2013-09-30 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 
____________________________________ 

FORM 10-Q
____________________________________ 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
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  ý.    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  ý.    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
ý
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  ý.
At September 30, 2013 there were 917,581,965 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, 2013
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,” “the Company,” or “UTC,” unless the context otherwise requires, mean United Technologies Corporation and its subsidiaries. References to internet web sites in this Form 10-Q are provided for convenience only. Information available through these web sites is not incorporated by reference into this Form 10-Q.

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Quarter Ended September 30,
(Dollars in millions, except per share amounts)
 
2013
 
2012
Net Sales:
 
 
 
 
Product sales
 
$
11,243

 
$
10,839

Service sales
 
4,219

 
4,203

 
 
15,462

 
15,042

Costs and Expenses:
 
 
 
 
Cost of products sold
 
8,316

 
8,278

Cost of services sold
 
2,704

 
2,725

Research and development
 
630

 
590

Selling, general and administrative
 
1,633

 
1,619

 
 
13,283

 
13,212

Other income, net
 
187

 
211

Operating profit
 
2,366

 
2,041

Interest expense, net
 
226

 
216

Income from continuing operations before income taxes
 
2,140

 
1,825

Income tax expense
 
614

 
484

Net income from continuing operations
 
1,526

 
1,341

Less: Noncontrolling interest in subsidiaries' earnings from continuing operations
 
111

 
94

Income from continuing operations attributable to common shareowners
 
1,415

 
1,247

Discontinued operations (Note 2):
 
 
 
 
Income (loss) from operations
 

 
91

Gain (loss) on disposal
 
10

 
(26
)
Income tax benefit (expense)
 
7

 
105

Income (loss) from discontinued operations
 
17

 
170

Less: Noncontrolling interest in subsidiaries' earnings from discontinued operations
 

 
2

Income (loss) from discontinued operations attributable to common shareowners
 
17

 
168

Net income attributable to common shareowners
 
$
1,432

 
$
1,415

Comprehensive income
 
$
2,235

 
$
2,546

Less: Comprehensive income attributable to noncontrolling interest
 
128

 
119

Comprehensive income attributable to common shareowners
 
$
2,107

 
$
2,427

Earnings Per Share of Common Stock - Basic:
 
 
 
 
Income from continuing operations attributable to common shareowners
 
$
1.57


$
1.39

Net income attributable to common shareowners
 
$
1.59

 
$
1.58

Earnings Per Share of Common Stock - Diluted:
 
 
 
 
Income from continuing operations attributable to common shareowners
 
$
1.55

 
$
1.37

Net income attributable to common shareowners
 
$
1.57

 
$
1.56

See accompanying Notes to Condensed Consolidated Financial Statements

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Table of Contents

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Nine Months Ended September 30,
(Dollars in millions, except per share amounts)
 
2013
 
2012
Net Sales:
 
 
 
 
Product sales
 
$
33,159

 
$
28,843

Service sales
 
12,708

 
12,422

 
 
45,867

 
41,265

Costs and Expenses:
 
 
 
 
Cost of products sold
 
24,876

 
21,724

Cost of services sold
 
8,161

 
8,143

Research and development
 
1,871

 
1,659

Selling, general and administrative
 
4,997

 
4,657

 
 
39,905

 
36,183

Other income, net
 
917

 
851

Operating profit
 
6,879

 
5,933

Interest expense, net
 
679

 
513

Income from continuing operations before income taxes
 
6,200

 
5,420

Income tax expense
 
1,677

 
1,257

Net income from continuing operations
 
4,523

 
4,163

Less: Noncontrolling interest in subsidiaries' earnings from continuing operations
 
286

 
261

Income from continuing operations attributable to common shareowners
 
4,237

 
3,902

Discontinued operations (Note 2):
 
 
 
 
Income (loss) from operations
 
63

 
(1,017
)
Gain (loss) on disposal
 
(30
)
 
(62
)
Income tax benefit (expense)
 
(12
)
 
256

Income (loss) from discontinued operations
 
21

 
(823
)
Less: Noncontrolling interest in subsidiaries' earnings from discontinued operations
 

 
6

Income (loss) from discontinued operations attributable to common shareowners
 
21

 
(829
)
Net income attributable to common shareowners
 
$
4,258

 
$
3,073

Comprehensive income
 
$
4,658

 
$
4,171

Less: Comprehensive income attributable to noncontrolling interest
 
277

 
271

Comprehensive income attributable to common shareowners
 
$
4,381

 
$
3,900

Earnings Per Share of Common Stock - Basic:
 
 
 
 
Income from continuing operations attributable to common shareowners
 
$
4.70

 
$
4.37

Net income attributable to common shareowners
 
$
4.73

 
$
3.44

Earnings Per Share of Common Stock - Diluted:
 
 
 
 
Income from continuing operations attributable to common shareowners
 
$
4.64

 
$
4.31

Net income attributable to common shareowners
 
$
4.66

 
$
3.39

See accompanying Notes to Condensed Consolidated Financial Statements



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Table of Contents

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
 
(Dollars in millions)
 
September 30,
2013
 
December 31,
2012
Assets
 
 
 
 
Cash and cash equivalents
 
$
4,621

 
$
4,819

Accounts receivable, net
 
11,135

 
11,099

Inventories and contracts in progress, net
 
10,765

 
9,537

Future income tax benefits, current
 
1,935

 
1,611

Assets held for sale
 

 
1,071

Other assets, current
 
895

 
1,473

Total Current Assets
 
29,351

 
29,610

Customer financing assets
 
1,229

 
1,150

Future income tax benefits
 
1,583

 
1,599

Fixed assets
 
18,388

 
18,065

Less: Accumulated depreciation
 
(9,839
)
 
(9,547
)
Fixed assets, net
 
8,549

 
8,518

Goodwill
 
28,100

 
27,801

Intangible assets, net
 
15,495

 
15,189

Other assets
 
6,019

 
5,542

Total Assets
 
$
90,326

 
$
89,409

Liabilities and Equity
 
 
 
 
Short-term borrowings
 
$
303

 
$
503

Accounts payable
 
6,628

 
6,431

Accrued liabilities
 
15,488

 
15,310

Liabilities held for sale
 

 
421

Long-term debt currently due
 
1,100

 
1,121

Total Current Liabilities
 
23,519

 
23,786

Long-term debt
 
19,785

 
21,597

Future pension and postretirement benefit obligations
 
7,175

 
7,520

Other long-term liabilities
 
9,804

 
9,199

Total Liabilities
 
60,283

 
62,102

Commitments and contingent liabilities (Note 13)
 
 
 

Redeemable noncontrolling interest
 
124

 
238

Shareowners’ Equity:
 
 
 
 
Common Stock
 
14,665

 
13,976

Treasury Stock
 
(20,233
)
 
(19,251
)
Retained earnings
 
39,599

 
36,776

Unearned ESOP shares
 
(129
)
 
(139
)
Accumulated other comprehensive loss
 
(5,325
)
 
(5,448
)
Total Shareowners’ Equity
 
28,577

 
25,914

Noncontrolling interest
 
1,342

 
1,155

Total Equity
 
29,919

 
27,069

Total Liabilities and Equity
 
$
90,326

 
$
89,409

See accompanying Notes to Condensed Consolidated Financial Statements

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Table of Contents

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended September 30,
(Dollars in millions)
 
2013
 
2012
Operating Activities of Continuing Operations:
 
 
 
 
Income from continuing operations
 
$
4,523

 
$
4,163

Adjustments to reconcile income from continuing operations to net cash flows provided by operating activities of continuing operations:
 
 
 
 
Depreciation and amortization
 
1,335

 
1,047

Deferred income tax provision
 
13

 
29

Stock compensation cost
 
216

 
150

Change in:
 
 
 
 
Accounts receivable
 
(198
)
 
406

Inventories and contracts in progress
 
(1,461
)
 
(1,162
)
Other current assets
 
118

 
(101
)
Accounts payable and accrued liabilities
 
1,077

 
708

Global pension contributions
 
(72
)
 
(233
)
Other operating activities, net
 
(660
)
 
(356
)
Net cash flows provided by operating activities of continuing operations
 
4,891

 
4,651

Investing Activities of Continuing Operations:
 
 
 
 
Capital expenditures
 
(1,047
)
 
(748
)
Investments in businesses
 
(120
)
 
(16,008
)
Dispositions of businesses
 
1,465

 
362

(Increase) decrease in customer financing assets, net
 
(121
)
 
1

Decrease (increase) in restricted cash, net
 
3

 
(191
)
Increase in collaboration intangible assets
 
(547
)
 
(1,394
)
Other investing activities, net
 
(232
)
 
(17
)
Net cash flows used in investing activities of continuing operations
 
(599
)
 
(17,995
)
Financing Activities of Continuing Operations:
 
 
 
 
(Repayment) issuance of long-term debt, net
 
(1,795
)
 
10,798

(Decrease) increase in short-term borrowings, net
 
(204
)
 
4,509

Proceeds from Common Stock issued under employee stock plans
 
336

 
460

Dividends paid on Common Stock
 
(1,395
)
 
(1,288
)
Repurchase of Common Stock
 
(1,000
)
 

Other financing activities, net
 
(168
)
 
(493
)
Net cash flows (used in) provided by financing activities of continuing operations
 
(4,226
)
 
13,986

Discontinued Operations:
 
 
 
 
Net cash (used in) provided by operating activities
 
(603
)
 
22

Net cash provided by (used in) investing activities
 
351

 
(352
)
Net cash flows used in discontinued operations
 
(252
)
 
(330
)
Effect of foreign exchange rate changes on cash and cash equivalents
 
(29
)
 
25

Net (decrease) increase in cash and cash equivalents
 
(215
)
 
337

Cash and cash equivalents, beginning of year
 
4,836

 
5,960

Cash and cash equivalents, end of period
 
4,621

 
6,297

Less: Cash and cash equivalents of businesses held for sale
 

 
55

Cash and cash equivalents of continuing operations, end of period
 
$
4,621

 
$
6,242


See accompanying Notes to Condensed Consolidated Financial Statements

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Table of Contents

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at September 30, 2013 and for the quarters and nine months ended September 30, 2013 and 2012 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The financial information included herein should be read in conjunction with the financial statements and notes in our Annual Report to Shareowners (2012 Annual Report) incorporated by reference to our Annual Report on Form 10-K for calendar year 2012 (2012 Form 10-K).
Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets
Business Acquisitions and Dispositions. During the first nine months of 2013, our cash investment in business acquisitions was $120 million, and consisted of a number of small acquisitions, primarily in our commercial businesses.
On May 17, 2013, we completed the sale of the Pratt & Whitney Power Systems business to Mitsubishi Heavy Industries (MHI) and entered into a long-term engineering and manufacturing agreement with MHI. The sale generated a pre-tax gain of approximately $193 million ($132 million after tax). Cash received in connection with the sale was $432 million, excluding contingent consideration valued at approximately $200 million. Pratt & Whitney Power Systems has not been reclassified to Discontinued Operations due to our level of continuing involvement in the business post-sale.
On February 7, 2013, we completed the acquisition of Grupo Ascensores Enor, S.A. (Enor), a privately held company headquartered in Spain with operations in Spain and Portugal, which designs, manufactures, installs and services elevators. Enor's 2012 sales were approximately $50 million. Under the terms of the transaction, Zardoya Otis, S.A. (ZOSA), a non-wholly owned subsidiary of the Company, exchanged publicly traded shares of ZOSA with a fair value of approximately $240 million as of the transaction completion date for all of the shares of Enor.
On July 26, 2012, UTC acquired Goodrich Corporation (Goodrich), a global supplier of systems and services to the aerospace and defense industry with 2011 sales of $8.1 billion. Goodrich products include aircraft nacelles and interior, actuation, landing and electronic systems. Under the terms of the agreement, Goodrich shareholders received $127.50 in cash for each share of Goodrich common stock they owned on July 26, 2012. This equated to a total enterprise value of $18.3 billion, including $1.9 billion in net debt assumed. The acquired Goodrich businesses were combined with the legacy Hamilton Sundstrand businesses to form the new UTC Aerospace Systems segment. The Goodrich acquisition and the formation of UTC Aerospace Systems provides increased scale, financial strength and complementary product offerings, allowing us to significantly strengthen our position in the aerospace and defense industry, create aftermarket efficiencies for our customers, accelerate our ability to drive innovation within the aerospace industry, and enhance our ability to support our customers with more integrated systems. This acquisition, coupled with our acquisition of an additional interest in IAE International Aero Engines AG (IAE), as discussed below, further advances UTC's strategy of focusing on our core businesses.
To finance the cash consideration for the Goodrich acquisition and pay related fees, expenses and other amounts due and payable, we utilized the previously disclosed net proceeds of approximately $9.6 billion from the $9.8 billion of long-term notes issued on June 1, 2012, the net proceeds of approximately $1.1 billion from the equity units issued on June 18, 2012, $3.2 billion from the issuance of commercial paper during July 2012, and $2.0 billion of proceeds borrowed under our April 24, 2012 term loan credit agreement. For the remainder of the cash consideration, we utilized approximately $0.5 billion of cash and cash equivalents generated from operating activities.
Allocation of Consideration Transferred to Net Assets Acquired:
The following amounts represent the final determination as of July 26, 2012 of the fair value of identifiable assets acquired and liabilities assumed from the Goodrich acquisition, through completion of the one year measurement period from the date of acquisition as required by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, “Business Combinations” (ASC Topic 805). Measurement period adjustments were not significant and were not retroactively reclassified to prior periods.

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(Dollars in millions)
 
Cash and cash equivalents
$
538

Accounts receivable, net
1,205

Inventories and contracts in progress, net
1,673

Future income tax benefits, current
515

Other assets, current
647

Fixed assets
2,209

Intangible assets:
 
Customer relationships and related program assets
8,550

Trademarks
1,550

Other assets
1,501

Short-term borrowings
(84
)
Accounts payable
(587
)
Accrued liabilities
(1,919
)
Long-term debt
(2,961
)
Future pension and postretirement benefit obligations
(1,743
)
Other long-term liabilities:
 
Customer contractual obligations
(2,200
)
Other long-term liabilities
(4,013
)
Noncontrolling interest
(41
)
Total identifiable net assets
4,840

Goodwill
11,580

Total consideration transferred
$
16,420

In order to allocate the consideration transferred for Goodrich, the fair values of all identifiable assets and liabilities needed to be established. For accounting and financial reporting purposes, fair value is defined under FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (ASC Topic 820) as the price that would be received upon sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. Use of different estimates and judgments could yield different results.
In determining the fair value of identifiable assets acquired and liabilities assumed, a review was conducted for any significant contingent assets or liabilities existing as of the acquisition date. As of September 30, 2013, no significant contingencies related to existing legal or government action have been identified which existed as of the opening balance sheet date. Based upon our existing practices and phase II environmental assessments done on a number of Goodrich sites, we have determined that environmental liability obligations of $325 million were assumed in connection with the Goodrich acquisition.

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The fair values of the customer relationships and related program intangible assets, which include the related aerospace program original equipment manufacturing (OEM) and aftermarket cash flows, were determined by using an “income approach” which is the most common valuation approach utilized. Under this approach, the net earnings attributable to the asset or liability being measured are isolated using the discounted projected net cash flows. These projected cash flows are isolated from the projected cash flows of the combined asset group over the remaining economic life of the intangible asset or liability being measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant net cash flows considered historical and projected pricing, remaining developmental effort, operational performance including company specific synergies, aftermarket retention, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where appropriate, the net cash flows are probability-adjusted to reflect the uncertainties associated with the underlying assumptions, as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future cash flows are then discounted to present value using an appropriate discount rate. The customer relationship and related program intangible assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of the underlying programs of 10 to 25 years.
We also identified customer contractual obligations on certain OEM development programs where the expected costs exceed the expected revenue under contract. We measured these liabilities under the measurement provisions of ASC Topic 820, which is based on the price to transfer the obligation to a market participant at the measurement date, assuming that the liability will remain outstanding in the marketplace. Based on the estimated net cash outflows of the OEM developmental programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, we recorded assumed liabilities of approximately $2.2 billion. These liabilities will be liquidated in accordance with the underlying economic pattern of obligations, as reflected by the net cash outflows incurred on the OEM developmental programs. Total consumption of the contractual obligation for the quarter and nine months ended September 30, 2013 was approximately $60 million and $210 million, respectively. Total consumption of the contractual obligation is expected to be as follows: $70 million remaining in 2013, $274 million in 2014, $213 million in 2015, $242 million in 2016, $233 million in 2017 and $894 million thereafter.
Goodrich had not recorded an income tax liability on the unremitted earnings of its non-U.S. subsidiaries, which were approximately $853 million as of December 31, 2011. In connection with the Goodrich acquisition, UTC made a determination to repatriate certain of these unremitted earnings, making such amounts subject to both U.S. and non-U.S. income taxes. Accordingly, an income tax liability of $215 million was recorded in purchase accounting for the unremitted earnings no longer considered permanently reinvested.
In 2010, Pratt & Whitney entered into a preferred supplier contract with Goodrich for the development and subsequent production of nacelles for the PW1500G (Bombardier C Series) and PW1200G (Mitsubishi Regional Jet). That preferred supplier contract replaced previous contracts and preliminary Memorandum of Understandings entered into in 2006 and 2008. Under the 2010 agreement, Pratt & Whitney agreed to fund Goodrich's non-recurring development effort and established a recurring price for the production nacelles. Prior to the date of the Goodrich acquisition, Pratt & Whitney and Goodrich had asserted claims against each other in a contractual dispute and would have ultimately arbitrated the matter were it not for the acquisition. In accordance with ASC Topic 805, pre-existing relationships must be effectively settled at acquisition as the relationships become intercompany relationships upon acquisition and are eliminated in the post-combination financial statements. Any resulting settlement gains or losses should be measured at fair value and recorded on the acquisition date. Accordingly, a $46 million gain was recorded in other income by Pratt & Whitney in the quarter ended September 30, 2012 based upon a third party determination of the probability-weighted outcome had the matter gone to arbitration. No additional gain or loss was recorded in connection with the settlement of these pre-existing relationships as we determined that the terms of these two contracts were consistent with other similar market transactions at the time of our acquisition of Goodrich.
Under Goodrich's pre-existing management continuity arrangements (MCAs), we assumed change-in-control obligations related to certain executives at Goodrich. We evaluated the change-in-control provisions governed by the MCAs and for certain of the executives, we determined that we had assumed liabilities of approximately $74 million as the benefit payments were effectively single trigger arrangements in substance. We measured the assumed liability based on fair value concepts of ASC Topic 820, using weighted average techniques of possible outcomes of the employees electing to receive such benefits. We expensed approximately $12 million in the quarter ended September 30, 2012 for MCAs where we amended the term of the MCAs beyond the original expiration date for certain executives. We incurred expense of approximately $9 million in connection with MCA payments made during the quarter ended June 30, 2013.

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Supplemental Pro-Forma Data:
Goodrich's results of operations have been included in UTC's financial statements for the periods subsequent to the completion of the acquisition on July 26, 2012. The following unaudited supplemental pro-forma data for the quarter and nine months ended September 30, 2012 presents consolidated information as if the acquisition had been completed on January 1, 2011. There were no significant pro-forma adjustments required for the quarter and nine months ended September 30, 2013. The pro-forma results were calculated by combining the results of UTC with the stand-alone results of Goodrich for the pre-acquisition periods, which were adjusted to account for certain costs which would have been incurred during this pre-acquisition period:
(Dollars in millions, except per share amounts)
Quarter Ended September 30, 2012
 
Nine Months Ended September 30, 2012
Net sales
$
15,512

 
$
45,730

Net income attributable to common shareowners from continuing operations
1,315

 
4,145

Basic earnings per share of common stock from continuing operations
1.47

 
4.63

Diluted earnings per share of common stock from continuing operations
1.45

 
4.57

The unaudited supplemental pro-forma data above includes the following significant adjustments made to account for certain costs which would have been incurred if the acquisition had been completed on January 1, 2011, as adjusted for the applicable tax impact:
(Dollars in millions)
Quarter Ended September 30, 2012
 
Nine Months Ended September 30, 2012
Amortization of inventory fair value adjustment1
$
(49
)
 
$
(49
)
Amortization of acquired Goodrich intangible assets, net2
15

 
107

Utilization of contractual customer obligation3
(10
)
 
(103
)
Interest expense incurred on acquisition financing, net4
(3
)
 
63

1 Removed the expense for the amortization of inventory fair value adjustments recognized in the quarter ended September 30, 2012, as the corresponding inventory would have been completely sold during the first two quarters of 2011.
2 Added the additional amortization of the acquired Goodrich intangible assets recognized at fair value in purchase accounting and eliminated the historical Goodrich intangible asset amortization expense.
3 Added the additional utilization of the Goodrich contractual customer obligation recognized in purchase accounting.
4 Added the additional interest expense for the indebtedness we incurred to finance the acquisition of Goodrich and reduced interest expense for the debt fair value adjustment which would have been amortized.
The unaudited supplemental pro-forma financial information does not reflect the potential realization of cost savings relating to the integration of the two companies. Further, the pro-forma data should not be considered indicative of the results that would have occurred if the acquisition and related financing had been consummated on January 1, 2011, nor are they indicative of future results.
In connection with regulatory approval of UTC's acquisition of Goodrich, regulatory authorities required UTC to dispose of the Goodrich electric power systems and the Goodrich pumps and engine controls businesses. Pursuant to regulatory obligations, these businesses had been held separately from UTC's and Goodrich's ongoing businesses since the acquisition of Goodrich by UTC. On March 18, 2013, we completed the sale of the Goodrich pumps and engine controls business to Triumph Group, Inc., and on March 26, 2013, we completed the sale of the Goodrich electric power systems business to Safran S.A. Combined proceeds from the sales of the two businesses were approximately $600 million.
In 2012, the UTC Board of Directors approved plans for the divestiture of a number of non-core businesses. Cash generated from these divestitures was used to repay debt incurred to finance the acquisition of Goodrich. See Note 2 for further discussion.
On June 29, 2012, Pratt & Whitney, Rolls Royce plc (Rolls-Royce), MTU Aero Engines AG (MTU), and Japanese Aero Engines Corporation (JAEC), participants in the IAE collaboration, completed a restructuring of their interests in IAE. Under the terms of the agreement, Rolls-Royce sold its ownership and collaboration interests in IAE to Pratt & Whitney, while also entering into an agreement to license its V2500 intellectual property to Pratt & Whitney. In exchange for the increased ownership and collaboration interests and intellectual property license, Pratt & Whitney paid Rolls-Royce $1.5 billion at closing with additional payments due to Rolls-Royce during the fifteen year period following closing of the purchase,

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conditional upon each hour flown by V2500-powered aircraft in service at the closing. Payments made to Rolls-Royce under this agreement are capitalized as collaboration intangible assets, as further discussed below. In October 2011, Pratt & Whitney and Rolls-Royce announced their intention to form a new partnership to develop an engine to power future mid-sized aircraft. In September 2013, following further discussion and because of the current regulatory environment, the parties agreed not to proceed with this partnership. As a result of this decision, an additional collaboration intangible asset payment was made to Rolls-Royce in accordance with the underlying agreement.
The collaboration interest and intellectual property licenses are reflected as intangible assets and will be amortized in relation to the economic benefits received over the remaining estimated 30 year life of the V2500 program. As a result of these transactions, Pratt & Whitney holds a 61% net interest in the collaboration and a 49.5% ownership interest in IAE. IAE’s business purpose is to coordinate the design, development, manufacturing and product support of the V2500 program through involvement with the collaborators. IAE retains limited equity with the primary economics of the V2500 program passed to the participants in the separate collaboration arrangement. As such, we have determined that IAE is a variable interest entity, and Pratt & Whitney its primary beneficiary under the criteria established in the FASB ASC Topic 810 “Consolidations” and has, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for IAE in our Consolidated Balance Sheet as of September 30, 2013 are as follows:
(Dollars in millions)
 
Current assets
$
1,636

Noncurrent assets
1,023

Total assets
$
2,659

 
 
Current liabilities
$
1,821

Noncurrent liabilities
1,067

Total liabilities
$
2,888


Goodwill. Changes in our goodwill balances for the nine months ended September 30, 2013 were as follows:
(Dollars in millions)
Balance as of
January 1, 2013
 
Goodwill 
resulting from business combinations
 
Foreign currency translation and other
 
Balance as of
September 30, 2013
Otis
$
1,583

 
$
139

 
$
(7
)
 
$
1,715

UTC Climate, Controls & Security
9,868

 
2

 
(149
)
 
9,721

Pratt & Whitney
1,238

 

 
35

 
1,273

UTC Aerospace Systems
14,754

 
301

 
(20
)
 
15,035

Sikorsky
353

 

 
(1
)
 
352

Total Segments
27,796

 
442

 
(142
)
 
28,096

Eliminations and other
5

 

 
(1
)
 
4

Total
$
27,801

 
$
442

 
$
(143
)
 
$
28,100


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Intangible Assets. Identifiable intangible assets are comprised of the following:
 
September 30, 2013
 
December 31, 2012
(Dollars in millions)
Gross Amount
 
Accumulated
Amortization
 
Gross Amount
 
Accumulated
Amortization
Amortized:
 
 
 
 
 
 
 
Service portfolios
$
2,235

 
$
(1,272
)
 
$
2,127

 
$
(1,202
)
Patents and trademarks
382

 
(178
)
 
412

 
(167
)
IAE collaboration
2,093

 

 
1,526

 

Customer relationships and other
12,025

 
(2,064
)
 
11,901

 
(1,718
)
 
16,735

 
(3,514
)
 
15,966

 
(3,087
)
Unamortized:
 
 
 
 
 
 
 
Trademarks and other
2,274

 

 
2,310

 

Total
$
19,009

 
$
(3,514
)
 
$
18,276

 
$
(3,087
)
The customer relationships intangible assets include payments made to our customers to secure certain contractual rights and are being amortized on a straight-line basis, as it approximates the underlying economic pattern of benefits. In accordance with the FASB ASC Topic 605, “Customer Payments and Incentives,” we classify amortization of such payments as a reduction of sales. The IAE collaboration intangible asset is being amortized based upon the economic pattern of benefits as represented by the underlying cash flows. As these cash flows have been negative to date, no amortization has yet been recorded. Amortization of intangible assets for the quarter and nine months ended September 30, 2013 was $180 million and $531 million respectively, compared with $166 million and $360 million for the same periods of 2012. The following is the expected amortization of intangible assets for the years 2013 through 2018: 
(Dollars in millions)
 
Remaining 2013
 
2014
 
2015
 
2016
 
2017
 
2018
Amortization expense
 
$
171

 
$
681

 
$
645

 
$
626

 
$
619

 
$
648


Note 2: Discontinued Operations
In 2012, the UTC Board of Directors approved plans for the divestiture of a number of non-core businesses, which were completed with the sale of Pratt & Whitney Rocketdyne (Rocketdyne) on June 14, 2013, as discussed below. Cash generated from these divestitures was used to repay debt incurred to finance the Goodrich acquisition.
The sale of substantially all operations of Rocketdyne to GenCorp Inc. generated a pre-tax loss of approximately $7 million ($3 million after tax) through September 30, 2013, which has been included in discontinued operations in the Condensed Consolidated Statement of Comprehensive Income. During the nine months ended September 30, 2012, we recorded pre-tax goodwill impairment charges of approximately $360 million ($220 million after tax) related to Rocketdyne.
On February 12, 2013, we completed the disposition of UTC Power to ClearEdge Power. The disposition resulted in payments by UTC totaling $48 million, which included capitalization of the business prior to the sale and interim funding of operations as the buyer took control of a loss generating business. We have no continuing involvement with the UTC Power business post disposition.
The legacy Hamilton Sundstrand Industrial businesses, as well as Clipper Windpower (Clipper), Rocketdyne and UTC Power all met the "held-for-sale" criteria in 2012. The results of operations, including the net realized gains and losses on disposition, and the related cash flows which resulted from these non-core businesses, have been reclassified to Discontinued Operations in our Condensed Consolidated Statements of Comprehensive Income and Cash Flows. The dispositions of Clipper and the legacy Hamilton Sundstrand Industrial businesses were completed in 2012.
The following summarized financial information for our discontinued operations businesses has been segregated from continuing operations and reported as Discontinued Operations:

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Quarter Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Discontinued Operations:
 
 
 
 
 
 
 
Net sales
$

 
$
522

 
$
309

 
$
1,607

Income (loss) from operations
$

 
$
91

 
$
63

 
$
(1,017
)
Income tax expense

 
(30
)
 
(32
)
 
(38
)
Income (loss) from operations, net of income taxes

 
61

 
31

 
(1,055
)
Gain (loss) on disposal
10

 
(26
)
 
(30
)
 
(62
)
Income tax benefit
7

 
135

 
20

 
294

Net income (loss) on discontinued operations
$
17

 
$
170

 
$
21

 
$
(823
)
Income (loss) from operations of discontinued operations for the nine months ended September 30, 2012 includes pre-tax impairment charges of approximately $1,135 million. There were no impairment charges for the quarter ended September 30, 2012. These amounts were previously included in loss on disposal of discontinued operations and have been reclassified for consistency of presentation.
Note 3: Earnings Per Share
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions, except per share amounts; shares in millions)
2013
 
2012
 
2013
 
2012
Net income attributable to common shareowners:
 
 
 
 
 
 
 
Net income from continuing operations
$
1,415

 
$
1,247

 
$
4,237

 
$
3,902

Net income (loss) from discontinued operations
17

 
168

 
21

 
(829
)
Net income attributable to common shareowners
$
1,432

 
$
1,415

 
$
4,258

 
$
3,073

Basic weighted average number of shares outstanding
900.8

 
896.3

 
900.9

 
893.6

Stock awards and equity units
14.7

 
10.9

 
13.2

 
11.7

Diluted weighted average number of shares outstanding
915.5

 
907.2

 
914.1

 
905.3

Earnings (Loss) Per Share of Common Stock - Basic:
 
 
 
 
 
 
 
Net income from continuing operations
$
1.57

 
$
1.39

 
$
4.70

 
$
4.37

Net income (loss) from discontinued operations
0.02

 
0.19

 
0.02

 
(0.93
)
Net income attributable to common shareowners
1.59

 
1.58

 
4.73

 
3.44

Earnings (Loss) Per Share of Common Stock - Diluted:
 
 
 
 
 
 
 
Net income from continuing operations
$
1.55

 
$
1.37

 
$
4.64

 
$
4.31

Net income (loss) from discontinued operations
0.02

 
0.19

 
0.02

 
(0.92
)
Net income attributable to common shareowners
1.57

 
1.56

 
4.66

 
3.39


The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period. These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would be anti-dilutive. For the quarter and nine months ended September 30, 2013 there were no anti-dilutive stock awards excluded from the computation. For the quarter and nine months ended September 30, 2012, the number of stock awards excluded from the computation was 6.1 million and 4.8 million, respectively. The dilutive impact of our equity units issued in 2012 was not significant for the quarter and nine months ended September 30, 2013. There was no impact on diluted earnings per share due to equity units for the quarter and nine months ended September 30, 2012.

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Note 4: Inventories and Contracts in Progress
(Dollars in millions)
September 30,
2013
 
December 31,
2012
Raw materials
$
1,967

 
$
1,861

Work-in-process
4,864

 
4,151

Finished goods
3,556

 
3,205

Contracts in progress
8,038

 
7,354

 
18,425

 
16,571

Less:
 
 
 
Progress payments, secured by lien, on U.S. Government contracts
(379
)
 
(274
)
Billings on contracts in progress
(7,281
)
 
(6,760
)
 
$
10,765

 
$
9,537

As of September 30, 2013 and December 31, 2012, inventories include capitalized contract development costs of $866 million and $823 million, respectively, related to certain aerospace programs. These capitalized costs are liquidated as production units are delivered to the customer. The capitalized contract development costs within inventories principally relate to costs capitalized on Sikorsky’s CH-148 contract with the Canadian Government. The CH-148 is a derivative of the H-92, a military variant of the S-92 helicopter.
Note 5: Borrowings and Lines of Credit
(Dollars in millions)
September 30,
2013
 
December 31,
2012
Commercial paper
$
100

 
$
320

Other borrowings
203

 
183

Total short-term borrowings
$
303

 
$
503

At September 30, 2013, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $4 billion pursuant to a $2 billion revolving credit agreement and a $2 billion multicurrency revolving credit agreement, both of which expire in November 2016. As of September 30, 2013, there were no borrowings under either of these revolving credit agreements. The undrawn portions of these revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of September 30, 2013, our maximum commercial paper borrowing authority as set by our Board of Directors was $4 billion. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, debt refinancing, and repurchases of our common stock.
On May 7, 2013, we commenced cash tender offers for two series of outstanding notes issued by Goodrich and the UTC 1.200% Senior Notes. A total of $874 million principal amount of all notes subject to the tender offers, and $36 million of the fair value adjustment related to the notes assumed in the Goodrich acquisition, were repaid, including approximately $103 million principal amount of the 2016 Goodrich 6.290% notes, approximately $98 million principal amount of the 2019 Goodrich 6.125% notes, and approximately $674 million principal amount of the 2015 UTC 1.200% Senior Notes. An extinguishment loss of approximately $18 million was recognized within Interest expense, net in the accompanying Condensed Consolidated Statements of Comprehensive Income.
On June 24, 2013, we redeemed all remaining outstanding 2015 UTC 1.200% Senior Notes, representing $327 million in aggregate principal, under our redemption notice issued on May 24, 2013. An extinguishment loss of approximately $6 million was recognized within Interest expense, net in the accompanying Condensed Consolidated Statements of Comprehensive Income.

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On August 23, 2013, we redeemed all remaining outstanding 2019 Goodrich 6.125% notes, representing $202 million in aggregate principal, under our redemption notice issued on July 24, 2013. On September 27, 2013, we redeemed all remaining outstanding 2021 Goodrich 3.600% notes, representing $294 million in aggregate principal, under our redemption notice issued on August 28, 2013. A combined extinguishment gain of approximately $1 million was recognized within Interest expense, net in the accompanying Condensed Consolidated Statements of Comprehensive Income.
As previously disclosed, on December 6, 2012, we announced that we had commenced cash tender offers for six series of outstanding notes issued by Goodrich. These offers expired on January 7, 2013. Approximately $637 million in aggregate principal amount of notes subject to the tender offers and $126 million of the fair value adjustment were repaid, with $635 million in aggregate principal amount being eligible for the early tender premium and approximately $2 million in aggregate principal amount being paid on January 8, 2013. An extinguishment loss of approximately $26 million was recognized during 2012 within Interest expense, net in the accompanying Condensed Consolidated Statements of Comprehensive Income.

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Long-term debt consisted of the following:
(Dollars in millions)
September 30,
2013
 
December 31,
2012
LIBOR§ plus 0.270% floating rate notes due 2013
$
1,000

 
$
1,000

LIBOR§ plus 0.500% floating rate notes due 2015
500

 
500

1.200% notes due 2015*

 
1,000

4.875% notes due 2015*
1,200

 
1,200

6.290% notes due 2016
188

 
291

5.375% notes due 2017*
1,000

 
1,000

1.800% notes due 2017*
1,500

 
1,500

6.800% notes due 2018
99

 
99

6.125% notes due 2019

 
300

6.125% notes due 2019*
1,250

 
1,250

8.875% notes due 2019
272

 
272

4.500% notes due 2020*
1,250

 
1,250

4.875% notes due 2020
171

 
171

3.600% notes due 2021

 
295

8.750% notes due 2021
250

 
250

3.100% notes due 2022*
2,300

 
2,300

1.550% junior subordinated notes due 2022
1,100

 
1,100

7.100% notes due 2027
141

 
141

6.700% notes due 2028
400

 
400

7.500% notes due 2029*
550

 
550

5.400% notes due 2035*
600

 
600

6.050% notes due 2036*
600

 
600

6.800% notes due 2036
134

 
134

7.000% notes due 2038
159

 
159

6.125% notes due 2038*
1,000

 
1,000

5.700% notes due 2040*
1,000

 
1,000

4.500% notes due 2042*
3,500

 
3,500

Project financing obligations
69

 
100

Other (including capitalized leases and discounts)
438

 
403

Total principal long-term debt
20,671

 
22,365

Other (fair market value adjustment)
214

 
353

Total long-term debt
20,885

 
22,718

Less: current portion
1,100

 
1,121

Long-term debt, net of current portion
$
19,785

 
$
21,597

*
We may redeem the above notes, in whole or in part, at our option at any time at a redemption price in U.S. Dollars equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semiannual basis at the adjusted treasury rate plus 10-50 basis points. The redemption price will also include interest accrued to the date of redemption on the principal balance of the notes being redeemed.
The junior subordinated notes are redeemable at our option, in whole or in part, on a date not earlier than August 1, 2017. The redemption price will be the principal amount, plus accrued and unpaid interest, if any, up to but excluding the redemption date. We may extend or eliminate the optional redemption date as part of a remarketing of the junior subordinated notes which could occur between April 29, 2015 and July 15, 2015 or between July 23, 2015 and July 29, 2015.
Includes notes and remaining fair market value adjustments that were assumed as a part of the Goodrich acquisition on July 26, 2012.
§ 
The three-month LIBOR rate as of September 30, 2013 was approximately 0.3%.

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We have an existing universal shelf registration statement filed with the Securities and Exchange Commission (SEC) for an indeterminate amount of equity and debt securities for future issuance, subject to our internal limitations on the amount of equity and debt to be issued under this shelf registration statement.
Note 6: Income Taxes
We conduct business globally and, as a result, UTC or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Belgium, Canada, China, France, Germany, Hong Kong, Italy, Japan, South Korea, Singapore, Spain, the United Kingdom and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2000.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest has also been recognized; interest accrued in relation to unrecognized tax benefits is recorded in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense.
It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change within a range of a net increase of $45 million to a net decrease of $490 million as a result of additional worldwide uncertain tax positions, the revaluation of current uncertain tax positions arising from developments in examinations, in appeals or in the courts, or the closure of tax statutes. A portion of this net change may impact the Company's income tax expense. Not included in the range are assessments made by the French Tax Authority of €237 million (approximately $320 million) related to the proposed disallowance of certain deductions claimed in France for tax years 2008 through 2011. This is a recurring issue and it is expected that similar challenges will be raised in subsequent tax years until the issue is resolved. Resolution discussions with the French Revenue Authority on this matter have been unsuccessful to date and UTC may be required to pursue the defense of the issue through litigation, which could be commenced as early as the fourth quarter of 2013. UTC intends to assert a vigorous defense and believes it should prevail on the issue. Accordingly, no accrual has been made for this matter. Also, not included in the range is €204 million (approximately $275 million) of tax benefits that we have claimed related to a 1998 German reorganization. A portion of these tax benefits was denied by the German Tax Office on July 5, 2012, as a result of the audit of tax years 1999 to 2000. On August 3, 2012, the Company filed suit in the German Tax Court and expects to litigate this case. In 2008 the German Federal Tax Court denied benefits to another taxpayer in a case involving a German tax law relevant to our reorganization. The determination of the German Federal Tax Court on this other matter was appealed to the European Court of Justice (ECJ) to determine if the underlying German tax law is violative of European Union (EU) principles. On September 17, 2009 the ECJ issued an opinion in this case that is generally favorable to the other taxpayer and referred the case back to the German Federal Tax Court for further consideration of certain related issues. In May 2010, the German Federal Tax Court released its decision, in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development. After consideration of the ECJ decision and the latest German Federal Tax Court decision, we continue to believe that it is more likely than not that the relevant German tax law is violative of EU principles and we have not accrued tax expense for this matter. As we continue to monitor developments related to this matter, it may become necessary for us to accrue tax expense and related interest.
UTC tax years 2006 through 2008 are currently before the Appeals Division of the IRS (IRS Appeals) for resolution discussions regarding certain proposed adjustments with which UTC does not agree. Such resolution discussions are currently expected to continue into 2014 and be completed within the next 12 months. Tax years 2009 and 2010 are under review by the Examination Division of the IRS (IRS Examination), which is expected to continue into 2014 and be completed within the next 12 months.
The Company is currently engaged in litigation regarding the proper timing of certain deductions taken by Goodrich in its tax years 2001 and 2002, prior to its acquisition by UTC, which could be settled as early as the fourth quarter of 2013. UTC believes that this matter is adequately reserved and it is not expected that any potential settlement would have a material adverse impact on financial results. The Company is also engaged in litigation with respect to a separate issue involving the proper timing of deductions taken by Goodrich Corporation in its tax years 2005 and 2006, prior to its acquisition by UTC, which is expected to continue into 2014. This is a recurring issue and it is expected that the IRS will continue to challenge it in

17

Table of Contents

subsequent tax years, potentially including post-acquisition years, until the issue is resolved. Goodrich pre-acquisition tax years 2007 through 2010 are currently before IRS Appeals for resolution discussions regarding certain disputed proposed adjustments, including the recurring timing issue described above. These resolution discussions are expected to continue into 2014.

Note 7: Employee Benefit Plans
Pension and Postretirement Plans. We sponsor both funded and unfunded domestic and foreign defined pension and other postretirement benefit plans, and defined contribution plans. As part of our acquisition of Goodrich on July 26, 2012, we assumed approximately $1.5 billion of pension and postretirement benefit plan obligations. Contributions to our plans were as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Defined Benefit Plans
$
21

 
$
209

 
$
72

 
$
233

Defined Contribution Plans
$
75

 
$
65

 
$
258

 
$
183

There were no contributions to our domestic defined benefit pension plans in the first nine months of 2013. In the first nine months of 2012, we made contributions of $201 million to our domestic defined benefit pension plans, all of which was contributed in the third quarter of 2012.
The following tables illustrate the components of net periodic benefit cost for our defined pension and other postretirement benefit plans:
 
Pension Benefits
Quarter Ended
September 30,
 
Other Postretirement Benefits
Quarter Ended
September 30,
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Service cost
$
142

 
$
131

 
$
1

 
$
1

Interest cost
343

 
344

 
9

 
10

Expected return on plan assets
(526
)
 
(503
)
 

 

Amortization
(8
)
 
(7
)
 
(2
)
 
(2
)
Recognized actuarial net loss (gain)
237

 
180

 
(1
)
 
(1
)
Net settlement and curtailment loss

 
15

 

 

Total net periodic benefit cost
$
188

 
$
160

 
$
7

 
$
8

 
Pension Benefits
Nine Months Ended
September 30,
 
Other Postretirement Benefits
Nine Months Ended
September 30,
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Service cost
$
428

 
$
361

 
$
3

 
$
3

Interest cost
1,029

 
970

 
28

 
26

Expected return on plan assets
(1,579
)
 
(1,415
)
 

 

Amortization
(26
)
 
(13
)
 
(8
)
 
(2
)
Recognized actuarial net loss (gain)
717

 
541

 
(3
)
 
(5
)
Net settlement and curtailment (gain) loss
(17
)
 
50

 

 

Total net periodic benefit cost
$
552

 
$
494

 
$
20

 
$
22

Net settlements and curtailment gains for pension benefits include curtailment gains of approximately $24 million related to, and recorded in, discontinued operations for the nine months ended September 30, 2013. There were no curtailment gains related to discontinued operations for the quarter ended September 30, 2013. Net settlements and curtailment losses for pension benefits include curtailment losses of approximately $24 million related to, and recorded in, discontinued operations for the nine months ended September 30, 2012. There were no curtailment losses related to discontinued operations for the quarter ended September 30, 2012.

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Table of Contents

Note 8: Restructuring Costs
During the nine months ended September 30, 2013, we recorded net pre-tax restructuring costs totaling $343 million for new and ongoing restructuring actions as follows:
(Dollars in millions)
 
Otis
$
68

UTC Climate, Controls & Security
66

Pratt & Whitney
122

UTC Aerospace Systems
65

Sikorsky
25

Eliminations and other
(1
)
Restructuring costs recorded within continuing operations
345

Restructuring costs recorded within discontinued operations
(2
)
Total
$
343

The net costs included $145 million recorded in cost of sales, $199 million in selling, general and administrative expenses, $1 million in other income, net, and ($2) million in discontinued operations. As described below, these costs primarily relate to actions initiated during 2013 and 2012.
2013 Actions. During the nine months ended September 30, 2013, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We recorded net pre-tax restructuring costs totaling $298 million, including $100 million in cost of sales and $198 million in selling, general and administrative expenses.
We expect the actions initiated in the nine months ended September 30, 2013 to result in net workforce reductions of approximately 3,600 hourly and salaried employees, the exiting of approximately 600 thousand net square feet of facilities and the disposal of assets associated with exited facilities. As of September 30, 2013, we have completed net workforce reductions of approximately 2,400 employees and have exited approximately 5,000 net square feet. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2013 and 2014. No specific plans for significant other actions have been finalized at this time.
The following table summarizes the accrual balances and utilization by cost type for the 2013 restructuring actions:
(Dollars in millions)
 
Severance
 
Asset
Write-Downs
 
Facility Exit,
Lease
Termination and
Other Costs
 
Total
Restructuring accruals at July 1, 2013
 
$
153

 
$

 
$
7

 
$
160

Net pre-tax restructuring costs
 
89

 
1

 
6

 
96

Utilization and foreign exchange
 
(108
)
 
(1
)
 
(2
)
 
(111
)
Balance at September 30, 2013
 
$
134

 
$

 
$
11

 
$
145

The following table summarizes expected, incurred and remaining costs for the 2013 restructuring actions by type:
(Dollars in millions)
 
Severance
 
Asset
Write-Downs
 
Facility Exit,
Lease
Termination and
Other Costs
 
Total
Expected costs
 
$
287

 
$
13

 
$
41

 
$
341

Costs incurred - quarter ended March 31, 2013
 
(19
)
 

 
(1
)
 
(20
)
Costs incurred - quarter ended June 30, 2013
 
(163
)
 
(12
)
 
(7
)
 
(182
)
Costs incurred - quarter ended September 30, 2013
 
(89
)
 
(1
)
 
(6
)
 
(96
)
Balance at September 30, 2013
 
$
16

 
$

 
$
27

 
$
43

The following table summarizes expected, incurred and remaining costs for the 2013 restructuring actions by segment:

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Table of Contents

(Dollars in millions)
Expected
Costs
 
Costs incurred Quarter ended
March 31, 2013
 
Costs incurred Quarter ended June 30, 2013
 
Costs incurred Quarter ended September 30, 2013
 
Remaining Costs at September 30, 2013
Otis
$
61

 
$
(6
)
 
$
(35
)
 
$
(12
)
 
$
8

UTC Climate, Controls & Security
81

 
(8
)
 
(18
)
 
(34
)
 
21

Pratt & Whitney
127

 
(6
)
 
(93
)
 
(22
)
 
6

UTC Aerospace Systems
55

 

 
(28
)
 
(19
)
 
8

Sikorsky
18

 

 
(8
)
 
(10
)
 

Eliminations and other
(1
)
 

 

 
1

 

Total
$
341

 
$
(20
)
 
$
(182
)
 
$
(96
)
 
$
43

2012 Actions. During the nine months ended September 30, 2013, we recorded net pre-tax restructuring costs totaling $44 million for restructuring actions initiated in 2012, including $40 million in cost of sales, $3 million in selling, general and administrative expenses, and $1 million in other income, net. The 2012 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations.
As of September 30, 2013, we have completed net workforce reductions of approximately 6,100 employees of an expected 7,300 employees, and have exited approximately 1.6 million net square feet of facilities of an expected 3.6 million net square feet. We are targeting the majority of the remaining workforce and facility related cost reduction actions for completion during 2013 and 2014.
The following table summarizes the accrual balances and utilization by cost type for the 2012 restructuring actions:
(Dollars in millions)
Severance
 
Asset
Write-Downs
 
Facility Exit,
Lease
Termination and
Other Costs
 
Total
Restructuring accruals at July 1, 2013
$
142

 
$

 
$
47

 
$
189

Net pre-tax restructuring costs
(3
)
 

 
9

 
6

Utilization and foreign exchange
(32
)
 

 
(13
)
 
(45
)
Balance at September 30, 2013
$
107

 
$

 
$
43

 
$
150

The following table summarizes expected, incurred and remaining costs for the 2012 restructuring actions by type:
(Dollars in millions)
Severance
 
Asset
Write-Downs
 
Facility Exit,
Lease
Termination and
Other Costs
 
Total
Expected costs
$
477

 
$
15

 
$
168

 
$
660

Costs incurred through December 31, 2012
(452
)
 
(14
)
 
(110
)
 
(576
)
Costs incurred - quarter ended March 31, 2013
(18
)
 
(1
)
 
(10
)
 
(29
)
Costs incurred - quarter ended June 30, 2013
1

 

 
(10
)
 
(9
)
Costs incurred - quarter ended September 30, 2013
3

 

 
(9
)
 
(6
)
Balance at September 30, 2013
$
11

 
$

 
$
29

 
$
40

The following table summarizes expected, incurred and remaining costs for the 2012 restructuring actions by segment:

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Table of Contents

(Dollars in millions)
Expected
Costs
 
Costs incurred through
December 31, 2012
 
Costs incurred Quarter ended
March 31, 2013
 
Costs incurred Quarter ended June 30, 2013
 
Costs incurred Quarter ended September 30, 2013
 
Remaining Costs at September 30, 2013
Otis
$
157

 
$
(146
)
 
$
(1
)
 
$
(2
)
 
$
(1
)
 
$
7

UTC Climate, Controls & Security
149

 
(123
)
 
(14
)
 
(1
)
 
1

 
12

Pratt & Whitney
98

 
(94
)
 
(1
)
 

 

 
3

UTC Aerospace Systems
154

 
(121
)
 
(8
)
 
(5
)
 
(5
)
 
15

Sikorsky
57

 
(47
)
 
(5
)
 
(1
)
 
(1
)
 
3

Eliminations and other
19

 
(19
)
 

 

 

 

Discontinued operations
26

 
(26
)
 

 

 

 

Total
$
660

 
$
(576
)
 
$
(29
)
 
$
(9
)
 
$
(6
)
 
$
40

2011 Actions. As of September 30, 2013, we have approximately $5 million of accrual balances remaining related to 2011 actions.
Note 9: Financial Instruments
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures.
By their nature, all financial instruments involve market and credit risks. We enter into derivative and other financial instruments with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. We limit counterparty exposure and concentration of risk by diversifying counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.
Foreign Currency Forward Contracts. We manage our foreign currency transaction risks to acceptable limits through the use of derivatives that hedge forecasted cash flows associated with foreign currency transaction exposures, which are accounted for as cash flow hedges, as we deem appropriate. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria of the Derivatives and Hedging Topic of the FASB ASC, the changes in the derivatives’ fair values are not included in current earnings but are included in “Accumulated other comprehensive loss.” These changes in fair value will subsequently be reclassified into earnings as a component of product sales or expenses, as applicable, when the forecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period in which it occurs.
To the extent the hedge accounting criteria are not met, the foreign currency forward contracts are utilized as economic hedges and changes in the fair value of these contracts are recorded currently in earnings in the period in which they occur. These include hedges that are used to reduce exchange rate risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (e.g. payables, receivables) and other economic hedges where the hedge accounting criteria were not met.
The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $12.6 billion and $11.8 billion at September 30, 2013 and December 31, 2012, respectively.
We enter into transactions that are subject to arrangements designed to provide for netting of offsetting obligations in the event of the insolvency or default of a counterparty. However, we have not elected to offset multiple contracts with a single counterparty and, as a result, the fair value of the derivative instruments in a loss position is not offset against the fair value of derivative instruments in a gain position.
The following table summarizes the fair value of derivative instruments as of September 30, 2013 and December 31, 2012 which consist solely of foreign exchange contracts:

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Table of Contents

 
September 30, 2013
 
December 31, 2012
(Dollars in millions)
Derivatives
designated
as hedging
instruments
 
Derivatives not
designated as
hedging
instruments
 
Derivatives
designated
as hedging
instruments
 
Derivatives not
designated as
hedging
instruments
Balance Sheet Asset Locations:
 
 
 
 
 
 
 
Other assets, current
$
38

 
$
23

 
$
48

 
$
47

Other assets
22

 
3

 
30

 
3

 
60

 
26

 
78

 
50

Total Asset Derivative Contracts
 
 
$
86

 
 
 
$
128

Balance Sheet Liability Locations:
 
 
 
 
 
 
 
Accrued liabilities
$
20

 
$
53

 
$
10

 
$
136

Other long-term liabilities
13

 
2

 
1

 
2

 
33

 
55

 
11

 
138

Total Liability Derivative Contracts
 
 
$
88

 
 
 
$
149

The impact from foreign exchange derivative instruments that qualified as cash flow hedges was as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Gain (loss) recorded in Accumulated other comprehensive loss
$
97

 
$
146

 
$
(64
)
 
$
83

Gain (loss) reclassified from Accumulated other comprehensive loss into Product sales (effective portion)
$
1

 
$
7

 
$
(22
)
 
$
26

Assuming current market conditions continue, a $15 million pre-tax gain is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At September 30, 2013, all derivative contracts accounted for as cash flow hedges will mature by September 2015.
The effect on the Condensed Consolidated Statement of Comprehensive Income from derivative contracts not designated as hedging instruments was as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2013
 
2012
 
2013
 
2012
Gain (loss) recognized in Other income, net
$
10

 
$
(19
)
 
$
33

 
$
(21
)
Valuation Hierarchy. The following table provides the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and nonrecurring basis in our Condensed Consolidated Balance Sheet as of September 30, 2013 and December 31, 2012: 
(Dollars in millions)
Total Carrying
Value at
September 30, 2013
 
Quoted price in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Unobservable
inputs
(Level 3)
Recurring fair value measurements:
 
 
 
 
 
 
 
Available-for-sale securities
$
882

 
$
882

 
$

 
$

Derivative assets
86

 

 
86

 

Derivative liabilities
(88
)
 

 
(88
)
 

Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Business dispositions
40

 

 
40

 

During the nine months ended September 30, 2013, we recorded an approximately $38 million net gain from UTC Climate, Controls & Security's ongoing portfolio transformation, primarily due to a gain on the sale of a business in Hong Kong. In addition, we recorded an approximately $193 million gain from the sale of the Pratt & Whitney Power Systems business (see Note 1), as well as an approximately $25 million charge to adjust the fair value of a Pratt & Whitney joint venture investment.


22

Table of Contents

(Dollars in millions)
Total Carrying
Value at
December 31,
2012
 
Quoted price in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Unobservable
inputs
(Level 3)
Recurring fair value measurements:
 
 
 
 
 
 
 
Available-for-sale securities
$
781

 
$
781

 
$

 
$

Derivative assets
128

 

 
128

 

Derivative liabilities
(149
)
 

 
(149
)
 

Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Equity method investment
432

 

 
432

 

Business dispositions
84

 

 
84

 

During the nine months ended September 30, 2012, we recorded net gains on nonrecurring fair value measurements of approximately $220 million within Other income, net from UTC Climate, Controls & Security's ongoing portfolio transformation efforts. These net gains include approximately $357 million from the sales of controlling interests in manufacturing and distribution joint ventures in Asia and Canada, of which approximately $272 million were non-cash. These gains were partially offset by $103 million of other-than-temporary impairment charges related to business dispositions and a $32 million loss on the disposition of the U.S. fire and security branch operations. In addition, we recorded a $34 million gain on the fair market measurement of the shares of Goodrich that the Company held prior to its acquisition of Goodrich.
Valuation Techniques. Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally. They are measured at fair value using closing stock prices from active markets and are classified within Level 1 of the valuation hierarchy. Our derivative assets and liabilities are managed on the basis of net exposure to market and credit risks of each of the counterparties. The fair value for these derivative assets and liabilities is measured at the price that would be received on a net asset position for a particular risk or to transfer a net liability position for a particular risk in an orderly transaction between market participants at the measurement date. Our derivative assets and liabilities include foreign exchange contracts and commodity derivatives that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. Based on our continued ability to trade securities and enter into forward contracts, we consider the markets for our fair value instruments to be active. As of September 30, 2013, there were no significant transfers in and out of Level 1 and Level 2.
As of September 30, 2013, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.
The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Condensed Consolidated Balance Sheet at September 30, 2013 and December 31, 2012:
 
September 30, 2013
 
December 31, 2012
(Dollars in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term receivables
$
651

 
$
642

 
$
499

 
$
464

Customer financing notes receivable
438

 
388

 
375

 
371

Short-term borrowings
(303
)
 
(303
)
 
(503
)
 
(503
)
Long-term debt (excluding capitalized leases)
(20,837
)
 
(20,937
)
 
(22,665
)
 
(25,606
)
Long-term liabilities
(284
)
 
(257
)
 
(182
)
 
(167
)
The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Condensed Consolidated Balance Sheet as of September 30, 2013:

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Table of Contents

(Dollars in millions)
Total Fair
Value at
September 30,
2013
 
Quoted price in
active markets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Unobservable
inputs
(Level 3)
Long-term receivables
$
642

 
$

 
$
642

 
$

Customer financing notes receivable
388

 

 
388

 

Short-term borrowings
(303
)
 

 
(100
)
 
(203
)
Long-term debt (excluding capitalized leases)
(20,937
)
 

 
(20,830
)
 
(107
)
Long-term liabilities
(257
)
 

 
(257
)
 

Valuation Techniques. Our long-term receivables and customer financing notes receivable include our commercial and aerospace long-term trade, government and other receivables, leases, and notes receivable. Our long-term receivables and customer financing notes receivable are measured and presented in the table above at fair value using an income approach based on the present value of the contractual, promised or most likely cash flows discounted at observed or estimated market rate for comparable assets or liabilities that are traded in the market. Based on these inputs, long-term receivables and customer financing notes receivable are presented in the table above within Level 2 of the valuation hierarchy. Our short-term borrowings include commercial paper and other international credit facility agreements. Our long-term debt includes domestic and international notes. Commercial paper and domestic long-term notes are measured and presented in the table above at fair values based on comparable transactions and current market interest rates quoted in active markets for similar assets, and are classified within Level 2 of the valuation hierarchy. Foreign short-term borrowings and foreign long-term notes are measured and presented in the table above at fair value based on comparable transactions and rates calculated from the respective countries’ yield curves. Based on these inputs, foreign borrowings and foreign long-term notes are classified within Level 3 of the valuation hierarchy. The fair values of Accounts receivable and Accounts payable approximate the carrying amounts due to the short-term maturities of these instruments.
We had commercial aerospace financing and other contractual commitments totaling approximately $11.7 billion at September 30, 2013, including approximately $6.4 billion of IAE commitments, related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms. We had commercial aerospace financing and other contractual commitments of approximately $10.9 billion at December 31, 2012, which included approximately $5.8 billion of IAE commitments. Risks associated with changes in interest rates on these commitments are mitigated by the fact that interest rates are variable during the commitment term, and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded. The fair value of the commitments is not readily determinable.
Note 10: Credit Quality of Long-Term Receivables
A long-term or financing receivable represents a contractual right to receive money on demand or on fixed and determinable dates, including trade receivable balances with maturity dates greater than one year. Our long-term and financing receivables primarily represent balances related to the aerospace businesses such as long-term trade accounts receivable, leases, and notes receivable. We also have other long-term receivables in our commercial businesses; however, both the individual and aggregate amounts are not significant.
Long-term trade accounts receivable represent amounts arising from the sale of goods and services with a contractual maturity date of greater than one year and are recognized as “Other assets” in our Condensed Consolidated Balance Sheet. Notes and leases receivable represent notes and lease receivables other than receivables related to operating leases, and are recognized as “Customer financing assets” in our Condensed Consolidated Balance Sheet. The following table summarizes the balance by class of aerospace long-term receivables as of September 30, 2013 and December 31, 2012:
(Dollars in millions)
September 30,
2013
 
December 31,
2012
Long-term trade accounts receivable
$
630

 
$
593

Notes and leases receivable
630

 
584

Total long-term receivables
$
1,260

 
$
1,177

Economic conditions and air travel influence the operating environment for most airlines, and the financial performance of our aerospace businesses is directly tied to the economic conditions of the commercial aerospace and defense industries. Additionally, the value of the collateral is also closely tied to commercial airline performance and may be subject to exposure of reduced valuation as a result of market declines. We determine a receivable is impaired when, based on current information and

24

Table of Contents

events, it is probable that we will be unable to collect amounts due according to the contractual terms of the receivable agreement. Factors considered in assessing collectability and risk include, but are not limited to, examination of credit quality indicators and other evaluation measures, underlying value of any collateral or security interests, significant past due balances, historical losses, and existing economic conditions.
Long-term receivables can be considered delinquent if payment has not been received in accordance with the underlying agreement. If determined delinquent, long-term trade accounts receivable and notes and leases receivable balances accruing interest may be placed on non-accrual status. We record potential losses related to long-term receivables when identified. The reserve for credit losses on these receivables relates to specifically identified receivables that are evaluated individually for impairment. For notes and leases receivable, we determine a specific reserve for exposure based on the difference between the carrying value of the receivable and the estimated fair value of the related collateral in connection with the evaluation of credit risk and collectability. For long-term trade accounts receivable, we evaluate credit risk and collectability individually to determine if an allowance is necessary. Uncollectible long-term receivables are written-off when collection of the indebtedness has been pursued for a reasonable period of time without collection; the customer is no longer in operation; or judgment has been levied, but the underlying assets are not adequate to satisfy the indebtedness. At both September 30, 2013 and December 31, 2012, we did not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or considered to be impaired.
The following table provides the balance of aerospace industry long-term receivables and summarizes the associated changes in the reserve for estimated credit losses and exposure for the nine months ended September 30, 2013 and 2012, respectively:
(Dollars in millions)
2013
 
2012
Beginning balance of the reserve for credit losses and exposure as of January 1
$
60

 
$
70

Provision
7

 
1

Charge-offs
(13
)
 

Recoveries
(1
)
 
(5
)
Other
(3
)
 
(5
)
Ending balance of the reserve for credit losses and exposure: individually evaluated for impairment as of September 30
$
50

 
$
61

Ending balance of long-term receivables: individually evaluated for impairment as of September 30
$
1,260

 
$
1,036

We determine credit ratings for each customer in the portfolio based upon public information and information obtained directly from our customers. We conduct a review of customer credit ratings, published historical credit default rates for different rating categories, and multiple third party aircraft value publications as a basis to validate the reasonableness of the allowance for losses on these balances quarterly or when events and circumstances warrant. The credit ratings listed below range from “A” which indicates an extremely strong capacity to meet financial obligations and the receivable is either collateralized or uncollateralized, to “D” which indicates that payment is in default and the receivable is uncollateralized. There can be no assurance that actual results will not differ from estimates or that consideration of these factors in the future will not result in an increase or decrease to the allowance for credit losses on long-term receivables.
The following table summarizes the credit risk profile by creditworthiness category for aerospace long-term receivable balances at September 30, 2013 and December 31, 2012:
 
September 30, 2013
 
December 31, 2012
(Dollars in millions)
Long-term
trade accounts
receivable
 
Notes and
leases
receivable
 
Long-term