FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from                  to                 

Commission file number 1-812

 

 

UNITED TECHNOLOGIES CORPORATION

 

 

 

DELAWARE   06-0570975

One Financial Plaza, Hartford, Connecticut 06103

(860) 728-7000

 

 

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

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

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

 

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

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

At September 30, 2011 there were 906,087,669 shares of Common Stock outstanding.

 

 

 


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

Quarter Ended September 30, 2011

 

     Page  

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements:

     3   

Condensed Consolidated Statement of Operations for the quarters ended September 30, 2011 and 2010

     3   

Condensed Consolidated Statement of Operations for the nine months ended September 30, 2011 and 2010

     4   

Condensed Consolidated Balance Sheet at September 30, 2011 and December 31, 2010

     5   

Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2011 and 2010

     6   

Notes to Condensed Consolidated Financial Statements

     7   

Report of Independent Registered Public Accounting Firm

     26   

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

     27   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     44   

Item 4. Controls and Procedures

     44   

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

     45   

Item 1A. Risk Factors

     45   

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

     50   

Item 6. Exhibits

     51   

SIGNATURES

     52   

EXHIBIT INDEX

     53   

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

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

     Quarter Ended September 30,  

(Dollars in millions, except per share amounts; shares in millions)

   2011      2010  

Net Sales:

     

Product sales

   $ 10,555      $ 9,771  

Service sales

     4,249        3,849  
  

 

 

    

 

 

 
     14,804        13,620  
  

 

 

    

 

 

 

Costs and Expenses:

     

Cost of products sold

     7,935        7,124  

Cost of services sold

     2,821        2,543  

Research and development

     495        433  

Selling, general and administrative

     1,578        1,478  
  

 

 

    

 

 

 
     12,829        11,578  
  

 

 

    

 

 

 

Other income (expense), net

     227        (114
  

 

 

    

 

 

 

Operating profit

     2,202        1,928  

Interest expense, net

     138        161  
  

 

 

    

 

 

 

Income before income taxes

     2,064        1,767  

Income tax expense

     643        468  
  

 

 

    

 

 

 

Net income

     1,421        1,299  

Less: Noncontrolling interest in subsidiaries’ earnings

     97        101  
  

 

 

    

 

 

 

Net income attributable to common shareowners

   $ 1,324      $ 1,198  
  

 

 

    

 

 

 

Earnings Per Share of Common Stock:

     

Basic

   $ 1.49      $ 1.32  

Diluted

   $ 1.47      $ 1.30  

Dividends Per Share of Common Stock

   $ .480      $ .425  

Weighted average number of shares outstanding:

     

Basic shares

     888.8        905.6  

Diluted shares

     901.9        919.5  

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

     Nine Months Ended September 30,  

(Dollars in millions, except per share amounts; shares in millions)

   2011      2010  

Net Sales:

     

Product sales

   $ 30,723      $ 28,123  

Service sales

     12,501        11,339  
  

 

 

    

 

 

 
     43,224        39,462  
  

 

 

    

 

 

 

Costs and Expenses:

     

Cost of products sold

     22,986        20,949  

Cost of services sold

     8,316        7,465  

Research and development

     1,506        1,289  

Selling, general and administrative

     4,765        4,393  
  

 

 

    

 

 

 
     37,573        34,096  
  

 

 

    

 

 

 

Other income (expense), net

     550        (33
  

 

 

    

 

 

 

Operating profit

     6,201        5,333  

Interest expense, net

     428        481  
  

 

 

    

 

 

 

Income before income taxes

     5,773        4,852  

Income tax expense

     1,821        1,394  
  

 

 

    

 

 

 

Net income

     3,952        3,458  

Less: Noncontrolling interest in subsidiaries’ earnings

     298        284  
  

 

 

    

 

 

 

Net income attributable to common shareowners

   $ 3,654      $ 3,174  
  

 

 

    

 

 

 

Earnings Per Share of Common Stock:

     

Basic

   $ 4.09      $ 3.49  

Diluted

   $ 4.02      $ 3.43  

Dividends Per Share of Common Stock

   $ 1.385      $ 1.275  

Weighted average number of shares outstanding:

     

Basic shares

     893.7        909.9  

Diluted shares

     909.1         924.8   

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 

(Dollars in millions)

   September  30,
2011
    December  31,
2010
 
    
Assets     

Cash and cash equivalents

   $ 5,966     $ 4,083  

Accounts receivable, net

     9,503       8,925  

Inventories and contracts in progress, net

     8,617       7,766  

Future income tax benefits, current

     1,551       1,623  

Other assets, current

     787       1,113  
  

 

 

   

 

 

 

Total Current Assets

     26,424       23,510  
  

 

 

   

 

 

 

Customer financing assets

     1,035       1,118  

Future income tax benefits

     1,744       1,970  

Fixed assets

     16,042       15,914  

Less: Accumulated depreciation

     (9,905     (9,634
  

 

 

   

 

 

 

Fixed assets, net

     6,137       6,280  
  

 

 

   

 

 

 

Goodwill

     17,980       17,721  

Intangible assets, net

     3,966       4,060  

Other assets

     4,662       3,834  
  

 

 

   

 

 

 

Total Assets

   $ 61,948     $ 58,493  
  

 

 

   

 

 

 
Liabilities and Equity     

Short-term borrowings

   $ 1,228     $ 116  

Accounts payable

     5,597       5,206  

Accrued liabilities

     12,604       12,247  

Long-term debt currently due

     635       163  
  

 

 

   

 

 

 

Total Current Liabilities

     20,064       17,732  
  

 

 

   

 

 

 

Long-term debt

     9,501       10,010  

Future pension and postretirement benefit obligations

     3,409       3,592  

Other long-term liabilities

     5,059       4,510  
  

 

 

   

 

 

 

Total Liabilities

     38,033       35,844  
  

 

 

   

 

 

 

Redeemable noncontrolling interest

     327       317  

Shareowners’ Equity:

    

Common Stock

     13,330       12,597  

Treasury Stock

     (19,412     (17,468

Retained earnings

     32,594       30,191  

Unearned ESOP shares

     (156     (166

Accumulated other comprehensive loss

     (3,766     (3,769
  

 

 

   

 

 

 

Total Shareowners’ Equity

     22,590       21,385  

Noncontrolling interest

     998       947  
  

 

 

   

 

 

 

Total Equity

     23,588       22,332  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 61,948     $ 58,493  
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended
September 30,
 

(Dollars in millions)

   2011     2010  

Operating Activities:

    

Net income attributable to common shareowners

   $ 3,654     $ 3,174  

Noncontrolling interest in subsidiaries’ earnings

     298       284  
  

 

 

   

 

 

 

Net income

     3,952       3,458  

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

    

Depreciation and amortization

     1,023       1,008  

Deferred income tax provision (benefit)

     333       (123

Stock compensation cost

     185       112  

Change in:

    

Accounts receivable

     (546     (169

Inventories and contracts in progress

     (912     (932

Other current assets

     3       (46

Accounts payable and accrued liabilities

     762       1,178  

Global pension contributions*

     (247     (699

Other operating activities, net

     25       443  
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     4,578       4,230  
  

 

 

   

 

 

 

Investing Activities:

    

Capital expenditures

     (605     (479

Investments in businesses

     (229     (2,551

Dispositions of businesses

     384       200  

Decrease (increase) in customer financing assets, net

     43       (29

Other investing activities, net

     109       173  
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (298     (2,686
  

 

 

   

 

 

 

Financing Activities:

    

(Repayment) issuance of long-term debt, net

     (50     610  

Increase in short-term borrowings, net

     1,124       1,882  

Common Stock issued under employee stock plans

     196       211  

Dividends paid on Common Stock

     (1,192     (1,114

Repurchase of Common Stock

     (2,175     (1,644

Other financing activities, net

     (313     (253
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (2,410     (308
  

 

 

   

 

 

 

Effect of foreign exchange rate changes on cash and cash equivalents

     13       46  
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1,883       1,282  

Cash and cash equivalents, beginning of year

     4,083       4,449  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 5,966     $ 5,731  
  

 

 

   

 

 

 

 

* Non-cash activities include contributions of UTC common stock of $450 million and $250 million to domestic defined benefit pension plans in the third quarter of 2011 and second quarter of 2010, respectively.

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Condensed Consolidated Financial Statements at September 30, 2011 and for the quarters and nine months ended September 30, 2011 and 2010 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. Certain reclassifications have been made to the prior period amounts to conform to the current year presentation. We previously reported “Other income, net,” which included “Interest income,” as a component of “Revenues.” “Other income, net,” excluding “Interest income,” is now reflected separately, while “Interest income” is now netted with “Interest expense” for financial statement presentation. The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our Annual Report to Shareowners (2010 Annual Report) incorporated by reference to our Annual Report on Form 10-K for calendar year 2010 (2010 Form 10-K).

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

Business Acquisitions and Dispositions. During the first nine months of 2011, our investment in business acquisitions was $229 million and consisted of a number of smaller acquisitions in both the aerospace and commercial businesses. As a result of Sikorsky’s contribution of a business into a new venture in the United Arab Emirates, we recognized a gain of approximately $73 million in the second quarter of 2011.

On September 21, 2011, we announced that we entered into an agreement to acquire Goodrich Corporation (Goodrich), a global supplier of systems and services to the aerospace and defense industry with 2010 sales of $7 billion. Under the terms of the agreement, Goodrich shareholders will receive $127.50 in cash for each share of Goodrich common stock they own at the time of the closing of the transaction. This equates to a total current enterprise value of $18.4 billion, including $1.9 billion in net debt to be assumed. Of the total $16.5 billion required, we expect to finance the transaction through a combination of debt and equity issuances, with the equity component expected to approximate 25% of the total financing (other than the amount of net debt assumed). The transaction is subject to customary closing conditions, including regulatory and Goodrich shareholder approval. We expect that this acquisition will close in mid-2012. Goodrich products include aircraft nacelles and interior systems, actuation and landing systems, and electronic systems. Once the acquisition is complete, Goodrich and Hamilton Sundstrand will be combined to form a new segment named UTC Aerospace Systems. It is expected that the increased scale, financial strength and complementary products of the new combined business will strengthen our position in the aerospace and defense industry. Further, this acquisition will enhance our ability to support our customers with more integrated systems.

On October 12, 2011, Pratt & Whitney and Rolls-Royce announced a restructure of their participation in IAE International Aero Engines AG (IAE), which produces the V2500 engine for the A320 family of aircraft. Under the terms of the agreement, Rolls-Royce will sell its equity and program shares in IAE and license its V2500 intellectual property in IAE to Pratt & Whitney for $1.5 billion and an agreed payment for each hour flown by the current installed fleet of V2500-powered aircraft during the fifteen year period following completion of the transaction. These licensing rights will be perpetual, worldwide, and permit Pratt & Whitney to sublicense, as necessary. The acquisition of the additional shares in IAE will give Pratt & Whitney a controlling interest with 66% ownership. Pratt & Whitney intends to offer a portion of its interests to the remaining IAE partners MTU Aero Engines AG (MTU) and Japanese Aero Engines Corporation (JAEC). Upon closing, we anticipate Pratt & Whitney will begin consolidating IAE. The acquisition of the collaboration rights and intellectual property licenses will be reflected as intangible assets and amortized in relation to the economic benefits received over the projected remaining life of the V2500 program.

Pratt & Whitney and Rolls-Royce also announced an agreement to form a new venture to develop engines to power future new mid-size aircraft (120 – 230 passenger aircraft). The two companies will establish a joint venture company, in which each will hold an equal share, to develop new engines for the next generation of mid-size aircraft. This new joint venture will focus on high-bypass ratio geared turbofan technology. In addition, the venture will collaborate on future studies for next generation propulsion systems. These announced transactions with Rolls-Royce are subject to various closing conditions, including regulatory approvals and are expected to close in mid-2012.

 

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Goodwill. Changes in our goodwill balances for the first nine months of 2011 were as follows:

 

(Dollars in millions)

   Balance as of
January 1, 2011
     Goodwill resulting from
business combinations
    Foreign currency
translation and other
    Balance as of
September  30, 2011
 

Otis

   $ 1,470      $ 45     $ (5   $ 1,510  

Carrier

     3,171        35       (51     3,155  

UTC Fire & Security

     6,646        35       (33     6,648  

Pratt & Whitney

     1,224        —          4       1,228  

Hamilton Sundstrand

     4,491        (10     (5     4,476  

Sikorsky

     330        —          (4     326  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Segments

     17,332        105       (94     17,343  

Eliminations and other

     389        258       (10     637  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 17,721      $ 363     $ (104   $ 17,980  
  

 

 

    

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2011, we recorded an additional $258 million of goodwill, reflected within “Eliminations and other” in the above table, related to the finalization of purchase accounting associated with the December 2010 acquisition of Clipper Windpower Plc (Clipper).

We early adopted the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) No 2011-08, “Testing Goodwill for Impairment,” in connection with the performance of our annual goodwill impairment test. Under ASU 2011-08, entities are provided with the option of first performing a qualitative assessment on none, some, or all of its reporting units to determine whether further quantitative impairment testing is necessary. An entity may also bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative impairment test. We completed our annual impairment testing in the third quarter of 2011 and determined that no significant adjustments to the carrying value of goodwill or indefinite lived intangible assets were necessary based on the results of the impairment tests.

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

 

     September 30, 2011     December 31, 2010  

(Dollars in millions)

   Gross Amount      Accumulated
Amortization
    Gross Amount      Accumulated
Amortization
 

Amortized:

          

Service portfolios

   $ 2,042      $ (1,051   $ 1,950      $ (942

Patents and trademarks

     468        (179     441        (153

Other, principally customer relationships

     3,311        (1,384     3,229        (1,222
  

 

 

    

 

 

   

 

 

    

 

 

 
     5,821        (2,614     5,620        (2,317
  

 

 

    

 

 

   

 

 

    

 

 

 

Unamortized:

          

Trademarks and other

     759          757     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 6,580      $ (2,614   $ 6,377      $ (2,317
  

 

 

    

 

 

   

 

 

    

 

 

 

Amortization of intangible assets for the quarter and nine months ended September 30, 2011 was $102 million and $304 million, respectively, compared with $104 million and $283 million for the same periods of 2010. Average amortization of these intangible assets for 2011 through 2015 is expected to approximate $315 million per year.

 

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Note 2: Earnings Per Share

 

     Quarter Ended September 30,      Nine Months Ended September 30,  

(Dollars in millions, except per share amounts; shares in millions)

   2011      2010      2011      2010  

Net income attributable to common shareowners

   $ 1,324      $ 1,198      $ 3,654      $ 3,174  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average number of shares outstanding

     888.8        905.6        893.7        909.9  

Stock awards

     13.1        13.9        15.4        14.9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average number of shares outstanding

     901.9        919.5        909.1        924.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings Per Share of Common Stock:

           

Basic

   $ 1.49      $ 1.32      $ 4.09      $ 3.49  

Diluted

   $ 1.47      $ 1.30      $ 4.02      $ 3.43  

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period. These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would be anti-dilutive. For the quarter ended September 30, 2011, there were 6.5 million anti-dilutive stock awards excluded from the computation. For the nine months ended September 30, 2011, there were no anti-dilutive stock awards excluded from the computation. The number of stock awards excluded from the computation was 12.7 million and 12.6 million for the quarter and nine months ended September 30, 2010, respectively.

Note 3: Inventories and Contracts in Progress

 

(Dollars in millions)

   September 30, 2011     December 31, 2010  

Raw materials

   $ 1,357     $ 1,221  

Work-in-process

     3,696       3,259  

Finished goods

     3,258       3,026  

Contracts in progress

     7,058       6,340  
  

 

 

   

 

 

 
     15,369       13,846  

Less:

    

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

     (463     (275

Billings on contracts in progress

     (6,289     (5,805
  

 

 

   

 

 

 
   $ 8,617     $ 7,766  
  

 

 

   

 

 

 

As of September 30, 2011 and December 31, 2010, the above inventory balances include capitalized contract development costs of $843 million and $804 million, respectively, related to certain aerospace programs. These capitalized costs are liquidated as production units are delivered to the customer. The capitalized contract development costs within inventory principally relate to costs capitalized on Sikorsky’s CH-148 contract with the Canadian government. The CH-148 is a derivative of the H-92, a military variant of the S-92.

Note 4: Borrowings and Lines of Credit

 

(Dollars in millions)

   September 30, 2011      December 31, 2010  

Commercial paper

   $ 1,080      $ —     

Other borrowings

     148        116  
  

 

 

    

 

 

 

Total short-term borrowings

   $ 1,228      $ 116  
  

 

 

    

 

 

 

At September 30, 2011, we had committed credit agreements from banks permitting aggregate borrowings of up to $3.0 billion under a $1.6 billion revolving credit agreement and a $1.4 billion multicurrency revolving credit agreement, both of which are available for general funding purposes, including acquisitions. As of September 30, 2011, there were no borrowings under either of these revolving credit agreements, which expire in November 2014 and December 2014, respectively. The undrawn portions under both of these agreements are also available to serve as backup facilities for the issuance of commercial paper. We generally use our

 

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commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions and repurchases of our common stock.

As part of our pending acquisition of Goodrich, we executed a commitment letter, dated September 21, 2011, with various financial institutions that provides a 12-month commitment, subject to a 6-month extension for regulatory reasons, for a $15 billion 364-day unsecured bridge loan facility.

Long-term debt consisted of the following:

 

(Dollars in millions)

   September 30, 2011     December 31, 2010  

6.100% notes due 2012*

   $ 500     $ 500  

4.875% notes due 2015*

     1,200       1,200  

5.375% notes due 2017*

     1,000       1,000  

6.125% notes due 2019*

     1,250       1,250  

8.875% notes due 2019

     272       272  

4.500% notes due 2020*

     1,250       1,250  

8.750% notes due 2021

     250       250  

6.700% notes due 2028

     400       400  

7.500% notes due 2029*

     550       550  

5.400% notes due 2035*

     600       600  

6.050% notes due 2036*

     600       600  

6.125% notes due 2038*

     1,000       1,000  

5.700% notes due 2040*

     1,000       1,000  

Project financing obligations

     132       141  

Other (including capitalized leases)

     132       160  
  

 

 

   

 

 

 

Total long-term debt

     10,136       10,173  

Less current portion

     (635     (163
  

 

 

   

 

 

 

Long-term debt, net of current portion

   $ 9,501     $ 10,010  
  

 

 

   

 

 

 

 

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

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

Note 5: Income Taxes

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

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

 

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It is reasonably possible that a net reduction within a range of $145 million to $310 million of unrecognized tax benefits may occur within the next twelve months as a result of additional worldwide uncertain tax positions, the revaluation of current uncertain tax positions arising from developments in examinations, in appeals or in the courts, or the closure of tax statutes. A portion of this net reduction may impact the Company’s 2011 or 2012 income tax expense. Not included in the range is €197 million (approximately $267 million) of tax benefits that we have claimed related to a 1998 German reorganization. These tax benefits are currently being reviewed by the German Tax Office in the course of an audit of tax years 1999 to 2000. In 2008 the German Federal Tax Court denied benefits to another taxpayer in a case involving a German tax law relevant to our reorganization. The determination of the German Federal Tax Court on this other matter was appealed to the European Court of Justice (ECJ) to determine if the underlying German tax law is violative of European Union (EU) principles. On September 17, 2009 the ECJ issued an opinion in this case that is generally favorable to the other taxpayer and referred the case back to the German Federal Tax Court for further consideration of certain related issues. In May 2010, the German Federal Tax Court released its decision, in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development. After consideration of the ECJ decision and the latest German Federal Tax Court decision, we continue to believe that it is more likely than not that the relevant German tax law is violative of EU principles and we have not accrued tax expense for this matter. As we continue to monitor developments related to this matter, it may become necessary for us to accrue tax expense and related interest.

Tax years 2004 and 2005 are currently before the Appeals Division of the Internal Revenue Service (IRS) for resolution discussions regarding certain proposed tax adjustments with which the Company does not agree. The Company expects that the Appeals Division’s consideration will continue into 2012 and be completed within the next 12 months. Tax years 2006, 2007 and 2008 are under review by the Examination Division of the IRS, which review is expected to continue into 2012 and be completed within the next 12 months. Additionally, the Company has two refund claims pending for years prior to 2004. The Company expects that a final determination will be made with respect to these claims during the quarter ending December 31, 2011. These claims are included within the range of unrecognized tax benefits disclosed above, which excludes the impact of interest.

Note 6: Employee Benefit Plans

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

 

     Quarter Ended September 30,      Nine Months Ended September 30,  

(Dollars in millions)

   2011      2010      2011      2010  

Defined Benefit Plans

   $ 627      $ 438      $ 697      $ 949  
  

 

 

    

 

 

    

 

 

    

 

 

 

Defined Contribution Plans

   $ 52      $ 46      $ 165      $ 142  
  

 

 

    

 

 

    

 

 

    

 

 

 

In the first nine months of 2011, we made contributions of $606 million to our domestic defined benefit pension plans, all of which was contributed in the third quarter of 2011. Included in the total domestic contributions was a $450 million contribution of UTC common stock. In the first nine months of 2010, we made contributions of $801 million to our domestic defined benefit pension plans, including $350 million which was contributed in the third quarter of 2010. Included in the total domestic contributions made through the first nine months of 2010 was a $250 million contribution of UTC common stock in the second quarter of 2010. The following tables illustrate the components of net periodic benefit cost for our defined pension and other postretirement benefit plans:

 

     Pension Benefits
Quarter  Ended

September 30,
    Other Postretirement Benefits
Quarter Ended

September 30,
 

(Dollars in millions)

   2011     2010     2011     2010  

Service cost

   $ 111     $ 99     $ 1     $ 1  

Interest cost

     325       321       9       11  

Expected return on plan assets

     (458     (430     —          —     

Amortization

     (2     (4     —          (1

Recognized actuarial net loss (gain)

     116       71       (2     —     

Net settlement and curtailment loss

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic benefit cost

   $ 92     $ 57     $ 8     $ 11  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Pension Benefits
Nine  Months

Ended September 30,
    Other Postretirement Benefits
Nine Months
Ended September 30,
 

(Dollars in millions)

   2011     2010     2011     2010  

Service cost

   $ 333     $ 297     $ 3     $ 2  

Interest cost

     975       963       29       34  

Expected return on plan assets

     (1,372     (1,289     —          —     

Amortization

     (8     (12     (2     (2

Recognized actuarial net loss (gain)

     347       213       (6     (1

Net settlement and curtailment loss

     13       17       —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic benefit cost

   $ 288     $ 189     $ 24     $ 33  
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 7: Restructuring Costs

During the first nine months of 2011, we recorded net pre-tax restructuring costs in our business segments totaling $188 million for new and ongoing restructuring actions as follows:

 

(Dollars in millions)

      

Otis

   $ 47  

Carrier

     37  

UTC Fire & Security

     29  

Pratt & Whitney

     48  

Hamilton Sundstrand

     10  

Sikorsky

     16  

Eliminations and other

     1  
  

 

 

 

Total

   $ 188  
  

 

 

 

The net costs included $121 million recorded in cost of sales, $65 million in selling, general and administrative expenses and $2 million in other income, net. As described below, these costs primarily relate to actions initiated during 2011 and 2010.

2011 Actions. During the first nine months of 2011, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We recorded net pre-tax restructuring costs totaling $150 million, including $88 million in cost of sales, $60 million in selling, general and administrative expenses and $2 million in other income, net.

We expect the actions initiated in the first nine months of 2011 to result in net workforce reductions of approximately 2,800 hourly and salaried employees, the exiting of approximately 540,000 net square feet of facilities and the disposal of assets associated with exited facilities. As of September 30, 2011, we have completed net workforce reductions of approximately 1,300 employees, and 10,000 net square feet of facilities have been exited. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2011 and 2012. No specific plans for significant other actions have been finalized at this time.

The following table summarizes the accrual balances and utilization by cost type for the 2011 restructuring actions:

 

(Dollars in millions)

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

Restructuring accruals at June 30, 2011

   $ 39     $ —         $ 1     $ 40  

Net pre-tax restructuring costs

     71       —           10       81  

Utilization and foreign exchange

     (34     —           (7     (41
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2011

   $ 76     $ —         $ 4     $ 80  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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The following table summarizes expected, incurred and remaining costs for the 2011 restructuring actions by type:

 

(Dollars in millions)

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

Expected costs

   $ 176     $ 3     $ 59     $ 238  

Costs incurred - quarter ended March 31, 2011

     (11     —          —          (11

Costs incurred - quarter ended June 30, 2011

     (54     (3     (1     (58

Costs incurred - quarter ended September 30, 2011

     (71     —          (10     (81
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 40     $ —        $ 48     $ 88  
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes expected, incurred and remaining costs for the 2011 restructuring actions by segment:

 

(Dollars in millions)

   Expected
Costs
     Costs Incurred
Quarter Ended
March 31, 2011
    Costs Incurred
Quarter Ended
June 30, 2011
    Costs Incurred
Quarter Ended
September 30, 2011
    Remaining
Costs  at
September 30, 2011
 

Otis

   $ 88      $ (3   $ (4   $ (41   $ 40  

Carrier

     27        (3     (9     (8     7  

UTC Fire & Security

     27        (2     (7     (12     6  

Pratt & Whitney

     48        —          (33     (3     12  

Hamilton Sundstrand

     8        (2     (2     (4     —     

Sikorsky

     39        (1     (2     (13     23  

Eliminations and other

     1        —          (1     —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 238      $ (11   $ (58   $ (81   $ 88  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2010 Actions. During the first nine months of 2011, we recorded net pre-tax restructuring costs totaling $40 million for restructuring actions initiated in 2010, including $27 million in cost of sales and $13 million in selling, general and administrative expenses. The 2010 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations.

As of September 30, 2011, we have completed net workforce reductions of approximately 4,000 employees of an expected 5,000 employees, and have exited approximately 800,000 net square feet of facilities of an expected 3.9 million net square feet. We are targeting the majority of the remaining workforce and facility related cost reduction actions for completion during 2011 and 2012.

The following table summarizes the accrual balances and utilization by cost type for the 2010 restructuring actions:

 

(Dollars in millions)

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

Restructuring accruals at June 30, 2011

   $ 98     $ —        $ 12     $ 110  

Net pre-tax restructuring costs

     (1     2       8       9  

Utilization and foreign exchange

     (30     (2     (8     (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 67     $ —        $ 12     $ 79  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

(Dollars in millions)

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

Expected costs

   $ 326     $ 25     $ 106     $ 457  

Costs incurred through December 31, 2010

     (301     (19     (51     (371

Costs incurred - quarter ended March 31, 2011

     (5     (4     (6     (15

Costs incurred - quarter ended June 30, 2011

     (5     —          (11     (16

Costs incurred - quarter ended September 30, 2011

     1       (2     (8     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Remaining costs at September 30, 2011

   $ 16     $ —        $ 30     $ 46  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

(Dollars in millions)

   Expected
Costs
     Costs Incurred
through
December 31, 2010
    Costs Incurred
Quarter Ended
March 31, 2011
    Costs Incurred
Quarter Ended
June 30, 2011
    Costs Incurred
Quarter Ended
September 30, 2011
    Remaining
Costs at
September 30, 2011
 

Otis

   $ 88      $ (87   $ (1   $ —        $ —        $ —     

Carrier

     107        (74     (11     (6     (1     15  

UTC Fire & Security

     92        (64     (2     (5     (6     15  

Pratt & Whitney

     93        (84     (1     (4     (1     3  

Hamilton Sundstrand

     41        (29     —          (1     (1     10  

Sikorsky

     18        (15     —          —          —          3  

Eliminations and other

     18        (18     —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 457      $ (371   $ (15   $ (16   $ (9   $ 46  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2009 Actions. As of September 30, 2011, we have approximately $56 million of accrual balances remaining related to 2009 actions.

Note 8: Financial Instruments

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

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

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

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

The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $10.1 billion and $8.5 billion at September 30, 2011 and December 31, 2010, respectively.

Commodity Forward Contracts. We enter into commodity forward contracts to reduce the risk of fluctuations in the price we pay for certain commodities (e.g., nickel) which are used directly in the production of our products, or are components of the products we procure to use in the production of our products. These hedges are economic hedges and the changes in fair value of these contracts are recorded currently in earnings in the period in which they occur. The fair value and outstanding notional amount of contracts hedging commodity exposures were insignificant at September 30, 2011 and December 31, 2010, respectively.

 

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The following table summarizes the fair value of derivative instruments as of September 30, 2011 and December 31, 2010:

 

(Dollars in millions)

  

Balance Sheet Asset Location

   September 30, 2011      December 31, 2010  

Derivatives designated as hedging instruments:

        

Foreign Exchange Contracts

   Other assets, current    $ 38      $ 73  

Foreign Exchange Contracts

   Other assets      1        24  
     

 

 

    

 

 

 
        39        97  
     

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

        

Foreign Exchange Contracts

   Other assets, current      58        31  

Foreign Exchange Contracts

   Other assets      4        5  
     

 

 

    

 

 

 
        62        36  
     

 

 

    

 

 

 

Total Asset Derivative Contracts

      $ 101      $ 133  
     

 

 

    

 

 

 
     

Balance Sheet Liability Location

             

Derivatives designated as hedging instruments:

        

Foreign Exchange Contracts

   Accrued liabilities    $ 62      $ 16  

Foreign Exchange Contracts

   Other long-term liabilities      46        1  
     

 

 

    

 

 

 
        108        17  
     

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

        

Foreign Exchange Contracts

   Accrued liabilities      74        33  

Foreign Exchange Contracts

   Other long-term liabilities      1        3  
     

 

 

    

 

 

 
        75        36  
     

 

 

    

 

 

 

Total Liability Derivative Contracts

      $ 183      $ 53  
     

 

 

    

 

 

 

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

 

     Quarter Ended September 30,      Nine Months Ended September 30,  

(Dollars in millions)

   2011     2010      2011     2010  

(Loss) gain recorded in Accumulated other comprehensive loss

   $ (125   $ 63      $ (25   $ 44  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

   $ 17     $ 35      $ 93     $ 76  
  

 

 

   

 

 

    

 

 

   

 

 

 

Assuming current market conditions continue, a $1 million pre-tax loss is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At September 30, 2011, all derivative contracts accounted for as cash flow hedges will mature by September 2013.

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

 

     Quarter Ended September 30,      Nine Months Ended September 30,  

(Dollars in millions)

   2011     2010      2011     2010  

(Loss) gain recognized in Other income (expense), net

   $ (51   $ 107      $ (23   $ 131  
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

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Valuation Hierarchy. The Fair Value Measurements and Disclosure Topic of the FASB ASC establishes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2011 and December 31, 2010:

 

(Dollars in millions)

   Total Carrying
Value at

September 30, 2011
     Quoted price in
active markets

(Level 1)
     Significant other
observable inputs

(Level 2)
     Unobservable
inputs

(Level 3)
 

Available-for-sale securities

   $ 808      $ 808      $ —         $ —     

Derivative assets

     101        —           101        —     

Derivative liabilities

     183        —           183        —     

(Dollars in millions)

   Total Carrying
Value at

December 31, 2010
     Quoted price in
active markets

(Level 1)
     Significant other
observable inputs

(Level 2)
     Unobservable
inputs

(Level 3)
 

Available-for-sale securities

   $ 829      $ 829      $ —         $ —     

Derivative assets

     133        —           133        —     

Derivative liabilities

     53        —           53        —     

Valuation Techniques. Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally. They are measured at fair value using closing stock prices from active markets and are classified within Level 1 of the valuation hierarchy. Our derivative assets and liabilities include foreign exchange contracts and commodity derivatives that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. Based on our continued ability to trade securities and enter into forward contracts, we consider the markets for our fair value instruments to be active. As of September 30, 2011, there were no significant transfers in and out of Level 1 and Level 2.

As of September 30, 2011, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.

The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value at September 30, 2011 and December 31, 2010:

 

     September 30, 2011     December 31, 2010  

(Dollars in millions)

   Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Long-term receivables

   $ 276     $ 265     $ 300     $ 276  

Customer financing notes receivable

     335       326       376       346  

Long-term debt (excluding capitalized leases)

     (10,079     (12,045     (10,117     (11,500

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

We had outstanding commercial aerospace financing and other contractual commitments totaling approximately $2.2 billion and $2.0 billion at September 30, 2011 and December 31, 2010, respectively. Risks associated with changes in interest rates on these commitments are mitigated by the fact that interest rates are variable during the commitment term, and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded. The fair value of the commitment itself is not readily determinable and is not considered significant.

 

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Table of Contents

Note 9: Credit Quality of Long-Term Receivables

In July 2010, the FASB issued ASU No. 2010-20, “Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU is intended to enhance a financial statement user’s ability to evaluate the entity’s credit risk exposures and adequacy of its allowance for credit losses by requiring additional disclosure about the nature of credit risk inherent in the portfolio of receivables, factors and methodologies used in estimating the allowance for credit losses and activity that occurs during a period for both financing receivables and allowance for credit losses. The scope of this ASU is limited to financing receivables, as defined by the ASU, and excludes short-term trade accounts receivable and receivables measured at fair value or lower of cost or fair value. We adopted the disclosures under this ASU for the reporting period ended December 31, 2010, with the exception of disclosures about activity that occurs during a reporting period, which became effective for interim and annual periods beginning on or after December 15, 2010. We adopted the interim disclosures required under this ASU during the quarter ended March 31, 2011.

A long-term or financing receivable represents a contractual right to receive money on demand or on fixed and determinable dates, including trade receivable balances with maturity dates greater than one year. Our long-term and financing receivables primarily represent balances related to the aerospace businesses such as long-term trade accounts receivable, leases, and notes receivable. We also have other long-term receivables in our commercial businesses; however, both the individual and aggregate amounts are not significant.

Our classes within aerospace long-term receivables are comprised of long-term trade accounts receivable and notes and leases receivable. Long-term trade accounts receivable represent amounts arising from the sale of goods and services with a contractual maturity date of greater than one year and are recognized as “Other assets” in our Condensed Consolidated Balance Sheet. Notes and leases receivable represent notes and lease receivables other than receivables related to operating leases, and are recognized as “Customer financing assets” in our Condensed Consolidated Balance Sheet. The following table summarizes the balance by class of aerospace long-term receivables as of September 30, 2011 and December 31, 2010:

 

(Dollars in millions)

   September 30, 2011      December 31, 2010  

Long-term trade accounts receivable

   $ 225      $ 198  

Notes and leases receivable

     373        416  
  

 

 

    

 

 

 

Total long-term receivables

   $ 598      $ 614  
  

 

 

    

 

 

 

Economic conditions and air travel influence the operating environment for most airlines, and the financial performance of our aerospace businesses is directly tied to the economic conditions of the commercial aerospace and defense industries. Additionally, the value of the collateral is also closely tied to commercial airline performance and may be subject to exposure of reduced valuation as a result of market declines. We determine a receivable is impaired when, based on current information and events, it is probable that we will be unable to collect amounts due according to the contractual terms of the receivable agreement. Factors considered in assessing collectability and risk include, but are not limited to, examination of credit quality indicators and other evaluation measures, underlying value of any collateral or security interests, significant past due balances, historical losses, and existing economic conditions.

Long-term receivables can be considered delinquent if payment has not been received in accordance with the underlying agreement. If determined delinquent, long-term trade accounts receivable and notes and leases receivable balances accruing interest may be placed on nonaccrual status. We record potential losses related to long-term receivables when identified. The reserve for credit losses on these receivables relates to specifically identified receivables that are evaluated individually for impairment. For notes and leases receivable, we determine a specific reserve for exposure based on the difference between the carrying value of the receivable and the estimated fair value of the related collateral in connection with the evaluation of credit risk and collectability. For long-term trade accounts receivable, we evaluate credit risk and collectability individually to determine if an allowance is necessary. Uncollectible long-term receivables are written-off when collection of the indebtedness has been pursued for a reasonable period of time without collection; the customer is no longer in operation; or judgment has been levied, but the underlying assets are not adequate to satisfy the indebtedness. At both September 30, 2011 and December 31, 2010, we do not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or considered to be impaired.

 

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The following table provides the balance of aerospace long-term receivables at September 30, 2011, and summarizes the associated changes in the reserve for estimated credit losses and exposure for the nine months ended September 30, 2011:

 

(Dollars in millions)

 

Beginning balance of the reserve for credit losses and exposure

     $ 42  

Provision

       1  

Charge-offs

       —     

Recoveries

       (9

Other

       (2
    

 

 

 

Ending balance of the reserve for credit losses and exposure: individually evaluated for impairment

     $ 32  
    

 

 

 

Ending balance of long-term receivables: individually evaluated for impairment

     $ 598  
    

 

 

 

We determine credit ratings for each customer in the portfolio based upon public information and information obtained directly from our customers. We conduct a review of customer credit ratings, published historical credit default rates for different rating categories, and multiple third party aircraft value publications as a basis to validate the reasonableness of the allowance for losses on these balances quarterly or when events and circumstances warrant. The credit ratings listed below range from “A” which indicates an extremely strong capacity to meet financial obligations and the receivable is either collateralized or uncollateralized, to “D” which indicates that payment is in default and the receivable is uncollateralized. There can be no assurance that actual results will not differ from estimates or that consideration of these factors in the future will not result in an increase or decrease to the allowance for credit losses on long-term receivables.

The following table summarizes the credit risk profile by creditworthiness category for aerospace long-term receivable balances at September 30, 2011 and December 31, 2010:

 

     September 30, 2011      December 31, 2010  

(Dollars in millions)

   Long-term
trade accounts
receivable
     Notes and
leases
receivable
     Long-term
trade accounts
receivable
     Notes and
leases
receivable
 

A - (low risk, collateralized/uncollateralized)

   $ 224      $ —         $ 193      $ —     

B - (moderate risk, collateralized/uncollateralized)

     1        299        5        336  

C - (high risk, collateralized/uncollateralized)

     —           74        —           80  

D - (in default, uncollateralized)

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 225      $ 373      $ 198      $ 416  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 10: Shareowners’ Equity and Noncontrolling Interest

A summary of the changes in shareowners’ equity and noncontrolling interest (excluding redeemable noncontrolling interest) comprising total equity for the quarters and nine months ended September 30, 2011 and 2010 is provided below:

 

      Quarter Ended September 30,  
     2011     2010  

(Dollars in millions)

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

Equity, beginning of period

   $ 22,723     $ 1,016     $ 23,739     $ 19,933     $ 982     $ 20,915  

Comprehensive income for the period:

            

Net income

     1,324       97       1,421       1,198       101       1,299  

Other comprehensive (loss) income:

            

Foreign currency translation, net

     (732     (25     (757     808       45       853  

(Decreases) increases in unrealized gains from available-for-sale securities, net

     (111       (111     25         25  

Cash flow hedging (losses) gains

     (106       (106     25         25  

Change in pension and post-retirement benefit plans, net

     79         79       23         23  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (870     (25     (895     881       45       926  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the period

     454       72       526       2,079       146       2,225  

Common Stock issued under employee plans

     119         119       113         113  

Common Stock repurchased

     (675       (675     (490       (490

Common Stock contributed to pension plans

     450         450       —            —     

Dividends on Common Stock

     (411       (411     (370       (370

Dividends on ESOP Common Stock

     (16       (16     (16       (16

Dividends attributable to noncontrolling interest

       (82     (82       (86     (86

Purchase of subsidiary shares from noncontrolling interest

     (51     (17     (68     —          (8     (8

Sale of subsidiary shares in noncontrolling interest

     —          2       2       —          9       9  

Acquisition of noncontrolling interest

       8       8         —          —     

Disposition of noncontrolling interest

       (1     (1       (18     (18

Redeemable noncontrolling interest in subsidiaries’ earnings

       (4     (4       (6     (6

Redeemable noncontrolling interest in total other comprehensive (loss) income

       4       4         (20     (20

Change in redemption value of put options

     (3       (3     5         5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity, end of period

   $ 22,590     $ 998     $ 23,588     $ 21,254     $ 999     $ 22,253  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Nine Months Ended September 30,  
     2011     2010  

(Dollars in millions)

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

Equity, beginning of period

   $ 21,385     $ 947     $ 22,332     $ 20,066     $ 933     $ 20,999  

Comprehensive income for the period:

            

Net income

     3,654       298       3,952       3,174       284       3,458  

Other comprehensive income (loss):

            

Foreign currency translation, net

     (63     13       (50     11       (3     8  

(Decreases) increases in unrealized gains from available-for-sale securities, net

     (40       (40     33         33  

Cash flow hedging losses

     (87       (87     (18       (18

Change in pension and post-retirement benefit plans, net

     193         193       104         104  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     3       13       16       130       (3     127  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the period

     3,657       311       3,968       3,304       281       3,585  

Common Stock issued under employee plans

     566         566       439         439  

Common Stock repurchased

     (2,175       (2,175     (1,650       (1,650

Common Stock contributed to pension plans

     450         450       250         250  

Dividends on Common Stock

     (1,192       (1,192     (1,114       (1,114

Dividends on ESOP Common Stock

     (47       (47     (47       (47

Dividends attributable to noncontrolling interest

       (248     (248       (233     (233

Purchase of subsidiary shares from noncontrolling interest

     (51     (17     (68     (2     (12     (14

Sale of subsidiary shares in noncontrolling interest

     3       10       13       —          36       36  

Acquisition of noncontrolling interest

       13       13         29       29  

Disposition of noncontrolling interest

       (1     (1       (18     (18

Redeemable noncontrolling interest in subsidiaries’ earnings

       (15     (15       (22     (22

Redeemable noncontrolling interest in total other comprehensive (loss) income

       (2     (2       5       5  

Change in redemption value of put options

     (6       (6     8         8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity, end of period

   $ 22,590     $ 998     $ 23,588     $ 21,254     $ 999     $ 22,253  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consistent with the requirements under the Business Combinations Topic of the FASB ASC and the accounting for redeemable equity instruments, all noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests) are reported in the mezzanine section of the Condensed Consolidated Balance Sheet, between liabilities and equity, at the greater of redemption value or initial carrying value.

 

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A summary of the changes in redeemable noncontrolling interest recorded in the mezzanine section of the Condensed Consolidated Balance Sheet for the quarters and nine months ended September 30, 2011 and 2010 is provided below:

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Redeemable noncontrolling interest, beginning of period

   $ 348     $ 311     $ 317     $ 389  

Net income

     4       6       15       22  

Foreign currency translation, net

     (4     20       2       (5

Dividends attributable to noncontrolling interest

     —          (3     (11     (16

Purchase of subsidiary shares from noncontrolling interest

     (2     —          (2     (65

Change in redemption value of put options

     3       (5     6       (8

Other changes in redeemable noncontrolling interest

     (22     (11     —          1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Redeemable noncontrolling interest, end of period

   $ 327     $ 318     $ 327     $ 318  
  

 

 

   

 

 

   

 

 

   

 

 

 

Consistent with the requirements under the Business Combinations Topic of the FASB ASC and the accounting for noncontrolling interests in consolidated financial statements, changes in noncontrolling interests that do not result in a change of control and where there is a difference between fair value and carrying value are accounted for as equity transactions. A summary of these changes in ownership interests in subsidiaries and the effect on shareowners’ equity for the quarters and nine months ended September 30, 2011 and 2010 is provided below:

 

     Quarter Ended September 30,      Nine Months Ended September 30,  

(Dollars in millions)

   2011     2010      2011     2010  

Net income attributable to common shareowners

   $ 1,324     $ 1,198      $ 3,654     $ 3,174  
  

 

 

   

 

 

    

 

 

   

 

 

 

Transfers to noncontrolling interests:

         

Increase in common stock for sale of subsidiary shares

     —          —           3       —     

Decrease in common stock for purchase of subsidiary shares

     (51     —           (51     (2
  

 

 

   

 

 

    

 

 

   

 

 

 

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

   $ 1,273     $ 1,198      $ 3,606     $ 3,172  
  

 

 

   

 

 

    

 

 

   

 

 

 

Note 11: Guarantees

We extend a variety of financial, market value and product performance guarantees to third parties. There have been no material changes to guarantees outstanding since December 31, 2010.

The changes in the carrying amount of service and product warranties and product performance guarantees for the nine months ended September 30, 2011 and 2010 are as follows:

 

(Dollars in millions)

   2011     2010  

Balance as of January 1

   $ 1,136     $ 1,072  

Warranties and performance guarantees issued

     370       310  

Settlements made

     (333     (271

Other

     315       (6
  

 

 

   

 

 

 

Balance as of September 30

   $ 1,488     $ 1,105  
  

 

 

   

 

 

 

The increase reflected in “Other” in the above table primarily reflects the impact of finalizing purchase accounting on the recent acquisition of Clipper.

Note 12: Collaborative Arrangements

In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into certain collaboration arrangements in which costs, sales and risks are shared. Sales generated from engine programs, spare parts, and aftermarket business under collaboration arrangements are recorded as earned in our financial statements. Amounts attributable to our collaborative partners for their share of sales are recorded as an expense in our financial statements based upon the terms and nature of the arrangement. Costs associated with engine programs under collaborative arrangements are expensed as incurred. Under these

 

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arrangements, collaborators contribute their program share of engine parts, incur their own production costs and make certain payments to Pratt & Whitney for shared or joint program costs. The reimbursement of the collaborators’ share of program costs is recorded as a reduction of the related expense item at that time. As of September 30, 2011, the collaborators’ interests in all commercial engine programs ranged from 12% to 48%. Pratt & Whitney directs those programs and is the principal participant in all existing collaborative arrangements. There are no individually significant collaborative arrangements, and none of the individual partners’ shares exceed 31% of an individual program.

On October 12, 2011, Pratt & Whitney and Rolls-Royce announced a restructure of their participation in IAE and an agreement to form a new venture to develop engines to power future mid-size aircraft. See Note 1 to the Condensed Consolidated Financial Statements for further discussion.

Note 13: Contingent Liabilities

Summarized below are the matters previously described in Note 17 of the Notes to the Consolidated Financial Statements in our 2010 Annual Report, incorporated by reference in our 2010 Form 10-K, updated as applicable.

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

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

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

As previously disclosed, the Department of Justice (DOJ) sued us in 1999 in the U.S. District Court for the Southern District of Ohio, claiming that Pratt & Whitney violated the civil False Claims Act and common law. This lawsuit relates to the “Fighter Engine Competition” between Pratt & Whitney’s F100 engine and General Electric’s F110 engine. The DOJ alleges that the government overpaid for F100 engines under contracts awarded by the U.S. Air Force in fiscal years 1985 through 1990 because Pratt & Whitney inflated its estimated costs for some purchased parts and withheld data that would have revealed the overstatements. At trial of this matter, completed in December 2004, the government claimed Pratt & Whitney’s liability to be $624 million. On August 1, 2008, the trial court judge held that the Air Force had not suffered any actual damages because Pratt & Whitney had made significant price concessions. However, the trial court judge found that Pratt & Whitney violated the False Claims Act due to inaccurate statements contained in the 1983 offer. In the absence of actual damages, the trial court judge awarded the DOJ the maximum civil penalty of $7.09 million, or $10,000 for each of the 709 invoices Pratt & Whitney submitted in 1989 and later under the contracts. In September 2008, both the DOJ and UTC appealed the decision to the Sixth Circuit Court of Appeals. In November 2010, the Sixth Circuit affirmed Pratt & Whitney’s liability under the False Claims Act and remanded the case to the U.S. District Court for further proceedings on the question of damages. Should the government ultimately prevail, the outcome of this matter could result in a material effect on our results of operations in the period in which a liability would be recognized or cash flows for the period in which damages would be paid.

As previously disclosed, in December 2008, the Department of Defense (DOD) issued a contract claim against Sikorsky to recover overpayments the DOD alleges it has incurred since January 2003 in connection with cost accounting changes approved by the DOD and implemented by Sikorsky in 1999 and 2006. These changes relate to the calculation of material overhead rates in

 

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government contracts. The DOD claims that Sikorsky’s liability is approximately $90 million (including interest through September 2011). We believe this claim is without merit and Sikorsky filed an appeal in December 2009 with the U.S. Court of Federal Claims, which is pending.

Other. As previously disclosed, on August 27, 2010, Rolls-Royce plc (Rolls-Royce) sued Pratt & Whitney in the U.S. District Court for the Eastern District of Virginia, alleging that fan blades on certain engines manufactured by Pratt & Whitney infringe a U.S. patent held by Rolls-Royce. Rolls-Royce sought damages plus interest, an injunction, attorney’s fees, and a finding of willful infringement. On May 20, 2011, the Court granted Pratt & Whitney’s motion for summary judgment of non-infringement and denied Rolls-Royce’s cross motion in which it alleged Pratt & Whitney had infringed the patent. Further, as previously disclosed, in November 2010, Pratt & Whitney filed complaints against Rolls-Royce in the High Court of Justice, Chancery Division, Patent Court (HCJ) in the United Kingdom (UK), with the U.S. International Trade Commission (ITC), and against Rolls-Royce and its parent, Rolls-Royce Group plc (Rolls-Royce Group) in the U.S. District Court for the District of Connecticut. The HCJ action alleged that certain turbomachinery blades, engines and components manufactured by Rolls-Royce infringe a UK patent held by Pratt & Whitney and sought damages plus interest and all other relief to which Pratt & Whitney is entitled, including attorney’s fees, expenses, and a permanent order preventing further infringements. The ITC complaint sought a permanent exclusion order barring the importation into the U.S. of infringing turbomachinery blades, engines and engine components manufactured by Rolls-Royce and Rolls-Royce Group, and requested a permanent cease-and-desist order against Rolls-Royce and Rolls-Royce Group preventing further importing, marketing, advertising, demonstrating, testing, distributing, licensing, offering for sale, or use of such infringing turbomachinery blades, engines and engine components. In the Connecticut District Court action, Pratt & Whitney alleged similar infringement claims based on a U.S. patent held by Pratt & Whitney and sought an injunction, damages, interest, attorney’s fees and other relief. On July 14, 2011, the parties entered into an amicable, confidential settlement agreement to dismiss all of the foregoing matters, resulting in no adverse impact to UTC.

We extend performance and operating cost guarantees beyond our normal warranty and service policies for extended periods on some of our products. We have accrued our estimate of the liability that may result under these guarantees and for service costs that are probable and can be reasonably estimated.

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

We also have other commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. We accrue contingencies based upon a range of possible outcomes. If no amount within this range is a better estimate than any other, then we accrue the minimum amount.

We are also subject to a number of routine lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the ordinary course of our business. We do not believe that these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.

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

Note 14: Segment Financial Data

Our operations are classified into six principal segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. The segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. On September 28, 2011, we announced a new organizational structure that will allow us to better serve customers through greater integration across product lines. This new structure will combine Carrier and UTC Fire & Security into a new segment called UTC Climate, Controls & Security Systems. Carrier and UTC Fire & Security will continue to report financial and operational results separately through the remainder of 2011. In the first quarter of 2012, Carrier and UTC Fire & Security will begin reporting as one segment. Also, as part of the new organizational structure, Pratt & Whitney and Hamilton Sundstrand will be part of a new aerospace organization, named UTC Propulsion and Aerospace Systems, but will continue to report their financial and operational results as separate segments. We will continue to report all financial and operational results under the six principal segments noted above for the remainder of 2011, consistent with how business operations are currently reviewed for decision making purposes, resource allocation and performance assessment.

 

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Results for the quarters and nine months ended September 30, 2011 and 2010 are as follows:

 

Quarter Ended September 30,    Net Sales     Operating Profits     Operating Profit Margins  

(Dollars in millions)

   2011     2010     2011     2010     2011     2010  

Otis

   $ 3,262     $ 2,908     $ 731     $ 678       22.4     23.3

Carrier

     3,175       2,936       422       380       13.3     12.9

UTC Fire & Security

     1,746       1,657       194       187       11.1     11.3

Pratt & Whitney

     3,251       3,230       535       547       16.5     16.9

Hamilton Sundstrand

     1,531       1,420       282       255       18.4     18.0

Sikorsky

     1,877       1,547       215       163       11.5     10.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segments

     14,842       13,698       2,379       2,210       16.0     16.1

Eliminations and other

     (38     (78     (75     (199    

General corporate expenses

     —          —          (102     (83    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 14,804     $ 13,620     $ 2,202     $ 1,928       14.9     14.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Nine Months Ended September 30,    Net Sales     Operating Profits     Operating Profit Margins  

(Dollars in millions)

   2011     2010     2011     2010     2011     2010  

Otis

   $ 9,226     $ 8,472     $ 2,104     $ 1,915       22.8     22.6

Carrier

     9,334       8,496       1,190       852       12.7     10.0

UTC Fire & Security

     5,120       4,687       562       478       11.0     10.2

Pratt & Whitney

     9,798       9,350       1,460       1,505       14.9     16.1

Hamilton Sundstrand

     4,503       4,125       793       680       17.6     16.5

Sikorsky

     5,245       4,597       633       477       12.1     10.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segments

     43,226       39,727       6,742       5,907       15.6     14.9

Eliminations and other

     (2     (265     (246     (321    

General corporate expenses

     —          —          (295     (253    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 43,224     $ 39,462     $ 6,201     $ 5,333       14.3     13.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Note 15: Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU clarifies the concepts related to highest and best use and valuation premise, blockage factors and other premiums and discounts, the fair value measurement of financial instruments held in a portfolio and of those instruments classified as a component of shareowners’ equity. The guidance includes enhanced disclosure requirements about recurring Level 3 fair value measurements, the use of nonfinancial assets, and the level in the fair value hierarchy of assets and liabilities not recorded at fair value. The provisions of this ASU are effective prospectively for interim and annual periods beginning on or after December 15, 2011. Early application is prohibited. This ASU is not expected to have an impact on our financial statements or disclosures as there are presently no recurring Level 3 fair value measurements.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” This ASU intends to enhance comparability and transparency of other comprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the option to present other comprehensive income components as part of the statement of changes in shareowners’ equity. The provisions of this ASU will be applied retrospectively for interim and annual periods beginning after December 15, 2011. Early application is permitted. We will adopt the provisions of this ASU in the first quarter 2012.

In September 2011, the FASB issued ASU No. 2011-09, “Disclosures about an Employer’s Participation in a Multiemployer Plan.” This ASU requires all nongovernmental entities that participate in multiemployer plans to provide additional qualitative and quantitative disclosures about financial obligations, risks and commitments, as well as the level of participation in multiemployer

 

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plans. The amendments in this ASU require employers to disclose detailed information about significant multiemployer plans, including contributions made to the plans, financial health and funded status of the plans, and expiration of collective-bargaining agreements that require contributions to the plans. To the extent available, additional disclosures are also pertinent to the foreign multiemployer plans. The provisions of this ASU will be applied retrospectively for annual periods ending after December 15, 2011. Early application is permitted. We are currently evaluating the impact of this new ASU.

 

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With respect to the unaudited condensed consolidated financial information of UTC for the quarters and nine months ended September 30, 2011 and 2010, PricewaterhouseCoopers LLP (PricewaterhouseCoopers) reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated October 24, 2011, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the Act) for its report on the unaudited condensed consolidated financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.

Report of Independent Registered Public Accounting Firm

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

We have reviewed the accompanying condensed consolidated balance sheet of United Technologies Corporation and its subsidiaries (the “Corporation”) as of September 30, 2011, and the related condensed consolidated statement of operations for the three-month and nine-month periods ended September 30, 2011 and 2010 and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2011 and 2010. This interim financial information is the responsibility of the Corporation’s management.

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

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

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2010, and the related consolidated statements of operations, of cash flows and of changes in equity for the year then ended (not presented herein), and in our report dated February 10, 2011 (which included an explanatory paragraph with respect to the Corporation’s change in the manner of accounting for business combinations and noncontrolling interests), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

October 24, 2011

 

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

BUSINESS OVERVIEW

We are a global provider of high technology products and services to the building systems and aerospace industries. Our operations are classified into six principal business segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Otis, Carrier and UTC Fire & Security are collectively referred to as the “commercial businesses,” while Pratt & Whitney, Hamilton Sundstrand and Sikorsky are collectively referred to as the “aerospace businesses.” On September 28, 2011, we announced a new organizational structure that will allow us to better serve customers through greater integration across product lines. This new structure will combine Carrier and UTC Fire & Security into a new segment called UTC Climate, Controls & Security Systems. Carrier and UTC Fire & Security will continue to report financial and operational results separately through the remainder of 2011. In the first quarter of 2012, Carrier and UTC Fire & Security will begin reporting as one segment. Also, as part of the new organizational structure, Pratt & Whitney and Hamilton Sundstrand will be part of a new aerospace organization, named UTC Propulsion and Aerospace Systems, but will continue to report their financial and operational results as separate segments. We will continue to report all financial and operational results under the six principal segments noted above for the remainder of 2011, consistent with how business operations are currently reviewed for decision making purposes, resource allocation and performance assessment. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. We previously reported “Other income, net,” which included “Interest income,” as a component of “Revenues.” “Other income, net,” excluding “Interest income,” is now reflected separately, while “Interest income” is now netted with “Interest expense” for financial statement presentation. The current status of significant factors impacting our business environment in 2011 is discussed below. For additional discussion, refer to the “Business Overview” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2010 Annual Report, which is incorporated by reference in our 2010 Form 10-K.

General

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

Although the global economy improved as compared with 2010, signs of recovery experienced earlier in 2011 have lost momentum, reflecting concerns about the deepening sovereign debt crisis in Europe and the political climate in Washington, D.C. As a result of persistent high unemployment in the United States (U.S.) and Europe, a weak U.S. housing sector, deficit reduction plans in the U.S., and the European sovereign debt and banking crisis, growth outlook for the developed economies was lowered. Although economies in China, India and Brazil are showing signs of slowing down, they are still delivering growth rates well above those of the developed economies and order rates for our businesses in emerging markets remain very strong. With a slower growth outlook, we are taking preemptive steps to position the business to grow earnings next year by further reducing operating costs even as we continue to invest in product launches and growth markets. As a result, we are increasing our 2011 full year restructuring cost estimate from $200 million to more than $300 million.

Notwithstanding these slowing economic conditions, we continue to see sales and order rate growth consistent with our full year expectations for most of our businesses. Consolidated net sales increased 9% in the third quarter of 2011, as compared to the same period of 2010. This reflects organic sales growth (6%) and the benefit from foreign currency translation (4%), partially offset by the impact from net dispositions (1%), as further discussed below within “Results of Continuing Operations.” Consolidated operating profit increased 14% in the third quarter of 2011, as compared with the same period of 2010. This year-over-year improvement reflects an increase in operational profit (2%), driven by higher volumes. Within this 2% operational profit growth, higher research and development, net commodity, and warranty related costs (combined 6%) partially offset the benefit from higher volumes. The benefit from favorable foreign exchange (3%) and non-recurring items (13%) was partially offset by higher year-over-year restructuring costs (1%) and the net year-over-year impact from business divestiture activity (3%).

Commercial Businesses

Our commercial businesses generally serve customers in the worldwide commercial and residential property industries, although Carrier also serves customers in the commercial and transport refrigeration industries. Sales in the commercial businesses are influenced by a number of external factors, including fluctuations in residential and commercial construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, credit markets

 

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and other global and political factors. Carrier’s financial performance can also be influenced by production and utilization of transport equipment, and, in the case of its residential business, weather conditions. To ensure adequate supply of Carrier products in the distribution channel, Carrier customarily offers its customers incentives to purchase products. The principal incentive program provides reimbursements to distributors for offering promotional pricing on Carrier products. We account for incentive payments made as a reduction to sales.

Within the Otis segment, sales increased 12% in the third quarter of 2011, compared with the same period of 2010, including the favorable impact of foreign currency translation (7%). Organic sales growth of 4% reflects an increase in new equipment sales and continued growth in contractual maintenance and repair volume. New equipment orders in the third quarter of 2011 increased 19% (including 7% attributable to foreign exchange) compared with the same period of 2010, driven principally by order growth in China, Russia, India, Brazil and Saudi Arabia. Pricing remained under pressure in most markets.

Organic sales growth of 9% in the third quarter of 2011 at Carrier was driven largely by continued strength in their transport refrigeration business and growth in emerging markets. As expected, the organic growth rate in the transport refrigeration business has moderated in the third quarter of 2011, compared with the first half of 2011 which benefited from higher container replacement demand. Further, new equipment orders for commercial HVAC grew 11% (including favorable foreign exchange of 4%), in the third quarter of 2011, compared with the same period of 2010, driven by emerging markets and a push for more energy efficient products, and U.S. residential HVAC orders grew 6%, however customers are opting for lower featured, lower efficiency products.

UTC Fire & Security experienced 2% organic sales growth in the third quarter of 2011, led by growth within the products businesses, while the service and install businesses declined due to continuing softness in the U.K. and Americas businesses. Third quarter organic order rates at UTC Fire & Security were flat year-over-year, although backlog continues to be strong and is up approximately 15% organically both year-over-year and from the beginning of the year.

Aerospace Businesses

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

The commercial airline industry rebounded in 2010 and remained generally strong through the first nine months of 2011. Airline capacity discipline and steady airline traffic levels are expected to result in another profitable year for most airlines. Additionally, large airframe manufacturers have announced increases in their build rates driven by emerging market demand and replacement of older, less fuel efficient fleets. Commercial aerospace spares orders at Pratt & Whitney’s large commercial engine business increased 3%, building on a 35% increase in the third quarter of 2010 due to a rebound from the weak economic conditions experienced in 2009. Hamilton Sundstrand commercial aerospace spares orders grew 24% in the third quarter of 2011, as compared with the same period of 2010, driven by orders received in support of the Boeing 787 entry into service. These increases in order rates have led to an increase in commercial aerospace aftermarket volume at both Pratt & Whitney and Hamilton Sundstrand. Accordingly, consolidated commercial aerospace aftermarket sales, including Sikorsky, increased 11% in the third quarter of 2011, as compared with the same period of 2010.

Total sales at Sikorsky increased 21% in the third quarter of 2011, as compared to the same period of 2010, driven by higher international military aircraft shipments and aftermarket support activity. Sikorsky continued to benefit from U.S. government spending, although deficit reduction measures by the U.S. government are expected to pressure the U.S. Department of Defense budget in coming years, resulting in a decline in U.S. Department of Defense spending. Notwithstanding these expected pressures, Sikorsky’s military backlog remains very strong. Sikorsky also continues to pursue significant international aircraft campaigns.

Acquisition and Disposition Activity

Our growth strategy contemplates acquisitions. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated, and anticipated synergies or cost savings are achieved.

During the first nine months of 2011, our investment in business acquisitions was $229 million, and consisted primarily of a number of smaller acquisitions in both our commercial and aerospace businesses. We recorded the excess of the purchase price over the estimated fair value of the assets acquired as an increase in goodwill. As a result of acquisition activity in the first nine months of 2011, goodwill increased $363 million, primarily related to the finalization of purchase accounting associated with the December 2010 acquisition of Clipper Windpower Plc (Clipper).

On September 21, 2011, we announced that we entered into an agreement to acquire Goodrich Corporation (Goodrich), a global supplier of systems and services to the aerospace and defense industry with 2010 sales of $7 billion. Under the terms of the

 

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agreement, Goodrich shareholders will receive $127.50 in cash for each share of Goodrich common stock they own at the time of the closing of the transaction. This equates to a total current enterprise value of $18.4 billion, including $1.9 billion in net debt to be assumed. Of the total $16.5 billion required, we expect to finance the transaction through a combination of debt and equity issuances, with the equity component expected to approximate 25% of the total financing (other than the amount of net debt assumed). The transaction is subject to customary closing conditions, including regulatory and Goodrich shareholder approval. We expect that this acquisition will close in mid-2012. Goodrich products include aircraft nacelles and interior systems, actuation and landing systems, and electronic systems. Once the acquisition is complete, Goodrich and Hamilton Sundstrand will be combined to form a new segment named UTC Aerospace Systems. It is expected that the increased scale, financial strength and complementary products of the new combined business will strengthen our position in the aerospace and defense industry. Further, this acquisition will enhance our ability to support our customers with more integrated systems.

On October 12, 2011, Pratt & Whitney and Rolls-Royce announced a restructure of their participation in IAE International Aero Engines AG (IAE), which produces the V2500 engine for the A320 family of aircraft. Under the terms of the agreement, Rolls-Royce will sell its equity and program shares in IAE and license its V2500 intellectual property in IAE to Pratt & Whitney for $1.5 billion and an agreed payment for each hour flown by the current installed fleet of V2500-powered aircraft during the fifteen year period following completion of the transaction. These licensing rights will be perpetual, worldwide, and permit Pratt & Whitney to sublicense, as necessary. The acquisition of the additional shares in IAE will give Pratt & Whitney a controlling interest with 66% ownership. Pratt & Whitney intends to offer a portion of its interests to the remaining IAE partners MTU Aero Engines AG (MTU) and Japanese Aero Engines Corporation (JAEC). Upon closing, we anticipate Pratt & Whitney will begin consolidating IAE. The acquisition of the collaboration rights and intellectual property licenses will be reflected as intangible assets and amortized in relation to the economic benefits received over the projected remaining life of the V2500 program.

Pratt & Whitney and Rolls-Royce also announced an agreement to form a new venture to develop engines to power future new mid-size aircraft (120 – 230 passenger aircraft). The two companies will establish a joint venture company, in which each will hold an equal share, to develop new engines for the next generation of mid-size aircraft. This new joint venture will focus on high-bypass ratio geared turbofan technology. In addition, the venture will collaborate on future studies for next generation propulsion systems. These announced transactions with Rolls-Royce are subject to various closing conditions, including regulatory approvals and are expected to close in mid-2012.

We now expect to invest less than $500 million in acquisitions in 2011, including those investments completed during the first nine months of 2011, although this will depend upon the timing, availability and the appropriate value of potential acquisition opportunities.

Other

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

Commercial airline financial distress and consolidation, global economic conditions, changes in raw material and commodity prices, interest rates, foreign currency exchange rates, energy costs, and the impact from natural disasters and weather conditions create uncertainties that could impact our earnings outlook for the remainder of 2011. See Part II, Item 1A, “Risk Factors” in this Form 10-Q for further discussion.

CRITICAL ACCOUNTING ESTIMATES

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in our 2010 Annual Report, incorporated by reference in our 2010 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting estimates during the first nine months of 2011.

 

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RESULTS OF CONTINUING OPERATIONS

Net Sales

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Net Sales

   $ 14,804     $ 13,620     $ 43,224     $ 39,462  

Percentage change year-over-year

     8.7     3.3     9.5     2.6

The 9% increase in net sales for the third quarter of 2011, as compared with the same period of 2010, reflects organic sales growth (6%) and the beneficial impact of foreign currency translation (4%), partially offset by the impact of net dispositions (1%). During the third quarter of 2011, all six business segments experienced organic sales growth, led by Sikorsky (21%) and Carrier (9%). The organic growth at Sikorsky was driven by higher international military aircraft shipments and aftermarket support, while Carrier’s organic growth was driven primarily by continued strength in the transport refrigeration business and growth in emerging markets, although the growth rate in the transport refrigeration markets has moderated. Growth at Otis was driven by a net overall increase in new equipment sales, primarily in China and Russia, while service sales increased from continued growth in contractual maintenance and repair volume. Organic sales at UTC Fire & Security reflected growth in the products business, partially offset by a decline in the service and install business as a result of continuing softness in the U.K. and Americas businesses. At Pratt & Whitney, sales from higher aftermarket and increased large commercial engine deliveries were partially offset, as expected, by fewer military engine deliveries, and net unfavorable foreign currency at Pratt & Whitney Canada (P&WC). Hamilton Sundstrand’s sales growth continues to be led by the aerospace aftermarket and industrials businesses as commercial aerospace spares sales were up more than 30% as compared to the same period of 2010.

The 10% increase in net sales for the first nine months of 2011, as compared with the same period of 2010, reflects organic sales growth (7%) and the beneficial impact of foreign currency translation (3%). Similar to the third quarter of 2011, all six business segments experienced organic sales growth for the first nine months of 2011, led by Sikorsky (13%) and Carrier (12%). The organic growth at Carrier was driven primarily by the transport refrigeration markets, while Sikorsky’s organic growth reflects higher sales driven by increased international development aircraft and higher aftermarket volumes. Higher commercial aerospace aftermarket sales volumes led the organic growth at both Pratt & Whitney and Hamilton Sundstrand in the first nine months of 2011.

Cost of Products and Services Sold

 

      Quarter Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Cost of products sold

   $ 7,935     $ 7,124     $ 22,986     $ 20,949  

Percentage of product sales

     75.2     72.9     74.8     74.5

Cost of services sold

   $ 2,821     $ 2,543     $ 8,316     $ 7,465  

Percentage of service sales

     66.4     66.1     66.5     65.8

Total cost of products and services sold

   $ 10,756     $ 9,667     $ 31,302     $ 28,414  

Percentage change year-over-year

     11.3     (1.7 )%      10.2     (0.5 )% 

The factors contributing to the total percentage change year-over-year for the quarter and nine months ended September 30, 2011 in total cost of products and services sold are as follows:

 

     Quarter Ended
September  30, 2011
    Nine Months  Ended
September 30, 2011
 

Organic volume

        

Foreign currency translation

        

Acquisitions and divestitures, net

     (1 )%      —     

Other

     —          (1 )% 
  

 

 

   

 

 

 

Total % Change

     11      10 
  

 

 

   

 

 

 

For the third quarter of 2011, total cost of products and services sold grew 8% organically reflecting the impact from organic sales growth (6%), higher gross commodity costs (1%), the impact from increased sales of lower margin product, and higher warranty

 

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and related operational costs. The year-over-year increase in cost of products sold, as a percentage of product sales, reflects the impact from increased sales of lower margin product, higher commodity costs, and warranty and related operational costs.

For the first nine months of 2011 total cost of products and services sold grew 8% organically reflecting the impact from organic sales growth (7%) and higher gross commodity costs (1%). The year-over-year increase in cost of services sold, as a percentage of service sales, was primarily attributable to the timing of long-term aerospace service contracts.

Gross Margin

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Gross margin

   $ 4,048     $ 3,953     $ 11,922     $ 11,048  

Percentage of net sales

     27.3     29.0     27.6     28.0

The 170 basis point decrease in gross margin as a percentage of sales for the third quarter of 2011, as compared to the same period of 2010, reflects the adverse impact of increased sales of lower margin products. The decrease also reflects the adverse impact of higher net commodity costs (approximately 30 basis points) and increased warranty related charges (approximately 15 basis points) at Hamilton Sundstrand. These adverse impacts were partially offset by the continued focus on cost reduction and savings from previously initiated restructuring actions.

The 40 basis point decrease in gross margin as a percentage of sales for the first nine months of 2011, as compared to the same period of 2010, reflects the adverse impact of higher net commodity costs (approximately 30 basis points) and the adverse impact of increased sales of lower margin products. This decrease was partially offset by the absence of approximately $86 million of asset impairment charges recorded in the second quarter of 2010 at Carrier and Hamilton Sundstrand.

Research and Development

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Company-funded

   $ 495     $ 433     $ 1,506     $ 1,289  

Percentage of net sales

     3.3     3.2     3.5     3.3

Customer-funded

   $ 490     $ 450     $ 1,339     $ 1,427  

Percentage of net sales

     3.3     3.3     3.1     3.6

Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year fluctuations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses. The year-over-year increase in company-funded research and development in both the quarter ended and the first nine months of 2011, as compared to the same periods of 2010, primarily reflects an increase at Pratt & Whitney to further advance the development of multiple geared turbo fan platforms, partially offset by a net decline at Hamilton Sundstrand led by lower expenditures on the Boeing 787 program. The amount of company-funded research and development for the full year 2011 is expected to increase at least $275 million, as compared with 2010, as we ramp up multiple next generation aerospace platforms.

The increase in customer-funded research and development in the third quarter of 2011 reflects increases at both Pratt & Whitney and Hamilton Sundstrand primarily as a result of an increase in commercial aerospace programs. The decrease in the first nine months of 2011, compared to the same periods of 2010, was primarily driven by a decrease at Pratt & Whitney related to a reduction in development spending on the Joint Strike Fighter engine program.

 

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Selling, General and Administrative

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Selling, general and administrative expenses

   $ 1,578     $ 1,478     $ 4,765     $ 4,393  

Percentage of net sales

     10.7     10.9     11.0     11.1

The increase in selling, general and administrative expenses in the third quarter of 2011, as compared to the same period of 2010, was due primarily to the impact of adverse foreign exchange translation, higher pension related costs, and acquisitions completed over the preceding twelve months, including the acquisition of Clipper in December 2010. As a percentage of sales, the 20 basis point year-over-year decrease primarily reflects the beneficial impact from increased sales, Carrier’s ongoing portfolio transformation and other cost reduction activities.

The increase in selling, general and administrative expenses in the first nine months of 2011, as compared to the same period of 2010, was due primarily to the impact of acquisitions completed over the preceding twelve months, including the acquisition of the GE Security business in March 2010 and the acquisition of Clipper in December 2010, adverse foreign exchange translation, and higher pension related costs, partially offset by lower year-over-year restructuring costs. As a percentage of sales, the 10 basis point year-over-year decrease primarily reflects the beneficial impact from increased sales, Carrier’s ongoing portfolio transformation and the impact of lower year-over-year restructuring costs, partially offset by the impact from recent acquisitions.

Other Income (Expense), Net

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

   2011      2010     2011      2010  

Other income (expense), net

   $ 227      $ (114   $ 550      $ (33
  

 

 

    

 

 

   

 

 

    

 

 

 

Other income (expense), net includes the operational impact of equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses as well as other ongoing and non-recurring items. The year-over-year change in other income (expense), net in the third quarter of 2011, as compared with the same period of 2010, largely reflects the absence of an approximately $159 million other-than-temporary impairment charge on our investment in Clipper and an approximately $60 million increase in joint venture income, led by Carrier, including the absence of an approximately $30 million valuation charge at Carrier reflected within equity income related to an unconsolidated foreign venture recorded in the third quarter of 2010. Also contributing to the year-over-year change is an approximately $41 million gain recognized at Pratt & Whitney from the sale of an investment, gains from the sale of real estate at Otis, the impact from the favorable resolution of litigation matters, and the absence of charges related to the early redemption of long-term debt in the third quarter of 2010. These increases were partially offset by approximately $35 million of acquisition costs and associated financing commitment fees recorded in the third quarter of 2011 related to the pending acquisition of Goodrich and an approximately $20 million other-than-temporary impairment charge on an equity investment at UTC Fire & Security.

Similarly, the year-over-year change in other income (expense), net in the first nine months of 2011, as compared with the same period of 2010, reflects the impact of the items noted above in the third quarter as well as transactions from prior quarters, including a gain of approximately $73 million recognized in the second quarter of 2011 at Sikorsky from the contribution of a business into a new venture in the United Arab Emirates, and gains in the first quarter of 2011 at Pratt & Whitney and UTC Fire & Security (combined $30 million). The gain at Pratt & Whitney resulted from the sale of an equity interest in a venture and the gain at UTC Fire & Security related to the disposition of the U.K. Guarding business. The year-over-year change also includes an approximately $125 million increase in joint venture income, led by Carrier, including the absence of an approximately $30 million valuation charge at Carrier recorded in the third quarter of 2010 as noted above, approximately $25 million from the favorable resolution of litigation at UTC Fire & Security, and the absence of charges related to the early redemption of long-term debt in the third quarter of 2010.

 

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Interest Expense, Net

 

     Quarter Ended September 30,     Nine Months Ended September 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Interest expense

   $ 166     $ 182     $ 497     $ 560  

Interest income

     (28     (21     (69     (79
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

   $ 138     $ 161     $ 428     $ 481  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average interest expense rate

     5.4     5.4     5.5     5.6

The decrease in interest expense, net in both the third quarter and first nine months of 2011, as compared with the same periods of 2010, was led by the impact from lower average long-term debt balances and lower average interest expense rates year-over-year. Interest expense also reflects the low cost associated with our commercial paper borrowings. The decline in interest income in the first nine months of 2011, as compared with the same periods of 2010, reflects the absence of a favorable pre-tax interest adjustment of approximately $24 million associated with the resolution of an uncertain tax item in the second quarter of 2010, partially offset by higher interest income on short-term investments.

Income Taxes

 

     Quarter Ended September 30,   Nine Months Ended September 30,
      2011   2010   2011   2010

Effective tax rate

   31.1%   26.5%   31.5%   28.7%

The increase in the effective tax rate for the quarter ended September 30, 2011, as compared to the same period of 2010, primarily reflects the impact of 2010 U.S. tax legislation changes. This increase is partially offset by the favorable tax impact of $17 million related to a U.K. tax rate reduction enacted in July 2011. The effective tax rate for quarter ended September 30, 2010 reflects a $102 million tax benefit associated with the repatriation of high-taxed dividends. This benefit was partially offset by the non-deductibility of impairment charges, primarily driven by a $159 million other-than-temporary impairment charge on our Clipper investment.

The effective tax rate for the nine months ended September 30, 2011 increased as compared to the same period of 2010, primarily as a result of the third quarter tax changes noted above. The effective tax rate for the nine months ended September 30, 2010 reflects the adverse impact from the health care legislation related to the Medicare Part D program in the first quarter of 2010, the tax effects of asset impairment charges in the second quarter of 2010 and the impact from items disclosed above that were recorded in the quarter ended September 30, 2010.

We expect our effective income tax rate for the quarter ended December 31, 2011 to be approximately 28%, before the refund claims referenced in Note 5 to the Condensed Consolidated Financial Statements or any other non-recurring pre-tax items. As a result, we expect our full year annual effective income tax rate in 2011 to be approximately 30.5%.

Net Income and Earnings Per Share

 

     Quarter Ended September 30,      Nine Months Ended September 30,  

(Dollars in millions, except per share amounts)

   2011      2010      2011      2010  

Net income

   $ 1,421      $ 1,299      $ 3,952      $ 3,458  

Less: Noncontrolling interest in subsidiaries’ earnings

     97        101        298        284  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to common shareowners

   $ 1,324      $ 1,198      $ 3,654      $ 3,174  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 1.47      $ 1.30      $ 4.02      $ 3.43  

Diluted earnings per share for the third quarter of 2011 includes $.06 per share of restructuring charges, partially offset by $.04 per share benefit from net non-recurring items. The results for the third quarter of 2010 included a net charge for restructuring and non-recurring items of $.09 per share. For the first nine months of 2011, diluted earnings per share includes a charge for restructuring and net non-recurring items of $.05 per share compared with a $.26 per share net charge for the same period of 2010.

The impact of foreign currency generated a benefit of $.04 and $.11 per diluted share on our operational performance in the third quarter and first nine months of 2011, respectively. This year-over-year impact also includes the net adverse foreign currency

 

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translation impact at P&WC. At P&WC, the weakness of the U.S. dollar in the third quarter of 2011 generated an adverse foreign currency translation impact as the majority of P&WC’s sales are denominated in U.S. dollars, while a significant portion of its costs are incurred in local currencies. To help mitigate the volatility of foreign currency exchange rates on our operating results, we maintain foreign currency hedging programs, the majority of which are entered into by P&WC. As a result of hedging programs currently in place, P&WC’s 2011 full year operating results are expected to include a net adverse impact of foreign currency translation and hedging of approximately $75 million, of which approximately $35 million has impacted our operating results in the first nine months of 2011. For additional discussion of hedging, refer to Note 8 to the Condensed Consolidated Financial Statements.

Restructuring Costs

During the first nine months of 2011, we recorded net pre-tax restructuring costs totaling $188 million for new and ongoing restructuring actions as follows:

 

(Dollars in millions)

      

Otis

   $ 47  

Carrier

     37  

UTC Fire & Security

     29  

Pratt & Whitney

     48  

Hamilton Sundstrand

     10  

Sikorsky

     16  

Eliminations and other

     1  
  

 

 

 

Total

   $ 188  
  

 

 

 

The net costs included $121 million recorded in cost of sales, $65 million in selling, general and administrative expenses and $2 million in other income, net. As described below, these costs primarily relate to actions initiated during 2011 and 2010.

2011 Actions. During the first nine months of 2011, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We recorded net pre-tax restructuring costs totaling $150 million as follows: Otis $48 million, Carrier $20 million, UTC Fire & Security $21 million, Pratt & Whitney $36 million, Hamilton Sundstrand $8 million, Sikorsky $16 million, and Eliminations and other $1 million. The charges included $88 million in cost of sales, $60 million in selling, general and administrative expenses and $2 million in other income, net. These costs include $136 million for severance and related employee termination costs, $3 million for asset write-downs and $11 million for facility exit, lease termination costs and other related costs.

We expect the 2011 actions that were initiated in the first nine months to result in net workforce reductions of approximately 2,800 hourly and salaried employees, the exiting of approximately 540,000 net square feet and the disposal of assets associated with exited facilities. As of September 30, 2011, we have completed net workforce reductions of approximately 1,300 employees and 10,000 net square feet have been exited. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2011 and 2012. Approximately 85% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During the first nine months of 2011, we had cash outflows of approximately $44 million related to the 2011 actions. We expect to incur additional restructuring costs of $88 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating these actions to approximately $175 million annually.

2010 Actions. During the first nine months of 2011, we recorded net pre-tax restructuring costs totaling $40 million for restructuring actions initiated in 2010. The 2010 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We recorded the charges for the first nine months of 2011 as follows: Otis $1 million, Carrier $18 million, UTC Fire & Security $13 million, Pratt & Whitney $6 million, and Hamilton Sundstrand $2 million. The charges included $27 million in cost of sales and $13 million in selling, general and administrative expenses. Those costs included $9 million for severance and related employee termination costs, $6 million for asset write-downs and $25 million for facility exit, lease termination costs and other related costs.

We expect the 2010 actions to result in net workforce reductions of approximately 5,000 hourly and salaried employees, the exiting of approximately 3.9 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of September 30, 2011, we completed net workforce reductions of approximately 4,000 employees and exited approximately 800,000 net square feet of facilities. We are targeting the majority of the remaining workforce and facility related cost reduction actions for completion during 2011 and 2012. Approximately 80% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During the first nine months of 2011, we had cash outflows of approximately $175 million

 

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related to the 2010 actions. We expect to incur additional restructuring costs of $46 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating these actions to approximately $350 million annually.

Additional 2011 Actions. We expect to initiate additional restructuring actions during the remainder of 2011. Including trailing costs related to previously initiated actions, we now expect full year 2011 restructuring costs to exceed $300 million, including the $188 million of charges incurred during the first nine months of 2011. The expected adverse impact on full year earnings in 2011 from anticipated restructuring costs is expected to be offset by the beneficial impact from net non-recurring items. Except for those actions described above, no specific plans for significant other actions have been finalized at this time.

Segment Review

Segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. On September 28, 2011, we announced a new organizational structure that will allow us to better serve customers through greater integration across product lines. This new structure will combine Carrier and UTC Fire & Security into a new segment called UTC Climate, Controls & Security Systems. Carrier and UTC Fire & Security will continue to report financial and operational results separately through the remainder of 2011. In the first quarter of 2012, Carrier and UTC Fire & Security will begin reporting as one segment. Also, as part of the new organizational structure, Pratt & Whitney and Hamilton Sundstrand will be part of a new aerospace organization, named UTC Propulsion and Aerospace Systems, but will continue to report their financial and operational results as separate segments. We will continue to report all financial and operational results under the six principal segments noted above for the remainder of 2011, consistent with how business operations are currently reviewed for decision making purposes, resource allocation and performance assessment. Adjustments to reconcile segment reporting to the consolidated results for the quarters and nine months ended September 30, 2011 and 2010 are included in “Eliminations and other” below, which also includes certain smaller subsidiaries.

Results for the quarters ended September 30, 2011 and 2010 are as follows:

 

     Net Sales     Operating Profits     Operating Profit Margins  

(Dollars in millions)

   2011     2010     2011     2010     2011     2010  

Otis

   $ 3,262     $ 2,908     $ 731     $ 678       22.4     23.3

Carrier

     3,175       2,936       422       380       13.3     12.9

UTC Fire & Security

     1,746       1,657       194       187       11.1     11.3

Pratt & Whitney

     3,251       3,230       535       547       16.5     16.9

Hamilton Sundstrand

     1,531       1,420       282       255       18.4     18.0

Sikorsky

     1,877       1,547       215       163       11.5     10.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segments

     14,842       13,698       2,379       2,210       16.0     16.1

Eliminations and other

     (38     (78     (75     (199    

General corporate expenses

     —          —          (102     (83    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 14,804     $ 13,620     $ 2,202     $ 1,928       14.9     14.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Third quarter 2011 and 2010 restructuring costs included in consolidated operating profit totaled $85 million and $58 million, respectively, as follows:

 

     Quarter Ended September 30,  

(Dollars in millions)

   2011      2010  

Otis

   $ 41      $ 12  

Carrier

     8        (1

UTC Fire & Security

     13        24  

Pratt & Whitney

     6        13  

Hamilton Sundstrand

     4        2  

Sikorsky

     13        7  

Eliminations and other

     —           1  
  

 

 

    

 

 

 

Total

   $ 85      $ 58  
  

 

 

    

 

 

 

 

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Results for the nine months ended September 30, 2011 and 2010 are as follows:

 

     Net Sales     Operating Profits     Operating Profit Margins  

(Dollars in millions)

   2011     2010     2011     2010     2011     2010  

Otis

   $ 9,226     $ 8,472     $ 2,104     $ 1,915       22.8     22.6

Carrier

     9,334       8,496       1,190       852       12.7     10.0

UTC Fire & Security

     5,120       4,687       562       478       11.0     10.2

Pratt & Whitney

     9,798       9,350       1,460       1,505       14.9     16.1

Hamilton Sundstrand

     4,503       4,125       793       680       17.6     16.5

Sikorsky

     5,245       4,597       633       477       12.1     10.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segments

     43,226       39,727       6,742       5,907       15.6     14.9

Eliminations and other

     (2     (265     (246     (321    

General corporate expenses

     —          —          (295     (253    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 43,224     $ 39,462     $ 6,201     $ 5,333       14.3     13.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the first nine months of 2011 and 2010, restructuring costs included in consolidated operating profit totaled $188 million and $210 million, respectively, as follows:

 

     Nine Months Ended September 30,  

(Dollars in millions)

   2011      2010  

Otis

   $ 47      $ 40  

Carrier

     37        32  

UTC Fire & Security

     29        53  

Pratt & Whitney

     48        48  

Hamilton Sundstrand

     10        11  

Sikorsky

     16        14  

Eliminations and other

     1        12  
  

 

 

    

 

 

 

Total

   $ 188      $ 210  
  

 

 

    

 

 

 

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

Otis –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended September 30, 2011     Nine Months Ended September 30, 2011  
     Net Sales     Operating
Profits
    Net Sales     Operating Profits  

Organic sales / Operational operating profit

                

Foreign currency translation

                

Acquisitions and divestitures, net

         —              —     

Restructuring costs

     —          (4 )%      —          —     

Other

     —              —         
  

 

 

   

 

 

   

 

 

   

 

 

 

Total % change

     12              10 
  

 

 

   

 

 

   

 

 

   

 

 

 

Quarter ended September 30, 2011 Compared with Quarter ended September 30, 2010

Sales increased $354 million (12%) in the third quarter of 2011, compared with the same period of 2010. The organic sales increase in the quarter was led by strong new equipment sales primarily in China and Russia (5% combined), partially offset by declines in new equipment sales in North America (1%). Service sales also increased in the quarter with continued growth in contractual maintenance and repairs led by North and South America.

Operating profits increased $53 million (8%) in the third quarter of 2011, compared with the same period of 2010. Operational profit improvement in the quarter was due to benefits from higher volume, partially offset by the unfavorable impact of new

 

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equipment pricing and higher commodity costs. The 3% contributed by “Other” in the third quarter of 2011 primarily reflects gains from the sale of real estate.

Nine months ended September 30, 2011 Compared with Nine months ended September 30, 2010

Sales increased $754 million (9%) in the first nine months of 2011, compared with the same period of 2010. The organic sales increase in the period was due to higher new equipment sales in China and Russia (combined 3%), partially offset by declines in North America (1%). Also contributing to the increase in organic sales was an increase in contractual maintenance across all regions and repair volume primarily in North America.

Operating profits increased $189 million (10%) in the first nine months of 2011, compared with the same period of 2010. Operational profit improvement in the period was due to benefits from higher volume partially offset by new equipment pricing and the impact of higher commodity costs.

Carrier –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended September 30, 2011     Nine Months Ended September 30, 2011  
     Net Sales     Operating
Profits
    Net Sales     Operating Profits  

Organic sales / Operational operating profit

             12      30 

Foreign currency translation

                

Acquisitions and divestitures, net

     (5 )%      (2 )%      (5 )%      (3 )% 

Restructuring costs

     —          (2 )%      —          (1 )% 

Other

     —              —          10 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total % change

         11      10      40 
  

 

 

   

 

 

   

 

 

   

 

 

 

Quarter ended September 30, 2011 Compared with Quarter ended September 30, 2010

Sales increased $239 million (8%) in the third quarter of 2011, compared with the same period of 2010. Organic sales growth of 9% was driven primarily by continued strength in the transport refrigeration business and growth in emerging markets, although as expected the growth rate in the transport refrigeration business has moderated in the third quarter of 2011. The 5% decrease in “Acquisitions and divestitures, net” reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months.

Operating profit increased $42 million (11%) in the third quarter of 2011, compared with the same period of 2010. The operational profit improvement of 3% was driven by solid conversion on higher organic sales growth and continued good performance in Carrier’s foreign ventures. This was partially offset by an unfavorable sales mix in the North America HVAC business and higher net commodity costs (9%). The 9% increase in “Other” reflects the net year-over-year impact of transactions associated with Carrier’s ongoing portfolio transformation and the absence of an approximately $30 million valuation allowance charge reflected within equity income at an unconsolidated foreign venture recorded in 2010.

Nine months ended September 30, 2011 Compared with Nine months ended September 30, 2010

Sales increased $838 million (10%) in the first nine months of 2011, compared with the same period of 2010. Organic sales growth of 12% was driven primarily by improvements in the transport refrigeration business. The 5% decrease in “Acquisitions and divestitures, net” reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months.

Operating profit increased $338 million (40%) in the first nine months of 2011, compared with the same period of 2010. Operational profit improvement of 30% was driven by strong conversion on organic sales growth, particularly in the higher margin transport refrigeration business, and earnings improvement in Carrier’s Japan joint venture (5%). This was partly offset by higher net commodity costs (12%). The 10% increase in “Other” primarily reflects the net year-over-year impact of items associated with Carrier’s ongoing portfolio transformation. Included in “Other” is the absence of an asset impairment charge of approximately $58 million associated with the disposition of a business, partially offset by a gain on the sale of another business, both of which were recorded in the second quarter of 2010. Also included within “Other” is the absence of an approximately $30 million valuation allowance charge reflected within equity income related to an unconsolidated foreign venture recorded in the third quarter of 2010.

 

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UTC Fire & Security –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended September 30, 2011     Nine Months Ended September 30, 2011  
     Net Sales     Operating
Profits
    Net Sales     Operating
Profits
 

Organic sales / Operational operating profit

         (2 )%          (1 )% 

Foreign currency translation

                

Acquisitions and divestitures, net

     (2 )%      (1 )%         

Restructuring costs

     —              —         

Other

     (1 )%      (5 )%      (1 )%     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total % change

                 18 
  

 

 

   

 

 

   

 

 

   

 

 

 

Quarter ended September 30, 2011 Compared with Quarter ended September 30, 2010

Sales increased $89 million (5%) in the third quarter of 2011, compared with the same period of 2010. The 2% organic sales growth reflects an increase in the products businesses (3%) while the service and install businesses declined (1%). Geographically, the organic growth was driven by stronger volume in the U.S. product businesses, partially offset by declines in the service and install businesses, particularly as a result of continuing market weakness in the U.K. The decrease contributed by “Acquisitions and divestitures, net” in the third quarter of 2011 reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months, led entirely by the divestiture in March 2011 of the U.K. Guarding business.

Operating profits increased $7 million (4%) in the third quarter of 2011, as compared with the same period of 2010. The operational profit decrease reflects lower profits in the U.K. as a result of continuing productivity challenges and a very soft market in the U.K., partially offset by the benefits from higher overall sales volume within the products businesses. The decrease contributed by “Acquisitions and divestitures, net” in the third quarter of 2011 reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months, led entirely by the divestiture in March 2011 of the U.K. Guarding business. The 5% decrease in “Other” primarily reflects a $20 million other-than-temporary impairment charge recorded on an equity investment in Asia, partially offset by the favorable settlement of litigation.

Nine months ended September 30, 2011 Compared with Nine months ended September 30, 2010

Sales increased $433 million (9%) in the first nine months of 2011, compared with the same period of 2010. The 3% organic sales growth reflects growth in the products businesses while the service and install businesses were flat. Geographically, the organic growth was driven by stronger volume in the products businesses, partially offset by declines in the U.K. and U.S. service and install businesses as a result of weak market conditions. The increase contributed by “Acquisitions and divestitures, net” in the first nine months of 2011 reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months.

Operating profits increased $84 million (18%) for the first nine months of 2011, compared with the same period of 2010. The operational profit decrease reflects lower results in the U.K. due to lower sales and productivity challenges, partially offset by the benefits of higher overall sales volume within the products businesses and restructuring savings. The 7% increase contributed by “Other” primarily reflects the favorable resolution of litigation combined with the gain in the first quarter of 2011 on the disposition of the U.K. Guarding business, partially offset by a $20 million other-than-temporary impairment charged recorded on an equity investment in Asia.

Pratt & Whitney –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended September 30, 2011     Nine Months Ended September 30, 2011  
     Net Sales     Operating Profits     Net Sales     Operating Profits  

Organic sales* / Operational operating profit*

         (6 )%          (4 )% 

Foreign currency (including P&WC net hedging)*

     (2 )%      (4 )%      (1 )%      (3 )% 

Acquisitions and divestitures, net

     —          (1 )%      —          —     

Restructuring costs

     —              —          —     

Other

     —              —         
  

 

 

   

 

 

   

 

 

   

 

 

 

Total % change

         (2 )%          (3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*

As discussed further in the “Business Overview” and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, for Pratt & Whitney only, the transactional impact of foreign exchange

 

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  hedging at P&WC has been netted against the translational foreign exchange impact for presentation purposes in the above table. For all other segments, these foreign exchange transactional impacts are included within the organic sales/operational operating profit caption in their respective tables. Due to its significance to Pratt & Whitney’s overall operating results, we believe it is useful to segregate the foreign exchange transactional impact in order to clearly identify the underlying financial performance.

Quarter ended September 30, 2011 Compared with Quarter ended September 30, 2010

Sales increased $21 million (1%) in the third quarter of 2011, compared with the same period of 2010. Organic sales growth in the quarter primarily reflects an increase in overall aerospace aftermarket sales (7%), driven by spares, and in large commercial engine deliveries (1%). This was partially offset by the impact from fewer military engine deliveries (4%) and lower sales from both Rocketdyne and Pratt & Whitney Power Systems (combined 1%).

Operating profits decreased $12 million (2%) in the third quarter of 2011, compared with the same period of 2010. The 6% operational profit decrease primarily reflects higher research and development costs (12%), net unfavorable commercial engine mix and fewer engine deliveries from the military business (combined 9%) as well as a decline at Rocketdyne and Pratt & Whitney Power Systems (combined 3%), partially offset by the benefit from higher commercial spares and overall aftermarket volumes. The 8% contributed by “Other” primarily reflects the gain on sale of an equity investment.

Nine months ended September 30, 2011 Compared with Nine months ended September 30, 2010

Sales increased $448 million (5%) in the first nine months of 2011, compared with the same period of 2010. The organic sales growth was primarily attributable to higher commercial aerospace aftermarket volumes (9%), driven by spares, partially offset by a decline in the military engine business (3%) driven by lower military engine deliveries.

Operating profits decreased $45 million (3%) in the first nine months of 2011, compared with the same period of 2010. The operational profit decline (4%) primarily reflects higher research and development cost (14%), net unfavorable commercial engine mix and fewer engine deliveries from the military business (combined 10%), partially offset by the benefit from higher overall aerospace aftermarket volumes (20%). The 4% contributed by “Other” primarily reflects gains from the sale of equity interests in ventures through the first nine months of 2011.

Hamilton Sundstrand –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended September 30, 2011     Nine Months Ended September 30, 2011  
     Net Sales     Operating Profits     Net Sales     Operating Profits  

Organic sales / Operational operating profit

         10          11 

Foreign currency translation

                

Acquisitions and divestitures, net

     (1 )%      —          (1 )%      —     

Restructuring costs

     —          (1 )%      —          —     

Other

     —          —          —         
  

 

 

   

 

 

   

 

 

   

 

 

 

Total % change

         11          17 
  

 

 

   

 

 

   

 

 

   

 

 

 

Quarter ended September 30, 2011 Compared with Quarter ended September 30, 2010

Sales increased $111 million (8%) in the third quarter of 2011, compared with the same period of 2010. The organic sales growth reflects higher volumes in both the aerospace (5%) and industrial (2%) businesses. The increase within aerospace was principally attributed to higher aftermarket volume, primarily commercial spares, while OEM sales volume was relatively flat. The industrial business increase was led by the compressor business as a result of general increases in the manufacturing and energy sectors, particularly in the U.S. and Asia.

Operating profits increased $27 million (11%) in the third quarter of 2011, compared with the same period of 2010. Operational profit reflects an increase in both the aerospace (9%) and industrial (1%) businesses. The growth within aerospace reflects higher aftermarket volume, primarily commercial spares, partially offset by an adverse mix of product sales within OEM, including a reduction in military ground vehicle volumes and an increase in volume of lower margin commercial development programs. Also, operational profit growth reflects the benefit of lower research and development costs (9%) partially offset by higher warranty costs (8%). The increase within the industrials business reflects the benefit of higher volume.

Nine months ended September 30, 2011 Compared with Nine months ended September 30, 2010

Sales increased $378 million (9%) in the first nine months of 2011, compared with the same period of 2010. The organic sales growth primarily reflects volume increase in both the aerospace (6%) and industrial (2%) businesses. The increase within aerospace was driven by higher aftermarket volume (6%), primarily commercial spares. The industrial business increase was led by the compressor business as a result of general increases in the manufacturing and energy sectors, particularly in the U.S. and Asia.

 

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Table of Contents

Operating profits increased $113 million (17%) in the first nine months of 2011, compared with the same period of 2010. The increase in operational profit reflects an increase in both the aerospace (7%) and industrial (4%) businesses. The growth within aerospace reflects higher commercial aftermarket volume, partially offset by the adverse mix of product sales within OEM, including a reduction in military ground vehicle volumes and an increase in volume of lower margin commercial development programs. Also, operational profit growth reflects higher warranty costs (5%) partially offset by the benefit from lower research and development costs (3%). The increase within the industrial businesses reflects the benefit of higher volume and cost reduction initiatives. The increase contributed by “Other” reflects the impact from the absence of approximately $28 million of asset impairment charges recorded in the second quarter of 2010. These charges were related primarily to the disposition of an aerospace business as part of Hamilton Sundstrand’s efforts to implement low cost sourcing initiatives.

Sikorsky –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended September 30, 2011     Nine Months Ended September 30, 2011  
     Net Sales     Operating Profits     Net Sales     Operating Profits  

Organic sales / Operational operating profit

     21      36      13