equipment manufacturers
(OEMs) in the automotive industry. Sales to Ford Motor Company, UTA's largest
customer, were 33% of UTA's revenues in 1998. UTA also has important
relationships with DaimlerChrysler and General Motors as well as European
manufacturers PSA, Renault, Volvo, Austin Rover/BMW, SAAB and Fiat and the U.S.
manufacturing divisions of Japanese automotive OEMs.
North American car and light truck production was lower while European car
sales were higher in 1998, compared to 1997. UTA was unfavorably impacted by a
strike at General Motors, during 1998, while benefiting from higher volumes in
Europe. The automotive OEMs require significant cost reduction and performance
improvements from suppliers and require suppliers to bear an increasing portion
of engineering, design, development, tooling and warranty expenditures.
During 1998, 43% of UTA's revenues were generated by international operations
and U.S. exports. Accordingly, UTA's results can be impacted by changes in
foreign currency exchange rates.
As described in Note 16 of Notes to Consolidated Financial Statements, UT
Automotive was sold to Lear Corporation on May 4, 1999.
COMMERCIAL AEROSPACE
The financial performance of the Corporation's Pratt & Whitney and Flight
Systems segments is directly tied to the aviation industry. Pratt & Whitney is a
major supplier of commercial, general aviation and military aircraft engines,
along with spare parts, product support and a full range of overhaul, repair and
fleet management services. The Flight Systems segment provides environmental,
flight and fuel control systems and propellers for commercial and military
aircraft through Hamilton Standard, and commercial and military helicopters,
along with after-market products and services, through Sikorsky Aircraft.
Worldwide airline profits, traffic growth and load factors have been reliable
indicators for new aircraft and after-market orders. During 1998, U.S. and
European airlines experienced continued profitability driven primarily by low
fuel prices and the effect of cost reduction programs. Airlines in the Asia
Pacific region have suffered declines in operating results reflecting weaker
local economies. This erosion in earnings has resulted in a decrease in new
orders for aerospace products and cancelations or deferrals of existing orders
throughout the industry. The impact of the Asian economic downturn or a slowdown
in the aviation industry, as a whole, will result in lower manufacturing volumes
in the near term.
Over the past several years, Pratt & Whitney's mix of large commercial engine
shipments has shifted to newer, higher thrust engines for wide-bodied aircraft
in a market which is very price and product competitive. In order to update and
further diversify its product base, Pratt & Whitney began development of the
PW6000, a 16,000 to 23,000 pound-thrust engine designed specifically for the
short-to-medium haul, 100 to 120 passenger, narrow-bodied aircraft market. The
PW6000 is expected to enter service in 2002, with delivery to the first of two
major customers.
The follow-on spare parts sales for Pratt & Whitney engines in service have
traditionally been an important source of profit for the Corporation. The large
investment required for new aircraft, coupled with performance improvements and
hush-kit upgrades to older aircraft and engines, have resulted in lengthened
lives of older aircraft in operation, including those with Pratt & Whitney
engines.
Technological improvements to newer generation engines that increase
reliability, as well as vertical integration of engine manufacturers in the
overhaul and maintenance business, may change the market environment in the
after-market business.
GOVERNMENT BUSINESS
During 1998, the Corporation's sales to the U.S. Government were $3,264 mil-
lion or 14% of total sales, compared with $3,311 million or 16% of total sales
in 1997 and $3,382 million or 17% of total sales in 1996.
The defense portion of the Corporation's aerospace businesses continues to
respond to a changing global political environment. The U.S. defense industry
continues to downsize and consolidate in response to continued pressure on U.S.
defense spending.
Sikorsky will continue to supply Black Hawk helicopters and derivatives
thereof to the U.S. and foreign governments under contracts extending into 2002
at lower volumes than in the past. The U.S. Army Comanche helicopter contract,
awarded to a Sikorsky/Boeing joint venture, supports completion of prototype
development, flight testing and aircraft for initial field tests.
The significant decrease in the U.S. defense procurement of helicopters in
recent years and the resulting overcapacity has led to some consolidation of
U.S. helicopter manufacturers. Sikorsky is responding to these continued
consolidation pressures by improving its products and concentrating on
increasing its after-market and foreign government sales. In addition, an
international team led by Sikorsky is developing the S-92, a large cabin
derivative of the Black Hawk family, for commercial and military markets. This
aircraft made its first flight in December 1998.
Pratt & Whitney continues to deliver F100 engines and military spare parts to
both U.S. and foreign governments. Pratt & Whitney engines have been selected to
power two of the primary U.S. Air Force programs of the future: the C-17
airlifter which is currently in production and the F-22 fighter (F119 engine)
which is currently being developed. Derivatives of Pratt & Whitney's F119 engine
were chosen to provide power for the Joint Strike Fighter demonstration
aircraft. The Joint Strike Fighter program is intended to lead to the
development of a single aircraft, with two configurations, to satisfy future
requirements of the U.S. Navy, Air Force and Marine Corps and the United Kingdom
Royal Navy.
RESULTS OF CONTINUING OPERATIONS
In Millions of Dollars 1998 1997 1996
Sales $22,787 $21,062 $19,702
Financing revenues and
other income, net 22 226 170
Revenues $22,809 $21,288 $19,872
Consolidated revenues increased 7% in 1998 and 1997. Excluding the
unfavorable impact of foreign currency translation, consolidated revenues
increased by 9% in 1998 and 10% in 1997. The Corporation estimates that
increases in selling prices to customers averaged approximately 1% each year.
Financing revenues and other income, net, decreased $204 million in 1998 and
increased $56 million in 1997. The 1998 decrease is primarily due to the costs
of Pratt & Whitney's repurchases of participant interests in commercial engine
programs, partially offset by the favorable settlement of a contract dispute
with the U.S. Government.
In Millions of Dollars 1998 1997 1996
Cost of sales $16,897 $15,846 $14,741
Gross margin % 25.8% 24.8% 25.2%
Gross margin as a percentage of sales increased one percentage point in 1998
and decreased four-tenths of a percentage point in 1997. The 1998 increase is
primarily due to improved margin percentages at Pratt & Whitney. Gross margin in
both years benefited from the Corporation's continuing cost reduction efforts.
In Millions of Dollars 1998 1997 1996
Research and development $1,168 $1,069 $1,014
Percent of sales 5.1% 5.1% 5.1%
Research and development spending increased $99 million (9%) and $55 million
(5%) in 1998 and 1997. The increases were primarily due to increases at Pratt &
Whitney. Research and development expenses in 1999 are expected to remain at
approximately 5% of sales.
In Millions of Dollars 1998 1997 1996
Selling, general and
administrative $2,737 $2,611 $2,587
Percent of sales 12.0% 12.4% 13.1%
Selling, general and administrative expenses, as a percentage of sales,
decreased four-tenths of a percentage point in 1998 and seven-tenths of a
percentage point in 1997. The 1998 decrease was primarily due to Otis, while the
1997 decrease was due to Pratt & Whitney and Flight Systems.
In Millions of Dollars 1998 1997 1996
Interest expense $197 $188 $213
Interest expense increased 5% in 1998, due to increased short-term borrowing
needs and the issuance of $400 million of 6.7% notes in August. Interest expense
decreased 12% in 1997 due to reduced average borrowing levels.
Years ended December 31 1998 1997 1996
Average interest rate:
Short-term borrowings 10.4% 11.9% 11.8%
Total debt 8.3% 8.3% 8.6%
The average interest rate, for the year, on short-term borrowings exceed
those of total debt due to higher short-term borrowing rates in certain foreign
operations.
The weighted-average interest rate applicable to debt outstanding at December
31, 1998 was 6.8% for short-term borrowings and 7.3% for total debt. Weighted-
average short-term borrowing rates are lower than those of total debt at
December 31, 1998, due to the addition of commercial paper borrowings in the
latter part of the year.
1998 1997 1996
Effective income tax rate 31.4% 32.7% 32.6%
The Corporation has reduced its effective income tax rate by implementing tax
reduction strategies.
The future tax benefit arising from net deductible temporary differences is
$2,315 million and relates to expenses recognized for financial reporting
purposes which will result in tax deductions over varying future periods.
Management believes that the Corporation's earnings during the periods when the
temporary differences become deductible will be sufficient to realize those
future income tax benefits.
While some tax credit and loss carryforwards have no expiration date, certain
foreign and state tax loss carryforwards arise in a number of different tax
jurisdictions with expiration dates beginning in 1999. For those jurisdictions
where the expiration date or the projected operating results indicate that
realization is not likely, a valuation allowance has been provided.
The Corporation believes, based upon a review of prior period income tax
returns, it is entitled to income tax refunds for prior periods. The Internal
Revenue Service reviews these potential refunds as part of the examination of
the Corporation's income tax returns and the impact on the Corporation's
liability for income taxes for these years cannot presently be determined.
Minority interest expense decreased $13 million (13%) in 1998 and $1 million
(1%) in 1997. The 1998 decrease is due to the level of the Corporation's
earnings in less than wholly-owned subsidiaries, principally in Asia, and recent
purchases of minority-shareholder interests.
Net income:
Increased 17% or $183 million from 1997 to 1998.
Increased 18% or $166 million from 1996 to 1997.
SEGMENT REVIEW
Operating segment and geographic data include the results of all majority-
owned subsidiaries, consistent with the management of these businesses. For
certain of these subsidiaries, minority shareholders have rights which, under
the provisions of Emerging Issues Task Force Issue No. 96-16, "Investor's
Accounting for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Shareholder or Shareholders Have Certain Approval or
Veto Rights" (EITF 96-16), overcome the presumption of consolidation. In the
Corporation's consolidated results, these subsidiaries are accounted for using
the equity method of accounting.
Revenues Operating Profits Operating Profit Margin
In Millions of Dollars 1998 1997 1996 1998 1997 1996 1998 1997 1996
Otis $5,572 $5,548 $5,595 $ 533 $465 $524 9.6% 8.4% 9.4%
Carrier 6,922 6,056 5,958 495 458 422 7.2% 7.6% 7.1%
Pratt & Whitney 7,876 7,402 6,201 1,024 816 637 13.0% 11.0% 10.3%
Flight Systems 2,891 2,804 2,596 287 301 244 9.9% 10.7% 9.4%
UT Automotive 2,962 2,987 3,233 169 173 196 5.7% 5.8% 6.1%
1998 COMPARED TO 1997
OTIS revenues increased $24 million in 1998. Excluding the unfavorable impact
of foreign currency translation, 1998 revenues increased 3% with increases in
Europe, North America and Latin America, partially offset by declines in Asia.
Otis operating profits increased $68 million (15%) in 1998. Excluding the
unfavorable impact of foreign currency translation, 1998 operating profits
increased 17%. European, North American and Latin American operations improved
in 1998, partially offset by declines in Asian operations and higher charges
related to workforce reductions and the consolidation of manufacturing and
engineering facilities.
CARRIER revenues increased $866 million (14%) in 1998. Excluding the
unfavorable impact of foreign currency translation, 1998 revenues increased 17%
due to the impact of acquisitions, as well as, increases in the Refrigeration
Operations, North America, Europe and Latin America, partially offset by
declines in Asia.
Carrier operating profits increased $37 million (8%) in 1998. Excluding the
unfavorable impact of foreign currency translation, 1998 operating profits
increased 11%. The 1998 increase reflects improvements in the Refrigeration
Operations, North America, Latin America and Europe and the impact of
acquisitions which more than offset declines in Asia. The 1998 results include
charges related to workforce reductions and plant closures.
PRATT & WHITNEY revenues increased $474 million (6%) in 1998, reflecting
higher after-market revenues, resulting primarily from acquisitions, as well as,
increased commercial engine shipments and U.S. military development revenues.
The 1998 results also reflect the favorable settlement of a contract dispute
with the U.S. Government and costs to repurchase interests from participants in
commercial engine programs.
Pratt & Whitney operating profits increased $208 million (25%), reflecting
higher engine margins, increased U.S. military development volumes, higher
after-market volumes and productivity improvements. These items were partially
offset by costs to repurchase interests from participants in commercial engine
programs, charges related to workforce reduction efforts in the U.S. and Canada,
higher research and development spending and selling, general and administrative
expenses. The 1998 results also reflect the favorable settlement of a contract
dispute with the U.S. Government and favorable resolution of customer contract
issues.
FLIGHT SYSTEMS revenues increased $87 million (3%) in 1998 primarily due to
increased revenues at Hamilton Standard, which were favorably impacted by the
first quarter 1998 acquisition of a French aerospace components manufacturer,
partly offset by lower volumes at Sikorsky.
Flight Systems operating profits decreased $14 million (5%) in 1998 due to
lower volumes at Sikorsky and cost reduction charges taken at both units. The
1998 decline was partly offset by improvements at Hamilton Standard, mostly due
to the first quarter acquisition of a French aerospace components manufacturer.
UT AUTOMOTIVE revenues decreased $25 million (1%) in 1998, reflecting
declines in the electrical and interiors businesses, which were primarily due to
lower selling prices and a strike at General Motors. These declines were
partially offset by increases in Europe.
UT Automotive operating profits decreased $4 million (2%) in 1998 due to
higher research and development spending in connection with new programs, higher
selling, general and administrative expenses, lower selling prices and a strike
at General Motors. The 1997 results include charges related to administrative
workforce reductions and a provision for a plant closure.
1997 COMPARED TO 1996
OTIS revenues decreased $47 million (1%) in 1997. Excluding the unfavorable
impact of foreign currency translation, 1997 revenues increased 7% with all
regions showing growth.
Otis operating profits decreased $59 million (11%) in 1997. Excluding the
unfavorable impact of foreign currency translation, 1997 operating profits
decreased 2%. The 1997 results include the impact of salaried workforce
reductions designed to lower costs and streamline the organization. North
American, Latin American and European operations improved in 1997, while Asian
operations declined.
CARRIER revenues increased $98 million (2%) in 1997. Excluding the
unfavorable impact of foreign currency translation, 1997 revenues increased 5%,
primarily due to the impact of European acquisitions and increases at Carrier
Transicold. Revenue increases were partially offset by declines due to sluggish
economic conditions in Europe, unseasonably cool summer selling seasons in
Europe and North America and an economic downturn in the Asia Pacific region,
particularly Southeast Asia.
Carrier operating profits increased $36 million (9%) in 1997. Excluding the
unfavorable impact of foreign currency translation, 1997 operating profits
increased 12%. The 1997 increase reflects improvements at Carrier Transicold and
the impact of acquisitions which more than offset declines in the Asian and
European operations and the weather related weakness noted above.
PRATT & WHITNEY revenues increased $1,201 million (19%) in 1997, reflecting
higher volumes in both the after-market and new engine businesses.
Pratt & Whitney operating profits increased $179 million (28%), reflecting
strong after-market results partially offset by higher research and development
spending. Operating results in 1997 also benefited from continued cost reduction
efforts which more than offset raw material price increases and costs associated
with staff reductions.
FLIGHT SYSTEMS revenues increased $208 million (8%) in 1997 due to increases
at both Hamilton Standard and Sikorsky.
Flight Systems operating profits increased $57 million (23%) in 1997 as a
result of continuing operating performance improvement at both Hamilton Standard
and Sikorsky, partially offset by higher research and development spending.
UT AUTOMOTIVE revenues decreased $246 million (8%) in 1997. Foreign currency
translation reduced 1997 revenues by 3%. The comparative decrease in 1997
revenues is also the result of the sale of the steering wheels business in the
fourth quarter of 1996 and lower volumes at most businesses.
UT Automotive operating profits decreased $23 million (12%) in 1997. Foreign
currency translation reduced 1997 operating profits by 7%. The comparative
results were also impacted by lower volumes, domestic administrative workforce
reductions, a provision for a European plant closure in 1997 and the fourth
quarter 1996 sale of the steering wheels business, which more than offset
improvements at the interiors business and in Europe.
LIQUIDITY AND FINANCING COMMITMENTS
Management assesses the Corporation's liquidity in terms of its overall
ability to generate cash to fund its operating and investing activities.
Significant factors affecting the management of liquidity are cash flows
generated from operating activities, capital expenditures, acquisitions,
customer financing requirements, Common Stock repurchases, adequate bank lines
of credit and the ability to attract long-term capital with satisfactory terms.
In Millions of Dollars 1998 1997 1996
Net cash flows provided by
operating activities $ 2,314 $1,903 $1,886
Capital expenditures (673) (658) (633)
(Increase) decrease in customer
financing assets, net (213) 39 48
Acquisition funding (1,228) (547) (277)
Common Stock repurchase (650) (849) (459)
Change in total debt 606 (142) (266)
Change in net debt 711 201 (518)
Cash flows provided by operating activities were $2,314 million during 1998
compared to $1,903 million in 1997. The increase resulted from improved
operating and working capital performance. Cash flows used in investing
activities were $2,071 million during 1998 compared to $1,005 million in 1997.
Capital expenditures in 1998 were $673 million, a $15 million increase over
1997. The Corporation expects 1999 capital spending to approximate that of 1998.
Customer financing activity was a net use of cash of $213 million in 1998
compared to a net source of cash of $39 million in 1997, primarily as a result
of first quarter 1998 funding for an airline customer. While the Corporation
expects that customer financing activity will be a net use of cash in 1999,
actual funding is subject to usage under existing customer financing
commitments. In 1998, the Corporation invested $1,228 million in the acquisition
of businesses including Pratt & Whitney's investment in an overhaul and repair
joint venture in Singapore, Hamilton Standard's acquisition of a French
aerospace components manufacturer, Carrier's investment in a United States based
distributor of HVAC equipment and Otis' purchase of the outstanding minority
shares of a European subsidiary. The Corporation repurchased $650 million and
$849 million of Common Stock during 1998 and 1997, representing 14.8 million and
22.4 million shares, under previously announced share repurchase programs. Share
repurchase continues to be a significant use of the Corporation's strong cash
flows and has more than offset the dilutive effect resulting from the issuance
of stock under stock-based employee benefit programs. In October 1998, the
Corporation's Board of Directors authorized the acquisition of an additional 30
million shares under the Corporation's share repurchase program.
In Millions of Dollars 1998 1997
Cash and cash equivalents $ 550 $ 655
Total debt 2,173 1,567
Net debt (total debt less cash) 1,623 912
Shareowners' equity 4,378 4,073
Debt to total capitalization 33% 28%
Net debt to total
capitalization 27% 18%
At December 31, 1998, the Corporation had credit commitments from banks
totaling $1.5 billion under a Revolving Credit Agreement, which serves as back-
up for a commercial paper facility. At December 31, 1998, there were no
borrowings under the Revolving Credit Agreement. In addition, at December 31,
1998, approximately $1.1 billion was available under short-term lines of credit
with local banks at the Corporation's various international subsidiaries.
As described in Note 8 of Notes to Consolidated Financial Statements, the
Corporation issued $400 million of unsubordinated, unsecured, nonconvertible
notes in August 1998. The proceeds were used for general corporate purposes,
including acquisitions and repurchases of the Corporation's Common Stock. At
December 31, 1998, up to $471 million of additional medium-term and long-term
debt could be issued under a registration statement on file with the Securities
and Exchange Commission.
At December 31, 1998, the Corporation had commitments of $1,420 million to
finance or arrange financing related to commercial aircraft, of which as much as
$600 million may be required to be disbursed in 1999. The Corporation cannot
currently predict the extent to which these commitments will be utilized, since
certain customers may be able to obtain more favorable terms from other
financing sources. The Corporation may also arrange for third-party investors to
assume a portion of its commitments. Refer to Note 4 of Notes to Consolidated
Financial Statements for additional discussion of the Corporation's commercial
airline industry assets and commitments.
The Corporation believes that existing sources of liquidity are adequate to
meet anticipated borrowing needs at comparable risk-based interest rates for the
foreseeable future. Management anticipates the level of debt to capital will
increase moderately in order to satisfy its various cash flow requirements,
including acquisition spending and continued share repurchases.
DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
The Corporation is exposed to changes in foreign currency exchange and
interest rates primarily in its cash, debt and foreign currency transactions.
The Corporation uses derivative instruments, including swaps, forward contracts
and options, to manage certain foreign currency exposures. Derivative
instruments utilized by the Corporation in its hedging activities are viewed as
risk management tools, involve little complexity and are not used for trading or
speculative purposes. The Corporation diversifies the counterparties used and
monitors the concentration of risk to limit its counterparty exposure.
International segment revenues from continuing operations, including U.S.
export sales, averaged approximately $13 billion over the last three years,
resulting in a large volume of foreign currency commitment and transaction
exposures and significant foreign currency net asset exposures. Foreign currency
commitment and transaction exposures are managed at the operating unit level as
an integral part of the business and residual exposures that cannot be offset to
an insignificant amount are hedged. These hedges are initiated by the operating
units, with execution coordinated on a corporate-wide basis, and are scheduled
to mature coincident with the timing of the underlying foreign currency
commitments and transactions. Currently, the Corporation does not hold any
derivative contracts that hedge its foreign currency net asset exposures.
The Corporation's cash position includes amounts denominated in foreign
currencies. The Corporation manages its worldwide cash requirements considering
available funds among its many subsidiaries and the cost effectiveness with
which these funds can be accessed. The repatriation of cash balances from
certain of the Corporation's subsidiaries could have adverse tax consequences.
However, those balances are generally available without legal restrictions to
fund ordinary business operations. The Corporation has and will continue to
transfer cash from those subsidiaries to the parent and to other international
subsidiaries when it is cost effective to do so.
The Corporation's long-term debt portfolio consists mostly of fixed-rate
instruments in order to minimize earnings volatility related to interest
expense. The Corporation currently does not hold interest rate derivative
contracts.
The Corporation has evaluated its exposure to changes in foreign currency
exchange and interest rates in its market risk sensitive instruments, primarily
cash, debt and derivative instruments, using a value at risk analysis. Based on
a 95% confidence level and a one-day holding period, at December 31, 1998 and
1997, the potential loss in fair value of the Corporation's market risk
sensitive instruments was not material in relation to the Corporation's
financial position, results of operations or cash flows. The Corporation's
calculated value at risk exposure represents an estimate of reasonably possible
net losses based on historical market rates, volatilities and correlations and
is not necessarily indicative of actual results.
Refer to Notes 1, 12 and 13 of Notes to Consolidated Financial Statements for
additional discussion of the Corporation's foreign exchange and financial
instruments.
ENVIRONMENTAL MATTERS
The Corporation's operations are subject to environmental regulation by
federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. As a result, the
Corporation has established, and continually updates, policies relating to
environmental standards of performance for its operations worldwide. The
Corporation believes that expenditures necessary to comply with the present
regulations governing environmental protection will not have a material effect
upon its cash flows, competitive position, financial position or results of
operations.
The Corporation has identified approximately 360 locations, mostly in the
United States, at which it may have some liability for remediating
contamination. The Corporation does not believe that any individual location's
exposure is material to the Corporation. Sites in the investigation or
remediation stage represent approximately 98% of the Corporation's recorded
liability. The remaining 2% of the recorded liability consists of sites where
the Corporation may have some liability but investigation is in the initial
stages or has not begun.
The Corporation has been identified as a potentially responsible party under
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or Superfund) at approximately 90 sites. The number of Superfund
sites, in and of itself, does not represent a relevant measure of liability
because the nature and extent of environmental concerns vary from site to site
and the Corporation's share of responsibility varies from sole responsibility to
very little responsibility. In estimating its liability for remediation, the
Corporation considers its likely proportionate share of the anticipated
remediation expense and the ability of other potentially responsible parties to
fulfill their obligations.
Environmental remediation expenditures were $36 million in 1998, $34 million
in 1997 and $30 million in 1996. The Corporation estimates that environmental
remediation expenditures in each of the next two years will not exceed $50
million in the aggregate.
Additional discussion of the Corporation's environmental matters is included
in Notes 1 and 14 of Notes to Consolidated Financial Statements.
U.S. GOVERNMENT
The Corporation's contracts with the U.S. Government are subject to audits.
Like many defense contractors, the Corporation has 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.
The Corporation has made voluntary refunds in those cases it believes
appropriate.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which is currently effective January 1, 2000. Also in
June 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", which the Corporation adopted in 1999.
Management believes adoption of these requirements will not have a material
impact on the Corporation's financial position, results of operations or cash
flows.
YEAR 2000
The Corporation has developed a project plan to address the impact of the
Year 2000 on its internal systems, products and facilities, as well as, its key
suppliers and customers. The project has strong executive sponsorship and has
been reviewed by an independent third party. The project consists of the
following phases: awareness, assessment, remediation, testing and contingency
planning.
The Corporation has substantially completed the awareness and assessment
phases, with respect to its internal systems, products and facilities. The
Corporation is in the process of carrying out the remediation and testing
phases, which are expected to be substantially completed by September 1999.
The Corporation has been assessing its Year 2000 risks related to significant
relationships with third parties via ongoing communication with its critical
suppliers and customers. As part of the process, the Corporation has requested
written assurances from these suppliers and customers that they have Year 2000
readiness programs in place, as well as an affirmation that they will be
compliant when necessary. Responses to these inquiries are currently being
gathered and reviewed. Further analysis, including site visits, will be
conducted as necessary. Activities related to third parties are scheduled to be
completed by September 1999. Despite these efforts, the Corporation can provide
no assurance that supplier and customer Year 2000 compliance plans will be
successfully completed in a timely manner.
The Corporation is taking steps to prevent major interruptions in the
business due to Year 2000 problems using both internal and external resources to
identify and correct problems and to test for readiness. The estimated external
costs of the project, including equipment costs and consultant and software
licensing fees, are expected to be approximately $125 million. Internal costs,
which are primarily payroll related, are expected to be approximately $50
million. These costs are being funded through operating cash flows with amounts
that would normally be budgeted for the Corporation's information systems and
production and facilities equipment. As of December 31, 1998, total costs for
continuing operations of external and internal resources incurred amounted to
approximately $70 million and relate primarily to internal systems, products and
facilities. Although the Corporation has been working on its Year 2000 readiness
efforts for several years, costs incurred prior to 1997 have not been separately
tracked and are generally not included in the estimate of total costs.
The schedule for completion and the estimated associated costs are based on
management's estimates, which include assumptions of future events. There can be
no assurance that the Corporation, its suppliers and customers will be fully
Year 2000 compliant by January 1, 2000. The Corporation, therefore, could be
adversely impacted by such things as loss of revenue, production delays, product
failures, lack of third party readiness and other business interruptions.
Accordingly, the Corporation has begun developing contingency plans to address
potential issues which include, among other actions, development of backup
procedures and identification of alternate suppliers. Contingency planning is
expected to be substantially completed by September 1999. The ultimate effects
on the Corporation or its suppliers or customers of not being fully Year 2000
compliant are not reasonably estimable. However, the Corporation believes its
Year 2000 remediation efforts, together with the diverse nature of its
businesses, help reduce the potential impact of non-compliance to levels which
will not have a material adverse impact on its financial position, results of
operations or cash flows.
EURO CONVERSION
On January 1, 1999, the European Economic and Monetary Union (EMU) entered a
three-year transition phase during which a common currency, the "euro", was
introduced in participating countries. Initially, the euro is being used for
wholesale financial transactions and it will replace the legacy currencies that
will be withdrawn between January 1, 2002 and July 1, 2002. The Corporation has
been preparing for the euro since December of 1996 and has identified issues and
developed implementation plans associated with the conversion, including
technical adaptation of information technology and other systems, continuity of
long-term contracts, foreign currency considerations, long-term competitive
implications of the conversions and the effect on the market risk inherent in
financial instruments. These implementation plans are expected to be completed
within a timetable that is consistent with the transition phases of the euro.
Based on its evaluation to date, management believes that the introduction of
the euro, including the total costs for the conversion, will not have a material
adverse impact on the Corporation's financial position, results of operations or
cash flows. However, uncertainty exists as to the effects the euro will have on
the marketplace and there is no guarantee that all issues will be foreseen and
corrected or that other third parties will address the conversion successfully.
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report contains statements which, to the extent they are not
statements of historical or present fact, constitute "forward-looking
statements" under the securities laws. These forward-looking statements are
intended to provide management's current expectations or plans for the future
operating and financial performance of the Corporation, based on assumptions
currently believed to be valid. Forward-looking statements can be identified by
the use of words such as "believe", "expect", "plans", "strategy", "prospects",
"estimate", "project", "anticipate" and other words of similar meaning in
connection with a discussion of future operating or financial performance. These
include, among others, statements relating to:
.the effect of economic downturns or growth in particular regions
.the effect of changes in the level of activity in particular industries or
markets
.the anticipated uses of cash
.the scope or nature of acquisition activity
.prospective product developments
.cost reduction efforts
.the outcome of contingencies
.the impact of Year 2000 conversion efforts and
.the transition to the use of the euro as a currency.
From time to time, oral or written forward-looking statements may also be
included in other materials released to the public.
All forward-looking statements involve risks and uncertainties that may cause
actual results to differ materially from those expressed or implied in the
forward-looking statements. For additional information identifying factors that
may cause actual results to vary materially from those stated in the forward-
looking statements, see the Corporation's reports on Forms 10-K, 10-Q and 8-K
filed with the Securities and Exchange Commission from time to time. The
Corporation's Annual Report on Form 10-K for 1998 includes important information
as to risk factors in the "Business" section under the headings "Description of
Business by Operating Segment" and "Other Matters Relating to the Corporation's
Business as a Whole".
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of United Technologies Corporation and its
subsidiaries are the responsibility of the Corporation's management and have
been prepared in accordance with generally accepted accounting principles.
Management is responsible for the integrity and objectivity of the financial
statements, including estimates and judgments reflected in them and fulfills
this responsibility primarily by establishing and maintaining accounting systems
and practices adequately supported by internal accounting controls. These
controls are designed to provide reasonable assurance that the Corporation's
assets are safeguarded, that transactions are executed in accordance with
management's authorizations and that the financial records are reliable for the
purpose of preparing financial statements. Self-monitoring mechanisms are also a
part of the control environment whereby, as deficiencies are identified,
corrective actions are taken. Even an effective internal control system, no
matter how well designed, has inherent limitations - including the possibility
of the circumvention or overriding of controls - and, therefore, can provide
only reasonable assurance with respect to financial statement preparation and
such safeguarding of assets. Further, because of changes in conditions, internal
control system effectiveness may vary over time.
The Corporation assessed its internal control system as of December 31, 1998.
Based on this assessment, management believes the internal accounting controls
in use provide reasonable assurance that the Corporation's assets are
safeguarded, that transactions are executed in accordance with management's
authorizations, and that the financial records are reliable for the purpose of
preparing financial statements.
Independent accountants are appointed annually by the Corporation's
shareowners to audit the financial statements in accordance with generally
accepted auditing standards. Their report appears below. Their audits, as well
as those of the Corporation's internal audit department, include a review of
internal accounting controls and selective tests of transactions.
The Audit Review Committee of the Board of Directors, consisting of directors
who are not officers or employees of the Corporation, meets regularly with
management, the independent accountants and the internal auditors, to review
matters relating to financial reporting, internal accounting controls and
auditing.
/s/ George David
George David
Chairman and Chief Executive Officer
/s/ David J. Fitzpatrick
David J. FitzPatrick
Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners of
United Technologies Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareowners' equity and of
cash flows present fairly, in all material respects, the financial position of
United Technologies Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
January 21, 1999, except for Note 16, which is as of May 20, 1999
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31
In Millions of Dollars (except per share amounts) 1998 1997 1996
REVENUES
Product sales $17,348 $15,946 $14,713
Service sales 5,439 5,116 4,989
Financing revenues and other income, net 22 226 170
22,809 21,288 19,872
COSTS AND EXPENSES
Cost of products sold 13,436 12,638 11,653
Cost of services sold 3,461 3,208 3,088
Research and development 1,168 1,069 1,014
Selling, general and administrative 2,737 2,611 2,587
Interest 197 188 213
20,999 19,714 18,555
Income from continuing operations
before income taxes and minority interests 1,810 1,574 1,317
Income taxes 568 514 430
Minority interests in subsidiaries' earnings 85 98 99
Income from continuing operations 1,157 962 788
Income from operations of discontinued UT Automotive
subsidiary (net of applicable income tax provisions
of $55, $51 and $64 million in 1998, 1997 and 1996) 98 110 118
NET INCOME $ 1,255 $ 1,072 $ 906
EARNINGS PER SHARE OF COMMON STOCK
Basic:
Continuing operations $2.47 $1.98 $1.57
Discontinued operation 0.21 0.24 0.24
Net earnings $2.68 $2.22 $1.81
Diluted:
Continuing operations $2.33 $1.89 $1.51
Discontinued operation 0.20 0.21 0.23
Net earnings $2.53 $2.10 $1.74
See accompanying Notes to Consolidated Financial Statements
CONSOLIDATED BALANCE SHEET
December 31
In Millions of Dollars (shares in thousands) 1998 1997
ASSETS
Cash and cash equivalents $ 550 $ 655
Accounts receivable (net of allowance for doubtful
accounts of $316 and $302) 3,417 3,215
Inventories and contracts in progress 3,191 2,934
Future income tax benefits 1,222 1,068
Other current assets 161 403
Net investment in discontinued operation 1,287 1,140
Total Current Assets 9,828 9,415
Customer financing assets 498 216
Future income tax benefits 1,093 955
Fixed assets 3,555 3,491
Goodwill (net of accumulated amortization
of $388 and $295) 1,417 639
Other assets 1,377 981
TOTAL ASSETS $17,768 $15,697
LIABILITIES AND SHAREOWNERS' EQUITY
Short-term borrowings $ 504 $ 178
Accounts payable 1,860 1,589
Accrued liabilities 4,719 4,675
Long-term debt currently due 99 121
Total Current Liabilities 7,182 6,563
Long-term debt 1,570 1,268
Future pension and postretirement benefit obligations 1,682 1,223
Future income taxes payable 143 117
Other long-term liabilities 1,936 1,656
Commitments and contingent liabilities (Notes 4 and 14)
Minority interests in subsidiary companies 421 347
Series A ESOP Convertible Preferred Stock, $1 par value
(Authorized-20,000 shares)
Outstanding-12,629 and 13,042 shares 836 865
ESOP deferred compensation (380) (415)
456 450
Shareowners' Equity:
Capital Stock:
Preferred Stock, $1 par value (Authorized-
230,000 shares; none issued or outstanding) - -
Common Stock, $1 par value (Authorized-
1,000,000 shares) Issued-582,160 and
575,674 shares 2,708 2,488
Treasury Stock (132,056 and 117,532 common
shares at cost) (3,117) (2,472)
Retained earnings 5,411 4,558
Accumulated other non-shareowner changes in equity:
Foreign currency translation adjustments (487) (484)
Minimum pension liability (137) (17)
(624) (501)
TOTAL SHAREOWNERS' EQUITY 4,378 4,073
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $17,768 $15,697
See accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31
In Millions of Dollars 1998 1997 1996
OPERATING ACTIVITIES
Income from continuing operations $ 1,157 $ 962 $ 788
Adjustments to reconcile income from continuing operations
to net cash flows provided by operating activities:
Depreciation and amortization 730 707 714
Deferred income tax benefit (264) (525) 4
Minority interests in subsidiaries' earnings 85 98 99
Change in:
Accounts receivable 44 (182) (43)
Inventories and contracts in progress (113) 113 (343)
Other current assets 213 (19) (19)
Accounts payable and accrued liabilities 135 331 516
Other, net 327 418 170
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 2,314 1,903 1,886
INVESTING ACTIVITIES
Capital expenditures (673) (658) (633)
Increase in customer financing assets (356) (132) (137)
Decrease in customer financing assets 143 171 185
Acquisitions of businesses (1,228) (547) (277)
Dispositions of businesses - 36 33
Other, net 43 125 82
NET CASH FLOWS USED IN INVESTING ACTIVITIES (2,071) (1,005) (747)
FINANCING ACTIVITIES
Issuance of long-term debt 402 12 26
Repayment of long-term debt (146) (129) (263)
Increase (decrease) in short-term borrowings 293 12 (104)
Common Stock issued under employee stock plans 220 143 96
Dividends paid on Common Stock (316) (291) (265)
Common Stock repurchase (650) (849) (459)
Dividends to minority interests and other (138) (95) (58)
NET CASH FLOWS USED IN FINANCING ACTIVITIES (335) (1,197) (1,027)
NET CASH FLOWS (USED) PROVIDED BY DISCONTINUED
OPERATION (9) 2 158
Effect of foreign exchange rate changes on
Cash and cash equivalents (4) (46) (11)
Net (decrease) increase in Cash and cash equivalents (105) (343) 259
Cash and cash equivalents, beginning of year 655 998 739
Cash and cash equivalents, end of year $ 550 $ 655 $ 998
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of amounts capitalized $ 170 $ 162 $ 179
Income taxes paid, net of refunds 888 859 388
See accompanying Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CHANGES IN SHAREOWNERS' EQUITY
Accumulated Non-
Other Non- Shareowner
Shareowner Changes in
Common Treasury Retained Changes Equity for
In Millions of Dollars (except per share amounts) Stock Stock Earnings in Equity the Period
DECEMBER 31, 1995 $2,249 $(1,168) $3,252 $(312)
Common Stock issued under employee plans
(3.6 million shares) 96 1 (14)
Common Stock repurchased (16.0 million shares) (459)
Dividends on Common Stock ($0.55 per share) (265)
Dividends on ESOP Stock ($4.80 per share) (30)
NON-SHAREOWNER CHANGES IN EQUITY:
Net income 906 $ 906
Foreign currency translation:
Foreign currency translation adjustments 2 2
Income taxes (9) (9)
Minimum pension liability:
Pension adjustment 94 94
Income taxes (37) (37)
DECEMBER 31, 1996 2,345 (1,626) 3,849 (262) $ 956
Common Stock issued under employee plans
(4.4 million shares) 143 3 (26)
Common Stock repurchased (22.4 million shares) (849)
Dividends on Common Stock ($0.62 per share) (291)
Dividends on ESOP Stock ($4.80 per share) (32)
NON-SHAREOWNER CHANGES IN EQUITY:
Net income 1,072 $1,072
Foreign currency translation:
Foreign currency translation adjustments (225) (225)
Income taxes (6) (6)
Minimum pension liability:
Pension adjustment (12) (12)
Income tax benefits 4 4
Other (14) (14)
DECEMBER 31, 1997 2,488 (2,472) 4,558 (501) 819
Common Stock issued under employee plans
(6.6 million shares) 220 5 (53)
Common Stock repurchased (14.8 million shares) (650)
Dividends on Common Stock ($0.695 per share) (316)
Dividends on ESOP Stock ($4.80 per share) (33)
NON-SHAREOWNER CHANGES IN EQUITY:
Net income 1,255 $1,255
Foreign currency translation:
Foreign currency translation adjustments 4 4
Income taxes (7) (7)
Minimum pension liability:
Pension adjustment (187) (187)
Income tax benefits 67 67
DECEMBER 31, 1998 $2,708 $(3,117) $5,411 $(624) $1,132
See accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING PRINCIPLES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform to
the current year presentation.
CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its controlled subsidiaries. Intercompany transactions have been eliminated.
In the fourth quarter of 1998, the Corporation adopted the provisions of EITF
96-16. Accordingly, majority-owned subsidiaries in which the minority
shareowners have rights that overcome the presumption for consolidation are
accounted for on the equity method. Adoption of EITF 96-16 resulted in the
restatement of certain prior period amounts.
Beginning January 1, 1997, international operating subsidiaries, which had
generally been included in the consolidated financial statements based on fiscal
years ending November 30, are included in the consolidated financial statements
based on fiscal years ending December 31. December 1996 results from these
international subsidiaries, which were not significant, are included in retained
earnings.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, demand deposits and short-
term cash investments which are highly liquid in nature and have original
maturities of three months or less.
ACCOUNTS RECEIVABLE
Current and long-term accounts receivable include retainage and unbilled
costs of approximately $103 million and $142 million at December 31, 1998 and
1997. Retainage represents amounts which, pursuant to the contract, are due upon
project completion and acceptance by the customer. Unbilled costs represent
revenues that are not currently billable to the customer under the terms of the
contract. These items are expected to be collected in the normal course of
business. Long-term accounts receivable are included in Other Assets on the
Consolidated Balance Sheet.
INVENTORIES AND CONTRACTS IN PROGRESS
Inventories and contracts in progress are stated at the lower of cost or
estimated realizable value and are primarily based on first-in, first-out (FIFO)
or average cost methods; however, certain subsidiaries use the last-in, first-
out (LIFO) method. Costs accumulated against specific contracts or orders are at
actual cost. Materials in excess of requirements for contracts and orders
currently in effect or anticipated have been reserved and written-off when
appropriate.
Manufacturing tooling costs are charged to inventories or to fixed assets
depending upon their nature, general applicability and useful lives. Tooling
costs included in inventory are charged to cost of sales based on usage,
generally within two years after they enter productive use.
Manufacturing costs are allocated to current production and firm contracts.
General and administrative expenses are charged to expense as incurred.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed over the assets'
useful lives generally using accelerated methods for aerospace operations and
the straight-line method for other operations.
GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill represents costs in excess of fair values assigned to the underlying
net assets of acquired companies and is generally being amortized using the
straight-line method over periods ranging from 10 to 40 years.
The Corporation evaluates potential impairment of goodwill on an ongoing
basis and other long-lived assets when appropriate. If the carrying amount of an
asset exceeds the sum of its undiscounted expected future cash flows, the
asset's carrying value is written down to fair value.
REVENUE RECOGNITION
Sales under government and commercial fixed-price contracts and government
fixed-price-incentive contracts are recorded at the time deliveries are made or,
in some cases, on a percentage-of-completion basis. Sales under cost-
reimbursement contracts are recorded as work is performed and billed. Sales of
commercial aircraft engines sometimes require participation by the Corporation
in aircraft financing arrangements; when appropriate, such sales are accounted
for as operating leases. Sales under elevator and escalator installation and
modernization contracts are accounted for under the percentage-of-completion
method.
Losses, if any, on contracts are provided for when anticipated. Loss
provisions are based upon excess inventoriable manufacturing, engineering,
estimated warranty and product guarantee costs over the net revenue from the
products contemplated by the specific order. Contract accounting requires
estimates of future costs over the performance period of the contract. These
estimates are subject to change and result in adjustments to margins on
contracts in progress.
Service sales, representing after-market repair and maintenance activities,
are recognized over the contractual period or as services are performed.
RESEARCH AND DEVELOPMENT
Research and development costs, not specifically covered by contracts and
those related to the Corporation-sponsored share of research and development
activity in connection with cost-sharing arrangements, are charged to expense as
incurred.
HEDGING ACTIVITY
The Corporation uses derivative instruments, including swaps, forward
contracts and options, to manage certain foreign currency exposures. Derivative
instruments are viewed by the Corporation as risk management tools and are not
used for trading or speculative purposes. Derivatives used for hedging purposes
must be designated as, and effective as, a hedge of the identified risk exposure
at the inception of the contract. Accordingly, changes in the market value of
the derivative contract must be highly correlated with changes in the market
value of the underlying hedged item at inception of the hedge and over the life
of the hedge contract.
Gains and losses from instruments that are effective hedges of firm
commitments are deferred and recognized as part of the economic basis of the
transactions underlying the commitments when the associated hedged transaction
occurs. Gains and losses from instruments that are effective hedges of foreign-
currency-denominated transactions are reported in earnings and offset the
effects of foreign exchange gains and losses from the associated hedged
transactions. Gains and losses on the excess of foreign currency hedge amounts
over the related hedged commitment or transaction would be recognized in
earnings. Cash flows from derivative instruments designated as hedges are
classified consistent with the items being hedged.
Derivative instruments designated but no longer effective as a hedge would be
reported at market value and the related gains and losses would be recognized in
earnings.
Gains and losses on terminations of foreign exchange contracts are deferred
and amortized over the remaining period of the original contract to the extent
the underlying hedged commitment or transaction is still likely to occur. Gains
and losses on terminations of foreign exchange contracts are recognized in
earnings when terminated in conjunction with the cancelation of the related
commitment or transaction.
Carrying amounts of foreign exchange contracts are included in accounts
receivable, other assets and accrued liabilities.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which is currently effective January 1, 2000. Management
believes adoption of this standard will not have a material impact on the
Corporation's financial position, results of operations or cash flows.
ENVIRONMENTAL
Environmental investigatory, remediation, operating and maintenance costs are
accrued when it is probable that a liability has been incurred and the amount
can be reasonably estimated. The most likely cost to be incurred is accrued
based on an evaluation of currently available facts with respect to each
individual site, including existing technology, current laws and regulations and
prior remediation experience. Where no amount within a range of estimates is
more likely, the minimum is accrued. For sites with multiple responsible
parties, the Corporation considers its likely proportionate share of the
anticipated remediation costs and the ability of the other parties to fulfill
their obligations in establishing a provision for those costs. Liabilities with
fixed or reliably determinable future cash payments are discounted.
Environmental liabilities are not reduced by potential insurance reimbursements.
2. ACQUISITIONS
The Corporation completed acquisitions in 1998, 1997 and 1996 for cash
consideration of $1,228 million, $547 million and $277 million. The assets and
liabilities of the acquired businesses accounted for under the purchase method
are recorded at their fair values at the dates of acquisition. The excess of the
purchase price over the estimated fair values of the net assets acquired, of
$855 million in 1998, $353 million in 1997 and $140 million in 1996, has been
recorded as goodwill and is being amortized over its estimated useful life.
The results of operations of acquired businesses have been included in the
Consolidated Statement of Operations beginning on the effective date of
acquisition. The pro forma results for 1998, 1997 and 1996, assuming these
acquisitions had been made at the beginning of the year, would not be materially
different from reported results.
3. EARNINGS PER SHARE
Average Per Share
In Millions (except per share amounts) Income Shares Amount
DECEMBER 31, 1998
Income from continuing operations $1,157
Less: ESOP Stock dividends (33)
BASIC EARNINGS FROM CONTINUING OPERATIONS 1,124 455.5 $2.47
Stock awards 12.0
ESOP Stock adjustment 28 27.3
DILUTED EARNINGS FROM CONTINUING OPERATIONS $1,152 494.8 $2.33
Net income $1,255
Less: ESOP Stock dividends (33)
BASIC EARNINGS 1,222 455.5 $2.68
Stock awards 12.0
ESOP Stock adjustment 28 27.3
DILUTED EARNINGS $1,250 494.8 $2.53
DECEMBER 31, 1997
Income from continuing operations $ 962
Less: ESOP Stock dividends (32)
BASIC EARNINGS FROM CONTINUING OPERATIONS 930 468.9 $1.98
Stock awards 11.7
ESOP Stock adjustment 27 26.5
DILUTED EARNINGS FROM CONTINUING OPERATIONS $ 957 507.1 $1.89
Net income $1,072
Less: ESOP Stock dividends (32)
BASIC EARNINGS 1,040 468.9 $2.22
Stock awards 11.7
ESOP Stock adjustment 27 26.5
DILUTED EARNINGS $1,067 507.1 $2.10
DECEMBER 31, 1996
Income from continuing operations $ 788
Less: ESOP Stock dividends (30)
BASIC EARNINGS FROM CONTINUING OPERATIONS 758 482.9 $1.57
Stock awards 9.7
ESOP Stock adjustment 24 24.6
DILUTED EARNINGS FROM CONTINUING OPERATIONS $ 782 517.2 $1.51
Net income $ 906
Less: ESOP Stock dividends (30)
BASIC EARNINGS 876 482.9 $1.81
Stock awards 9.7
ESOP Stock adjustment 24 24.6
DILUTED EARNINGS $ 900 517.2 $1.74
4. COMMERCIAL AIRLINE INDUSTRY ASSETS AND COMMITMENTS
The Corporation has receivables and other financing assets with commercial
airline industry customers totaling $1,361 million and $1,235 million at
December 31, 1998 and 1997, net of allowances of $237 million and $257 million,
respectively.
Customer financing assets consist of the following:
In Millions of Dollars 1998 1997
Notes and leases receivable $337 $139
Products under lease 248 129
585 268
Less: receivables due within one year 87 52
$498 $216
Scheduled maturities of notes and leases receivable due after one year are as
follows: $110 million in 2000, $85 million in 2001, $5 million in 2002, $3
million in 2003 and $47 million in 2004 and thereafter.
Financing commitments, in the form of secured debt, guarantees or lease
financing, are provided to commercial aircraft engine customers. The extent to
which the financing commitments will be utilized cannot currently be predicted,
since customers may be able to obtain more favorable terms from other financing
sources. The Corporation may also arrange for third-party investors to assume a
portion of its commitments. If financing commitments are exercised, debt
financing is generally secured by assets with fair market values equal to or
exceeding the financed amounts with interest rates established at the time of
funding. The Corporation also may lease aircraft and subsequently sublease the
aircraft to customers under long-term noncancelable operating leases. In some
instances, customers may have minimum lease terms which result in sublease
periods shorter than the Corporation's lease obligation. Lastly, the Corporation
has residual value and other guarantees related to various commercial aircraft
engine customer financing arrangements. The estimated fair market values of the
guaranteed assets equal or exceed the value of the related guarantees, net of
existing reserves.
The following table summarizes the airline industry commitments and related
maturities of the Corporation's financing and rental commitments as of December
31, 1998 should all commitments be exercised as scheduled:
Maturities
In Millions of Dollars Financing Rental
1999 $545 $ 9
2000 50 9
2001 36 9
2002 3 9
2003 90 9
Thereafter 236 50
Total Commitments $960 $95
In addition, the Corporation has residual value and other guarantees of $159
million as of December 31, 1998.
The Corporation has a 33% interest in International Aero Engines (IAE), an
international consortium of four shareholders organized to support the V2500
commercial aircraft engine program. IAE may offer customer financing in the form
of guarantees, secured debt or lease financing in connection with V2500 engine
sales. At December 31, 1998, IAE has financing commitments of $1,390 million. In
addition, IAE has lease obligations under long-term noncancelable leases of
approximately $360 million through 2021 related to aircraft which are subleased
to customers under long-term leases. These aircraft have fair market values
which exceed the financed amounts. The shareholders of IAE have guaranteed IAE's
financing arrangements to the extent of their respective ownership interests. In
the event any shareholder was to default on certain of these financing
arrangements, the other shareholders would be proportionately responsible. The
Corporation's share of IAE's financing commitments was approximately $460
million at December 31, 1998.
5. INVENTORIES AND CONTRACTS IN PROGRESS
In Millions of Dollars 1998 1997
Inventories $ 3,454 $ 3,221
Contracts in progress 1,410 1,274
4,864 4,495
Less:
Progress payments, secured by lien,
on U.S. Government contracts (124) (144)
Billings on contracts in progress (1,549) (1,417)
$ 3,191 $ 2,934
The methods of accounting followed by the Corporation do not permit
classification of inventories by category. Contracts in progress principally
relate to elevator and escalator contracts and include costs of manufactured
components, accumulated installation costs and estimated earnings on incomplete
contracts.
The Corporation's sales contracts in many cases are long-term contracts
expected to be performed over periods exceeding twelve months. Approximately 58%
and 60% of total inventories and contracts in progress have been acquired or
manufactured under such long-term contracts at December 31, 1998 and 1997,
respectively. It is impracticable for the Corporation to determine the amounts
of inventory scheduled for delivery under long-term contracts within the next
twelve months.
If inventories which were valued using the LIFO method had been valued under
the FIFO method, they would have been higher by $110 million at December 31,
1998 ($105 million at December 31, 1997).
6. FIXED ASSETS
Estimated
In Millions of Dollars Useful Lives 1998 1997
Land - $ 149 $ 140
Buildings and improvements 20-40 years 2,977 2,826
Machinery, tools and equipment 3-12 years 6,153 6,065
Other, including under construction - 270 226
9,549 9,257
Accumulated depreciation (5,994) (5,766)
$ 3,555 $ 3,491
Depreciation expense was $613 million in 1998, $625 million in 1997 and $659
million in 1996.
7. ACCRUED LIABILITIES
In Millions of Dollars 1998 1997
Accrued salaries, wages and employee benefits $ 841 $ 828
Service and warranty accruals 462 416
Advances on sales contracts 637 699
Income taxes payable 415 606
Other 2,364 2,126
$4,719 $4,675
8. BORROWINGS AND LINES OF CREDIT
Short-term borrowings consist of the following:
In Millions of Dollars 1998 1997
Foreign bank borrowings $183 $178
Commercial paper 321 -
$504 $178
The weighted-average interest rates applicable to short-term borrowings
outstanding at December 31, 1998 and 1997 were 6.8% and 9.8%, reflecting the
addition of commercial paper borrowings in the latter part of 1998. At December
31, 1998, approximately $1.1 billion was available under short-term lines of
credit with local banks at the Corporation's various international subsidiaries.
At December 31, 1998, the Corporation had credit commitments from banks
totaling $1.5 billion under a Revolving Credit Agreement, which serves as back-
up for a commercial paper facility. There were no borrowings under the Revolving
Credit Agreement.
Long-term debt consists of the following:
1998 Debt
Weighted
Average
In Millions of Dollars Interest Rate Maturity 1998 1997
Notes and other debt denominated in:
U.S. dollars 7.7% 1999-2028 $1,013 $ 641
Foreign currency 7.2% 1999-2012 37 34
Capital lease obligations 6.6% 1999-2017 246 305
ESOP debt 7.7% 1999-2009 373 409
$1,669 $1,389
Less: Long-term debt
currently due 99 121
$1,570 $1,268
Principal payments required on long-term debt for the next five years are $99
million in 1999, $192 million in 2000, $96 million in 2001, $41 million in 2002
and $43 million in 2003.
In August 1998, the Corporation issued $400 million of 6.7% unsubordinated,
unsecured, nonconvertible notes (the "Notes") under a shelf registration
statement previously filed with the Securities and Exchange Commission. The
Notes are due August 1, 2028, with interest payable semiannually commencing
February 1, 1999. The Notes are not redeemable at the option of the Corporation
or repayable at the option of the holder prior to maturity, and do not provide
for any sinking fund payments. At December 31, 1998, up to $471 million of
additional medium-term and long-term debt could be issued under this
registration statement.
Prior to 1997, the Corporation executed in-substance defeasances by
depositing U.S. Government Securities into irrevocable trusts to cover the
interest and principal payments on $296 million of its debt. For financial
reporting purposes, the debt has been considered extinguished. As of December
31, 1998, the amount outstanding on these debt instruments was $68 million,
which matures in 1999.
The percentage of total debt at floating interest rates was 26% and 14% at
December 31, 1998 and 1997, respectively.
9. TAXES ON INCOME
Significant components of income taxes (benefits) for each year are as follows:
In Millions of Dollars 1998 1997 1996
Current:
United States:
Federal $ 347 $ 607 $126
State 23 38 13
Foreign 337 359 308
707 1,004 447
Future:
United States:
Federal (214) (414) 2
State (25) (82) 6
Foreign (25) (29) (4)
(264) (525) 4
443 479 451
Attributable to items
credited (charged) to equity 125 35 (21)
$ 568 $ 514 $430
Future income taxes represent the tax effects of transactions which are
reported in different periods for tax and financial reporting purposes. These
amounts consist of the tax effects of temporary differences between the tax and
financial reporting balance sheets and tax carryforwards. The tax effects of
temporary differences and tax carryforwards which gave rise to future income tax
benefits and payables at December 31, 1998 and 1997 are as follows:
In Millions of Dollars 1998 1997
Future income tax benefits:
Insurance and employee benefits $ 693 $ 562
Other asset basis differences 651 591
Other liability basis differences 974 928
Tax loss carryforwards 106 109
Tax credit carryforwards 110 110
Valuation allowance (219) (277)
$2,315 $2,023
Future income taxes payable:
Fixed assets $ 47 $ 79
Other items, net 116 47
$ 163 $ 126
Current and non-current future income tax benefits and payables within the
same tax jurisdiction are generally offset for presentation in the Consolidated
Balance Sheet. Valuation allowances have been established primarily for tax
credit and tax loss carryforwards to reduce the future income tax benefits to
amounts expected to be realized.
The sources of income from continuing operations before income taxes and
minority interests were:
In Millions of Dollars 1998 1997 1996
United States $ 924 $ 659 $ 400
Foreign 886 915 917
$1,810 $1,574 $1,317
United States income taxes have not been provided on undistributed earnings
of international subsidiaries. The Corporation's intention is to reinvest these
earnings permanently or to repatriate the earnings only when it is tax effective
to do so. Accordingly, the Corporation believes that any U.S. tax on repatriated
earnings would be substantially offset by U.S. foreign tax credits.
Differences between effective income tax rates and the statutory U.S. federal
income tax rates are as follows:
1998 1997 1996
Statutory U.S. federal
income tax rate 35.0% 35.0% 35.0%
Varying tax rates of consolidated subsidiaries
(including Foreign Sales Corporation) (4.8) (4.5) (6.5)
Other 1.2 2.2 4.1
Effective income tax rate 31.4% 32.7% 32.6%
Tax credit carryforwards at December 31, 1998 are $110 million of which $1
million expires annually in each of the next three years.
Tax loss carryforwards, principally state and foreign, at December 31, 1998
are $522 million of which $413 million expire as follows: $169 million from
1999-2003, $124 million from 2004-2008, $120 million from 2009-2018.
10. EMPLOYEE BENEFIT PLANS
The Corporation and its subsidiaries sponsor many domestic and foreign
defined benefit pension and other postretirement plans whose balances are as
follows:
Other
Pension Benefits Postretirement Benefits
In Millions of Dollars 1998 1997 1998 1997
CHANGE IN BENEFIT OBLIGATION:
Beginning balance $ 9,666 $ 9,195 $ 700 $ 703
Service cost 222 228 10 10
Interest cost 695 664 51 52
Actuarial loss (gain) 978 218 21 (23)
Total benefits paid (601) (570) (57) (65)
Other 115 (69) 46 23
Ending balance $11,075 $ 9,666 $ 771 $ 700
CHANGE IN PLAN ASSETS:
Beginning balance $10,570 $ 8,956 $ 82 $ 83
Actual return on plan assets (143) 2,073 5 6
Employer contributions 139 85 - -
Benefits paid from plan assets (572) (549) (10) (11)
Other (49) 5 4 4
Ending balance $ 9,945 $10,570 $ 81 $ 82
Funded status $(1,130) $ 904 $(690) $(618)
Unrecognized net actuarial loss (gain) 999 (973) (26) (67)
Unrecognized prior service cost 235 196 (181) (204)
Unrecognized net asset at transition (35) (57) - -
Net amount recognized $ 69 $ 70 $(897) $(889)
AMOUNTS RECOGNIZED IN
THE CONSOLIDATED
BALANCE SHEET CONSIST OF:
Prepaid benefit cost $ 360 $ 310 $ - $ -
Accrued benefit liability (712) (295) (897) (889)
Intangible asset 207 28 - -
Accumulated other non-shareowner
changes in equity 214 27 - -
Net amount recognized $ 69 $ 70 $(897) $(889)
The pension funds are valued at September 30 of the respective years in the
preceding table. Major assumptions used in the accounting for the employee
benefit plans are shown in the following table as weighted-averages:
1998 1997 1996
Pension Benefits:
Discount rate 6.6% 7.4% 7.5%
Expected return on plan assets 9.6% 9.7% 9.7%
Salary scale 4.8% 4.9% 5.0%
Other Postretirement Benefits:
Discount rate 6.7% 7.5% 7.6%
Expected return on plan assets 9.6% 7.0% 7.0%
Salary scale - - -
For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually to 6.75% for 2001 and remain at that level thereafter.
In Millions of Dollars 1998 1997 1996
COMPONENTS OF NET
PERIODIC BENEFIT COST:
Pension benefits:
Service cost $ 222 $ 228 $ 213
Interest cost 695 664 648
Expected return on plan assets (856) (783) (737)
Amortization of prior service cost 26 26 24
Amortization of unrecognized net transition asset (23) (23) (23)
Recognized actuarial net loss 8 7 5
Net settlement and curtailment loss 73 6 10
Less: Discontinued operation (4) (8) (10)
Net periodic benefit cost $ 141 $ 117 $ 130
Net periodic benefit cost of multiemployer plans $ 25 $ 26 $ 24
Other postretirement benefits:
Service cost $ 10 $ 10 $ 10
Interest cost 51 52 52
Expected return on plan assets (6) (6) (6)
Amortization of prior service cost (18) (18) (19)
Recognized actuarial net gain - - (1)
Net settlement and curtailment loss 10 - 1
Less: Discontinued operation (2) (3) (2)
Net periodic benefit cost $ 45 $ 35 $ 35
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $2,826 million, $2,688 million and $2,194 million,
respectively as of December 31, 1998, and $391 million, $278 million and $3
million, respectively as of December 31, 1997.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would change the accumulated postretirement benefit
obligation as of December 31, 1998 by approximately 2%. The effects of this
change on the service expense and the interest expense components of the net
postretirement benefit expense for 1998 would be 3%.
EMPLOYEE SAVINGS PLANS
The Corporation and certain subsidiaries sponsor various employee savings
plans. Total contribution expenses were $81 million, $76 million and $71 million
for 1998, 1997 and 1996.
The Corporation's nonunion domestic employee savings plan uses an Employee
Stock Ownership Plan ("ESOP") for employer contributions. External borrowings,
guaranteed by the Corporation and reported as debt on the Consolidated Balance
Sheet, were used by the ESOP to fund a portion of its purchase of ESOP Stock
from the Corporation. Each share of ESOP Stock is convertible into four shares
of Common Stock, has a guaranteed value of $65, a $4.80 annual dividend and is
redeemable at any time for $65.48 per share. Upon notice of redemption by the
Corporation, the Trustee has the right to convert the ESOP Stock into Common
Stock. Because of its guaranteed value, the ESOP Stock is classified outside of
permanent equity.
Shares of ESOP Stock are committed to employees at fair value on the date
earned. The ESOP Stock's cash dividends are used for debt service payments.
Participants receive shares in lieu of the cash dividends. As debt service
payments are made, ESOP Stock is released from an unreleased shares account. If
share releases do not meet share commitments, the Corporation will contribute
additional ESOP Stock, Common Stock or cash. At December 31, 1998, 6.9 million
shares had been committed to employees, leaving 5.7 million shares in the ESOP
Trust, with an approximate fair value of $1,256 million based on equivalent
common shares.
Upon withdrawal, shares of the ESOP Stock must be converted into the
Corporation's Common Stock or, if the value of the Common Stock is less than the
guaranteed value of the ESOP Stock, the Corporation must repurchase the shares
at their guaranteed value.
LONG-TERM INCENTIVE PLANS
The Corporation has long-term incentive plans authorizing various types of
market and performance based incentive awards, which may be granted to officers
and employees. The 1989 Long-Term Incentive Plan provides for the annual grant
of awards in an amount not to exceed 2% of the aggregate shares of Common Stock,
treasury shares and potentially dilutive common shares for the preceding year.
The 1995 Special Retention and Stock Appreciation Program Plan permits up to 4
million award units to be granted in any calendar year. In addition, up to 2
million options on Common Stock may be granted annually under the Corporation's
Employee Stock Option Plan. The exercise price of stock options, set at the time
of the grant, is not less than the fair market value per share at the date of
grant. Options have a term of ten years and generally vest after three years.
In February 1997, the Corporation granted a key group of senior executives
1,700,000 stock options under the 1989 Plan. The grant price of $37.938
represents the market value per share at the date of grant. The options become
exercisable at the earlier of the closing stock price of the Corporation's
Common Stock averaging $62.50 or higher for thirty consecutive trading days or
nine years.
A summary of the transactions under all plans for the three years ended
December 31, 1998 follows:
Stock Options Other
Average Incentive
Shares and Units in Thousands Shares Price Shares/Units
OUTSTANDING AT:
DECEMBER 31, 1995 32,138 $ 14.33 4,020
Granted 8,784 25.55 26
Exercised/earned (4,278) 12.05 (472)
Canceled (484) 19.78 -
DECEMBER 31, 1996 36,160 17.25 3,574
Granted 9,446 35.69 174
Exercised/earned (4,422) 13.35 (1,156)
Canceled (1,130) 29.52 (66)
DECEMBER 31, 1997 40,054 21.68 2,526
Granted 8,648 38.93 52
Exercised/earned (6,708) 14.94 (550)
Canceled (772) 32.34 (8)
DECEMBER 31, 1998 41,222 $ 26.20 2,020
The Corporation applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its long-term
incentive plans. Accordingly, no compensation cost has been recognized for its
fixed stock options. The compensation cost that has been recorded for stock-
based performance awards was $31 million, $22 million and $45 million for 1998,
1997 and 1996.
The following table summarizes information about stock options outstanding
(in thousands) at December 31, 1998:
Options Outstanding Options Exercisable
Average Remaining Average
Exercise Price Shares Price Term Shares Price
$10.01-$20.00 16,760 $15.25 4.85 16,760 $15.25
$20.01-$30.00 7,382 25.48 7.11 1,036 25.96
$30.01-$40.00 15,064 36.01 8.49 370 35.93
$40.01-$50.00 2,016 46.64 9.42 - -
Had compensation cost for the Corporation's stock-based compensation plans
been determined based on the fair value at the grant date for awards under those
plans consistent with the requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Corporation's
net income and earnings per share would have been reduced to the following pro
forma amounts:
In Millions of Dollars (except per share amounts) 1998 1997 1996
Net income:
As reported $1,255 $1,072 $ 906
Pro forma 1,208 1,042 894
Basic earnings per share:
As reported $ 2.68 $ 2.22 $ 1.81
Pro forma 2.58 2.16 1.79
Diluted earnings per share:
As reported $ 2.53 $ 2.10 $ 1.74
Pro forma 2.44 2.05 1.72
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions:
1998 1997 1996
Risk-free interest rate 5.4% 6.3% 5.3%
Expected life 6 years 6 years 6 years
Expected volatility 23% 18% 17%
Expected dividend yield 1.5% 1.8% 2.1%
The weighted-average grant date fair values of options granted during 1998,
1997 and 1996 were $11.33, $9.28 and $5.96.
11. 1998 COST REDUCTION EFFORTS
During 1998, the Corporation recorded pre-tax charges totaling $320 million
related to ongoing efforts to reduce costs for its continuing operations in
response to an increasingly competitive business environment. Charges were
recorded in each of the Corporation's business segments, with the majority
relating to the Pratt & Whitney, Otis and Carrier operations. The amounts were
primarily recorded in cost of sales and relate to workforce reductions of
approximately 7,500 employees, plant closings and charges associated with asset
impairments. Approximately 3,500 employees were terminated by the end of 1998.
The remaining terminations and plant closings are planned to be completed by
December 31, 1999.
The following table summarizes the costs associated with these actions:
Severance Other Asset
and Related Exit Write-
In Millions of Dollars Costs Costs Downs Total
1998 Charges $266 $5 $49 $320
Utilized in 1998 143 1 49 193
Remaining $123 $4 $- $127
In 1997 and 1996, the Corporation recorded charges which were similar in
nature to those noted above. However, the amounts were not material and the
related actions have been substantially completed.
12. FOREIGN EXCHANGE
The Corporation conducts business in many different currencies and,
accordingly, is subject to the inherent risks associated with foreign exchange
rate movements. The financial position and results of operations of
substantially all of the Corporation's foreign subsidiaries are measured using
the local currency as the functional currency. The aggregate effects of
translating the balance sheets of these subsidiaries are deferred as a separate
component of shareowners' equity. The Corporation had foreign currency net
assets in more than forty currencies, aggregating $1.4 billion and $1.3 billion
at December 31, 1998 and 1997, including Canadian dollar net assets of $259
million and $420 million, respectively. The Corporation's net assets in the Asia
Pacific region were $489 million and $434 million at December 31, 1998 and 1997.
Foreign currency commitment and transaction exposures are managed at the
operating unit level as an integral part of the business. Residual exposures
that cannot be offset to an insignificant amount are hedged. These hedges are
initiated by the operating units, with execution coordinated on a corporate-wide
basis, and are scheduled to mature coincident with the timing of the underlying
foreign currency commitments and transactions. Hedged items include foreign-
currency-denominated receivables and payables on the balance sheet, and
commitments for purchases and sales.
At December 31, the Corporation had the following amounts related to foreign
exchange contracts hedging foreign currency transactions and firm commitments:
In Millions of Dollars 1998 1997
Notional amount:
Buy contracts $1,694 $1,706
Sell contracts 1,037 1,058
Gains and losses explicitly deferred
as a result of hedging firm commitments:
Gains deferred $ 6 $ 12
Losses deferred (83) (68)
$ (77) $ (56)
The deferred gains and losses are expected to be recognized in earnings over
the next three years along with the offsetting gains and losses on the
underlying commitments.
13. FINANCIAL INSTRUMENTS
The Corporation operates internationally and, in the normal course of
business, is exposed to fluctuations in interest rates and currency values.
These fluctuations can increase the costs of financing, investing and operating
the business. The Corporation manages its transaction risks to acceptable limits
through the use of derivatives to create offsetting positions in foreign
currency markets. The Corporation views derivative financial instruments as risk
management tools and is not party to any leveraged derivatives.
The notional amounts of derivative contracts do not represent the amounts
exchanged by the parties, and thus are not a measure of the exposure of the
Corporation through its use of derivatives. The amounts exchanged by the parties
are normally based on the notional amounts and other terms of the derivatives,
which relate to exchange rates. The value of derivatives is derived from those
underlying parameters and changes in the relevant rates.
By nature, all financial instruments involve market and credit risk. The
Corporation enters into derivative financial instruments with major investment
grade financial institutions. The Corporation has policies to monitor its credit
risks of counterparties to derivative financial instruments. Pursuant to these
policies, the Corporation periodically determines the fair value of its
derivative instruments in order to identify its credit exposure. The Corporation
diversifies the counterparties used as a means to limit counterparty exposure
and concentration of risk. Credit risk is assessed prior to entering into
transactions and periodically thereafter. The Corporation does not anticipate
nonperformance by any of these counterparties.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Significant differences can arise
between the fair value and carrying amount of financial instruments at historic
cost.
The carrying amounts and fair values of financial instruments are as follows:
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
In Millions of Dollars Amount Value Amount Value
Financial assets:
Long-term receivables $ 54 $ 53 $ 71 $ 68
Customer financing notes 311 304 117 117
Financial liabilities:
Short-term borrowings 504 504 178 178
Long-term debt 1,423 1,674 1,084 1,257
Foreign exchange contracts:
In a receivable position 16 21 18 17
In a payable position 105 96 96 68
The following methods and assumptions were used to estimate the fair value of
financial instruments:
CASH, CASH EQUIVALENTS AND SHORT-TERM BORROWINGS
The carrying amount approximates fair value because of the short maturity of
those instruments.
LONG-TERM RECEIVABLES AND CUSTOMER FINANCING NOTES
The fair values are based on quoted market prices for those or similar
instruments. When quoted market prices are not available, an approximation of
fair value is based upon projected cash flows discounted at an estimated current
market rate of interest.
DEBT
The fair values are estimated based on the quoted market prices for the same
or similar issues or on the current rates offered to the Corporation for debt of
the same remaining maturities.
FOREIGN EXCHANGE CONTRACTS
The fair values are estimated based on the amount that the Corporation would
receive or pay to terminate the agreements at the reporting date.
FINANCING COMMITMENTS
The Corporation had outstanding financing commitments totaling $1,420 million
at December 31, 1998. Risks associated with changes in interest rates are
negated by the fact that interest rates are variable during the commitment term
and are set at the date of funding based on current market conditions, the fair
value of the underlying collateral and the credit worthiness of the customers.
As a result, the fair value of these financings is expected to equal the amounts
funded. The fair value of the commitment itself is not readily determinable and
is not considered significant. Additional information pertaining to these
commitments is included in Note 4.
14. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Corporation occupies space and uses certain equipment under lease
arrangements. Rental commitments at December 31, 1998 under long-term
noncancelable operating leases are as follows:
In Millions of Dollars
1999 $167
2000 118
2001 83
2002 65
2003 55
Thereafter 190
$678
Rent expense was $230 million in 1998 and $240 million in 1997 and 1996.
See Note 4 for lease commitments associated with customer financing
arrangements.
ENVIRONMENTAL
The Corporation's operations are subject to environmental regulation by
federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its local operations. As described in Note 1,
the Corporation has accrued for the costs of environmental remediation
activities and periodically reassesses these amounts. Management believes that
losses materially in excess of amounts accrued are not reasonably possible.
The Corporation has had insurance in force over its history with a number of
insurance companies and has commenced litigation seeking indemnity and defense
under these insurance policies in relation to its environmental liabilities. The
litigation is expected to last several years. Environmental liabilities are not
reduced by potential insurance reimbursements.
U.S. GOVERNMENT
The Corporation is now and believes that, in light of the current government
contracting environment, it will be the subject of one or more government
investigations. If the Corporation or one of its business units were charged
with wrongdoing as a result of any of these investigations, the Corporation or
one of its business units could be suspended from bidding on or receiving awards
of new government contracts pending the completion of legal proceedings. If
convicted or found liable, the Corporation could be fined and debarred from new
government contracting for a period generally not to exceed three years. Any
contracts found to be tainted by fraud could be voided by the Government.
The Corporation's contracts with the U.S. Government are also subject to
audits. Like many defense contractors, the Corporation has 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. The Corporation has made voluntary refunds in those cases
it believes appropriate.
OTHER
The Corporation extends performance and operating cost guarantees beyond its
normal warranty and service policies for extended periods on some of its
products, particularly commercial aircraft engines. Liability under such
guarantees is contingent upon future product performance and durability. The
Corporation has accrued its estimated liability that may result under these
guarantees.
The Corporation also has other commitments and contingent liabilities related
to legal proceedings and matters arising out of the normal course of business.
The Corporation has accrued for environmental investigatory, remediation,
operating and maintenance costs, performance guarantees and other litigation and
claims based on management's estimate of the probable outcome of these matters.
While it is possible that the outcome of these matters may differ from the
recorded liability, management believes that resolution of these matters will
not have a material impact on the Corporation's financial position, results of
operations or cash flows.
15. SEGMENT FINANCIAL DATA
The Corporation and its subsidiaries design, develop, manufacture, sell and
provide service on products, classified in five principal operating segments.
The Corporation's operating segments were generally determined on the basis of
separate operating companies, each with general operating autonomy over
diversified products and services.
Otis products include elevators and escalators, service, maintenance and
spare parts sold to a diversified international customer base in commercial real
estate development.
Carrier products include heating, ventilating and air conditioning systems
and equipment, transport and commercial refrigeration equipment and service for
a diversified international customer base principally in commercial and
residential real estate development.
Pratt & Whitney products include aircraft engines and spare parts sold to a
diversified customer base including international and domestic commercial
airlines and aircraft leasing companies, aircraft manufacturers, regional and
commuter airlines, and U.S. and non-U.S. governments. Pratt & Whitney also
provides product support and a full range of overhaul, repair and fleet
management services and produces land based power generation equipment which is
used for electrical power generation and other applications.
The Flight Systems segment includes Sikorsky Aircraft and Hamilton Standard.
Sikorsky Aircraft products include helicopters and spare parts sold primarily to
U.S. and non-U.S. governments. Hamilton Standard products include environmental,
flight and fuel control systems and propellers sold primarily to U.S. and non-
U.S. governments, aerospace and defense prime contractors, and airframe and jet
engine manufacturers.
UT Automotive products include electrical distribution systems,
electromechanical and hydraulic devices, electric motors, car and truck interior
trim components, steering wheels (through October 1996), instrument panels and
other products for the automotive industry principally in North America and
Europe. As discussed in Note 16, the Corporation sold UT Automotive to Lear
Corporation on May 4, 1999.
Operating segment and geographic data include the results of all majority-
owned subsidiaries, consistent with the management reporting of these
businesses. For certain of these subsidiaries, minority shareholders have rights
which, under the provisions of EITF 96-16, overcome the presumption of
consolidation. In the Corporation's consolidated results, these subsidiaries are
accounted for using the equity method of accounting. Adjustments to reconcile
segment reporting to consolidated results are included in "Eliminations and
other", which also includes certain small subsidiaries.
Operating segment information for the years ended December 31 follows:
OPERATING SEGMENTS
Total Revenues Operating Profits
In Millions of Dollars 1998 1997 1996 1998 1997 1996
Otis $ 5,572 $ 5,548 $ 5,595 $ 533 $ 465 $ 524
Carrier 6,922 6,056 5,958 495 458 422
Pratt & Whitney 7,876 7,402 6,201 1,024 816 637
Flight Systems 2,891 2,804 2,596 287 301 244
UT Automotive 2,962 2,987 3,233 169 173 196
Total segment $26,223 $24,797 $23,583 $2,508 $2,213 $2,023
Eliminations and other (452) (522) (478) (89) (56) (109)
Discontinued operation (2,962) (2,987) (3,233) (169) (173) (196)
General corporate expenses - - - (243) (222) (188)
Consolidated $22,809 $21,288 $19,872 $2,007 $1,762 $1,530
Interest expense (197) (188) (213)
Income from continuing operations
before income taxes and minority
interests $1,810 $1,574 $1,317
Depreciation and
Capital Expenditures Amortization
In Millions of Dollars 1998 1997 1996 1998 1997 1996
Otis $ 93 $ 143 $ 132 $ 139 $ 134 $ 116
Carrier 190 143 169 184 148 145
Pratt & Whitney 254 285 248 278 286 296
Flight Systems 105 91 84 118 118 121
UT Automotive 195 163 138 126 128 128
Total segment $ 837 $ 825 $ 771 $ 845 $ 814 $ 806
Eliminations and other 31 (4) - 11 21 36
Discontinued operation (195) (163) (138) (126) (128) (128)
Consolidated $ 673 $ 658 $ 633 $ 730 $ 707 $ 714
SEGMENT REVENUES AND OPERATING PROFIT
Total revenues by operating segment include intersegment sales, which are
generally made at prices approximating those that the selling entity is able to
obtain on external sales. Operating profits by segment includes income before
interest expense, income taxes and minority interest.
GEOGRAPHIC AREAS
External Revenues Operating Profits Long-Lived Assets
In Millions of Dollars 1998 1997 1996 1998 1997 1996 1998 1997 1996
United States operations $13,852 $12,494 $11,084 $1,340 $1,123 $ 872 $2,973 $2,426 $2,194
International operations:
Europe 4,252 3,857 3,868 516 364 377 755 706 766
Asia Pacific 2,487 2,943 3,037 130 210 273 748 485 552
Other 2,517 2,348 2,218 353 343 305 496 536 444
Eliminations and other (299) (354) (335) (332) (278) (297) - (23) -
Consolidated $22,809 $21,288 $19,872 $2,007 $1,762 $1,530 $4,972 $4,130 $3,956
GEOGRAPHIC EXTERNAL REVENUES AND OPERATING PROFIT
Geographic external revenues and operating profits are attributed to the
geographic regions based on their location of origin. United States external
revenues include export sales to commercial customers outside the U.S. and sales
to the U.S. Government, commercial and affiliated customers, which are known to
be for resale to customers outside the U.S.
Revenues from United States operations include export sales as follows:
In Millions of Dollars 1998 1997 1996
Europe $ 967 $ 870 $ 783
Asia Pacific 1,910 1,854 1,471
Other 1,220 1,116 708
$4,097 $3,840 $2,962
GEOGRAPHIC LONG-LIVED ASSETS
Long-lived assets include net fixed assets and net goodwill, which can be
attributed to the specific geographic regions.
MAJOR CUSTOMERS
Revenues include sales under prime contracts and subcontracts to the U.S.
Government, primarily related to Pratt & Whitney and Flight Systems products, as
follows:
In Millions of Dollars 1998 1997 1996
Pratt & Whitney $1,941 $1,935 $1,857
Flight Systems 1,273 1,317 1,471
Sales to Ford Motor Company, UT Automotive's largest customer, comprised
approximately 33% of UT Automotive's revenues in 1998 and 38% in 1997 and 1996.
16. SUBSEQUENT EVENTS
On March 16, 1999, the Corporation announced an agreement to sell its UT
Automotive unit to Lear Corporation for $2.3 billion in cash. This transaction
was completed on May 4, 1999. The financial statements presented herein have
been restated to reflect UT Automotive as a discontinued operation for all
periods presented.
On April 30, 1999, the Corporation announced a two-for-one stock split
payable on May 17, 1999, in the form of a stock dividend to shareowners of
record at the close of business on May 7, 1999. All common share and per share
amounts in these financial statements reflect the stock split.
On February 22, 1999, the Corporation announced a merger agreement with
Sundstrand Corporation. Under terms of the agreement each outstanding share of
Sundstrand Common Stock will be converted into the right to receive $35 in cash
plus .5580 shares of the Corporation's Common Stock. The merger will be
accounted for as a purchase and closed June 10, 1999.
* * * * * *
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
In Millions of Dollars Quarter Ended
(except per share amounts) March 31 June 30 September 30 December 31
1998
Sales $5,220 $5,848 $5,710 $6,009
Gross margin 1,259 1,539 1,508 1,584
Income from continuing operations 229 333 326 269
Net income 260 360 348 287
Earnings per share of Common Stock:
Basic:
Continuing operations $ 0.48 $ 0.71 $ 0.70 $ 0.58
Net earnings $ 0.55 $ 0.77 $ 0.75 $ 0.62
Diluted:
Continuing operations $ 0.46 $ 0.67 $ 0.66 $ 0.55
Net earnings $ 0.52 $ 0.72 $ 0.70 $ 0.58
1997
Sales $5,043 $5,499 $5,178 $5,342
Gross margin 1,214 1,372 1,310 1,320
Income from continuing operations 204 284 274 200
Net income 224 304 300 244
Earnings per share of Common Stock:
Basic:
Continuing operations $ 0.41 $ 0.59 $ 0.57 $ 0.41
Net earnings $ 0.45 $ 0.63 $ 0.62 $ 0.51
Diluted:
Continuing operations $ 0.40 $ 0.55 $ 0.54 $ 0.40
Net earnings $ 0.43 $ 0.59 $ 0.58 $ 0.49
Restated to reflect application of EITF 96-16.
COMPARATIVE STOCK DATA
1998 1997
Common Stock High Low Dividend High Low Dividend
First quarter 46 31/32 33 1/2 $ .155 39 3/4 32 9/16 $ .155
Second quarter 50 1/16 42 1/32 $ .18 43 7/8 35 1/8 $ .155
Third quarter 49 9/16 35 7/8 $ .18 44 15/32 38 3/8 $ .155
Fourth quarter 56 1/4 36 $ .18 40 29/32 33 3/8 $ .155
The Corporation's Common Stock is listed on the New York Stock Exchange. The
high and low prices are based on the Composite Tape of the New York Stock
Exchange. There were approximately 22,000 common shareowners of record at
December 31, 1998.
EXHIBIT 99.2
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of United Technologies Corporation
Our audits of the consolidated financial statements referred to in our report
dated January 21, 1999, except for Note 16, as to which the date is May 20, 1999
included as Exhibit 99.1 of United Technologies Corporation's Current Report on
Form 8-K dated June 11, 1999, also included an audit of the Financial Statement
Schedule included as Exhibit 99.3 of the aforementioned Form 8-K. In our
opinion, the Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
May 20,1999
EXHIBIT 99.3
UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Financial Statement Schedule on Valuation and Qualifying Accounts
Three Years Ended December 31, 1998
(Millions of Dollars)
Allowances for Doubtful Accounts and Other Customer Financing Activity:
Balance December 31, 1995 $ 408
Provision charged to income 31
Doubtful accounts written off (net) (55)
Other adjustments _
Balance December 31, 1996 384
Provision charged to income 34
Doubtful accounts written off (net) (26)
Other adjustments (11)
Balance December 31, 1997 381
Provision charged to income 67
Doubtful accounts written off (net) (32)
Other adjustments (21)
Balance December 31, 1998 $ 395
Future Income Tax Benefits - Valuation allowance:
Balance December 31, 1995 $ 310
Additions charged to income tax expense 39
Reductions credited to income tax expense (44)
Balance December 31, 1996 305
Additions charged to income tax expense 61
Reductions credited to income tax expense (89)
Balance December 31, 1997 277
Additions charged to income tax expense 35
Reductions credited to income tax expense (93)
Balance December 31, 1998 $ 219
EXHIBIT 99.4
UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Computations of Basic Earnings Per Share and Diluted Earnings Per Share
For the Five Years Ended December 31, 1998
(Millions, except per share amounts)
1998 1997 1996 1995 1994 (1)
Net Income $ 1,255 $ 1,072 $ 906 $ 750 $ 585
ESOP Convertible Preferred Stock
dividend (33) (32) (30) (27) (22)
Basic earnings for period $ 1,222 $ 1,040 $ 876 $ 723 $ 563
ESOP Convertible Preferred Stock
adjustment 28 27 24 21 17
Diluted earnings for period $ 1,250 $ 1,067 $ 900 $ 744 $ 580
Basic average number of shares
outstanding during the period 455.5 468.9 482.9 491.3 502.2
Stock awards 12.0 11.7 9.7 5.9 5.3
ESOP Convertible Preferred Stock 27.3 26.5 24.6 21.8 18.5
Diluted average number of shares
outstanding during the period 494.8 507.1 517.2 519.0 526.0
Basic earnings per common share $ 2.68 $ 2.22 $ 1.81 $ 1.47 $ 1.12
Diluted earnings per common
share $ 2.53 $ 2.10 $ 1.74 $ 1.43 $ 1.10
(1)In 1994, the Corporation adopted AICPA Statement of Position (SOP) 93-6, "Employers' Accounting for
Employee Stock Ownership Plans" and conformed its calculations of earnings per common share to the
requirements of this SOP.
EXHIBIT 99.5
UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Millions of Dollars)
Years Ended December 31,
1998 1997 1996
s>
Fixed Charges:
Interest expense $ 197 $ 188 $ 213
Interest capitalized 12 10 16
One-third of rents* 77 80 80
Total Fixed Charges $ 286 $ 278 $ 309
Earnings:
Income from continuing
operations before income
taxes and minority interests $ 1,810 $ 1,574 $ 1,317
Fixed charges per above 286 278 309
Less: interest capitalized (12) (10) (16)
274 268 293
Amortization of interest
capitalized 31 34 35
Total Earnings $ 2,115 $ 1,876 $ 1,645
Ratio of Earnings to Fixed
Charges 7.40 6.75 5.32
* Reasonable approximation of the interest factor.
