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United Technologies 10-K 2010
Annual Report for the year ended December 31, 2009

Exhibit 13

Five-Year Summary

 

 

 

(in millions, except per share amounts)    2009     2008     2007     2006     2005  
         

For the year

                    

Revenues

   $ 52,920     $ 59,757     $ 55,716     $ 48,651     $ 43,414  

Research and development

     1,558       1,771       1,678       1,529       1,367  

Restructuring and other costs

     830       357       166       288       267  

Net income

     4,179       5,053       4,548       3,998       3,336  

Income attributable to common shareowners before cumulative effect of a change in accounting principle

     3,829       4,689       4,224       3,732       3,164  

Net income attributable to common shareowners 

     3,829       4,689       4,224       3,732       3,069  
                                          

Earnings per share:

                    

Basic:

                    

Income attributable to common shareowners before cumulative effect of a change in accounting principle

     4.17       5.00       4.38       3.81       3.19  

Cumulative effect of a change in accounting principle

                                 (.09

Net income attributable to common shareowners

     4.17       5.00       4.38       3.81       3.10  

Diluted:

                    

Income attributable to common shareowners before cumulative effect of a change in accounting principle

     4.12       4.90       4.27       3.71       3.12  

Cumulative effect of a change in accounting principle

                                 (.09

Net income attributable to common shareowners

     4.12       4.90       4.27       3.71       3.03  

Cash dividends per common share

     1.54       1.35       1.17       1.02       .88  
                                          

Average number of shares of Common Stock outstanding:

                    

Basic

     917       938       964       980       991  

Diluted

     929       956       989       1,006       1,014  

Cash flow from operations

     5,353       6,161       5,330       4,803       4,334  

Capital expenditures

     826       1,216       1,153       954       929  

Acquisitions, including debt assumed

     703       1,448       2,336       1,049       4,583  

Repurchase of Common Stock

     1,100       3,160       2,001       2,068       1,181  

Dividends paid on Common Stock

     1,356       1,210       1,080       951       832  
                                          
         

At year end

                    

Working capital

   $ 5,281     $ 4,665     $ 4,602     $ 3,636     $ 1,861  

Total assets 1,5

     55,762       56,837       54,888       47,382       46,159  

Long-term debt, including current portion

     9,490       10,453       8,063       7,074       6,628  

Total debt

     9,744       11,476       9,148       7,931       8,240  

Debt to total capitalization 2,5,6

     32%        41%        29%        30%        32%   

Total equity 2,5,6

     20,999       16,681       22,064       18,133       17,769  

Number of employees

     206,700       223,100       225,600       214,500       218,200  
                                          

 

 

During 2005, we acquired Kidde, which in conjunction with Chubb (acquired during 2003) forms the UTC Fire & Security segment.

 

During 2005, a 2-for-1 split of our common stock was effected in the form of a share dividend.

 

Note 1   During 2009, we adopted the provisions of the Collaborative Arrangements Topic of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) which requires that participants in a collaborative arrangement report costs incurred and revenues generated from such transactions on a gross basis and in the appropriate lines in each company’s financial statements. The provisions of this Topic were applied retrospectively to all periods presented.
Note 2   During 2009, we adopted the provisions under the Consolidation Topic of the FASB ASC as it relates to the accounting and reporting standards for noncontrolling interests (previously referred to as minority interests) in consolidated subsidiaries as reported in consolidated financial statements. These provisions require that the carrying value of noncontrolling interests be removed from the mezzanine section of the balance sheet and reclassified as equity, and that consolidated net income be recast to include net income attributable to the noncontrolling interests. The provisions of this Topic were applied retrospectively to all periods presented.
Note 3   During 2005, we adopted accounting standards related to Asset Retirement and Environmental Obligations and the accounting for Share-Based Payments.
Note 4   Excludes dividends paid on Employee Stock Ownership Plan Common Stock.
Note 5   During 2006, we adopted the accounting related to Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans which resulted in an approximately $1.8 billion non-cash charge to equity and a $2.4 billion non-cash reduction to total assets. In addition, we early-adopted the measurement date provisions of this standard effective January 1, 2007, which increased shareowners’ equity by approximately $425 million and decreased long-term liabilities by approximately $620 million.
Note 6   The increase in the 2008 debt to total capitalization ratio reflects unrealized losses of approximately $4.2 billion, net of taxes, associated with the effect of market conditions on our pension plans, and the 2008 debt issuances totaling $2.25 billion. The decrease in the 2009 debt to total capitalization ratio, as compared to 2008, reflects the reversal of unrealized losses in our pension plans of approximately $1.1 billion, the beneficial impact of foreign exchange rate movement of approximately $1.0 billion, and the reduction of approximately $1.7 billion of total debt.

 

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Management’s Discussion and Analysis

 

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.” Certain reclassifications have been made to the prior year amounts to conform to the current year presentation of noncontrolling interests and collaborative arrangements as required by the Consolidation and Collaborative Arrangements Topics, respectively, of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC). See discussion in Notes 9 and 15, respectively, to the Consolidated Financial Statements. The 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. The aerospace businesses serve commercial and government aerospace customers in both the original equipment and aftermarket parts and services markets. In addition, a portion of these businesses serve customers in certain industrial markets. Our consolidated revenues were derived from the commercial and aerospace businesses as follows (revenues from Hamilton Sundstrand’s and Pratt & Whitney’s industrial markets are included in “commercial and industrial”):

 

      2009     2008      2007

Commercial and industrial

   58%      61%       62%

Military aerospace and space

   21%      17%       16%

Commercial aerospace

   21%      22%       22%
                   
   100%      100%       100%
                   

In 2009, approximately 58% of our consolidated sales were original equipment and 42% were aftermarket parts and services, while in 2008 the amounts were 60% and 40%, respectively. The amounts in 2007 were 59% and 41%, respectively. The overall shift in composition noted in the table above largely reflects the decline in commercial revenues resulting from the adverse economic environment and foreign currency translation impact, accompanied by significant growth in military helicopter deliveries as discussed more fully below.

As worldwide businesses, our operations can be affected by industrial, economic and political factors on both a regional and global level. To limit the impact of any one industry or the economy of any single country on our consolidated operating

results, our strategy has been, and continues to be, the maintenance of a balanced and diversified portfolio of businesses. Our businesses include both commercial and aerospace operations, original equipment manufacturing (OEM) businesses with extensive related aftermarket parts and services businesses as noted above, as well as the combination of shorter cycles in our commercial businesses, particularly Carrier, and longer cycles in our aerospace businesses. Our customers include companies in the private sector and governments, and our businesses reflect extensive geographic diversification that has evolved with the continued globalization of world economies. The composition of total revenues from outside the United States, including U.S. export sales, in dollars and as a percentage of total segment revenues, has been as follows:

 

(in millions of dollars)   2009     2008     2007     2009     2008     2007

Europe

  $ 12,269     $ 15,180     $ 13,917         23%          25%          25%

Asia Pacific

    7,138       8,212       7,991     13%      14%      14%

Other Non-U.S.

    5,040       6,619       5,783     10%      11%      10%

U.S. Exports

    6,996       7,262       6,492     13%      12%      12%
                                         

International segment revenues

  $ 31,443     $ 37,273     $ 34,183     59%      62%      61%
                                         

As part of our growth strategy, we invest in businesses in certain countries that carry high levels of currency, political and/or economic risk, such as Argentina, Brazil, China, India, Russia, South Africa and countries in the Middle East. At December 31, 2009, our investment in any one of these countries did not exceed 5% of consolidated shareowners’ equity.

The global economic turmoil that began in 2008 continued throughout 2009 with U.S. unemployment near record highs, severely diminished liquidity and credit availability, and global gross domestic product (GDP) contraction. Most airlines incurred significant losses as both revenue passenger miles (RPM) and average ticket prices declined, while weaker corporate profits contributed to a substantial decline in business jet production. The overall recessionary conditions had a significant adverse impact on the domestic and many international housing markets as well as the worldwide commercial construction markets. As a result of these poor market conditions, 2009 total revenues declined 11%, when compared with 2008, including a 7% organic revenue decline. The decline in organic revenues reflects lower volumes across all business units with the exception of Sikorsky, which continued to experience the benefits of strong government spending and helicopter demand.

In recognition of global economic challenges and expected volume declines, we announced a significant restructuring initiative in early 2009 designed to reduce structural and overhead costs across all of our businesses in order to partially mitigate the adverse volume impact, in addition to better positioning us for a


 

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resumption of earnings growth expected in 2010. Restructuring charges in 2009 totaled $830 million and included costs related to headcount reductions of approximately 14,600 employees. Segment operating margin declined 30 basis points year-over-year, from 13.4% in 2008 to 13.1% in 2009. This year-over-year decrease includes the net adverse impact of approximately 80 basis points of restructuring charges and one-time items. Excluding the significant restructuring charges and one-time items, segment operating margin reflects the benefits from an intensive focus on cost reduction and savings realized from actions taken in 2009.

Although there were signs that the challenging and difficult end market environments in which our businesses operated over the past year were beginning to stabilize in the second half of 2009, there is still considerable uncertainty as to the shape and length of any economic recovery. Emerging markets have started to show some indications of recovery, particularly China, India and Brazil, although this recovery reflects, in part, the effects of significant government intervention and stimulus initiatives in those markets. In the U.S., both the financial and housing markets have shown recent signs of stability, but unemployment remains high with both consumer spending and confidence remaining weak. The general lack of global credit, stemming in part from the regulatory pressure on financial institutions to solidify their internal financial positions, is continuing to have an adverse impact on the commercial construction markets with growth in China and the emerging markets partially offsetting the declines in the U.S. and Europe.

Consistent with prior years, our backlog includes both short cycle orders that are expected to be realized in the near term, as well as longer cycle orders that are expected to be recognized over a period of years. With the good conversion of backlog into revenues in 2009, and the amortization profile of the long cycle backlog, we are expecting only flat to slight organic revenue growth in 2010 as compared with 2009. Further, any growth would likely be weighted towards the second half of 2010 and would be dependent upon further recovery in order rates. However, as noted previously, earnings growth is expected to resume in 2010 due to both lower restructuring costs and the savings generated from the restructuring actions we undertook in 2009, and our continued focus on cost containment and operational efficiencies.

As discussed below in “Results of Operations,” operating profit in both 2009 and 2008 benefited from gains related to several business divestiture activities and from certain pretax interest adjustments. Our earnings growth strategy contemplates earnings from organic revenue growth, including growth from new product development and product improvements, and incremental earnings from our investments in acquisitions. We

invested $703 million and $1.4 billion (including debt assumed of $0 and $196 million, respectively) in the acquisition of businesses across the entire Company in 2009 and 2008, respectively. Acquisitions in both 2009 and 2008 consisted principally of a number of small acquisitions in both our aerospace and commercial businesses.

In November 2009, we entered into an agreement with General Electric Company (GE) to purchase the GE Security business for approximately $1.8 billion. Subject to regulatory approvals and the satisfaction of customary closing conditions, the closing is anticipated to take place early in the second quarter of 2010. GE Security, part of GE Technology Infrastructure, supplies security and fire safety technologies for commercial and residential applications through a broad product portfolio that includes fire detection and life safety systems, intrusion alarms, video surveillance and access control systems. We intend to incorporate the GE Security business within the existing UTC Fire & Security segment, which will significantly enhance UTC Fire & Security’s geographic diversity with GE Security’s strong North American presence and increased product and technology offerings.

As a result of the January 1, 2009 adoption of the provisions of the Business Combination Topic of the FASB ASC, both acquisition and restructuring costs associated with a business combination are now expensed subsequent to the acquisition date. Depending upon the nature and level of acquisition activity in 2010, earnings could be adversely impacted due to acquisition and restructuring actions initiated in connection with the integration of the acquisitions.

In December 2009, we agreed to acquire a 49.5% equity stake in Clipper Windpower Plc (Clipper), a California-based wind turbine manufacturer that trades on the AIM London Stock Exchange. This investment is intended to expand our power generation portfolio and allow us to enter the wind power segment by leveraging our expertise in blade technology, turbines and gearbox design. The total cost was £166 million (approximately $270 million) for the purchase of 84.3 million newly issued shares and 21.8 million shares from existing shareowners. We completed the acquisition of this investment on January 12, 2010 and will account for it under the equity method of accounting. Pursuant to our agreement with Clipper, we are prohibited from acquiring additional shares of Clipper within two years of the closing date that would result in an equity stake in excess of 49.9% without prior approval of Clipper.

For additional discussion of acquisitions and restructuring, see “Liquidity and Financial Condition,” “Restructuring and Other Costs” and Notes 2 and 12 to the Consolidated Financial Statements.


 

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Results of Operations

Revenues

 

(in millions of dollars)    2009      2008      2007

Sales

   $ 52,425      $ 59,119      $ 54,876

Other income, net

     495        638        840
                          

Total revenues

   $ 52,920      $ 59,757      $ 55,716
                          

The 11% decline in consolidated revenues in 2009, as compared with 2008, reflects organic revenue contraction (7%), the adverse impact from foreign currency translation (3%) and the impact of net divestitures (1%) resulting from the portfolio rationalization efforts undertaken, principally at Carrier. As discussed in “Business Overview,” the organic decline in revenue reflects volume decreases at most of our businesses resulting from the challenging global economic conditions experienced during 2009. The depressed residential housing and commercial construction markets drove volume declines across all of our commercial businesses, while declines in aerospace aftermarket revenues at both Pratt & Whitney and Hamilton Sundstrand, coupled with the adverse impact from a depressed business jet market, led to an overall decline in aerospace revenues. Record aircraft deliveries at Sikorsky helped to partially mitigate the effect of other aerospace volume losses.

The consolidated revenue increase of $4.0 billion or 7% in 2008 reflected organic revenue growth (5%), growth from net acquisitions (1%), and the favorable impact of foreign currency translation (1%) resulting from the weakness of the U.S. dollar relative to other currencies, particularly the Euro, experienced for most of 2008. All segments, except for Carrier, experienced organic revenue growth in 2008. Organic growth was led by the aerospace businesses which benefited from the general strength of the commercial aerospace OEM, regional and business jet markets, and demand for military helicopters. Commercial aerospace aftermarket growth rates moderated due to declines in large commercial spares orders resulting from the airlines’ consolidation and continued reductions of capacity in response to market conditions. Commercial aerospace OEM growth reflected strong production levels at the airframe manufacturers, while military OEM revenue growth was driven largely by government demand for military helicopters. In the commercial businesses, revenue growth at Otis reflected increases in Europe and North America, led by new equipment sales generated from the strong backlog entering 2008. At Carrier, significantly lower unit shipments of U.S. residential product due to the continued weakness in the North American residential market, and lower customer demand for commercial refrigeration products as a result of weak economic conditions contributed to a decline in organic revenues. UTC Fire & Security revenues increased largely on the strength of fire safety sales in the oil & gas and marine industries as well as growth in Asia.

 

The decrease in other income in 2009, as compared with 2008, largely reflects the absence of gains from the sale of marketable securities, lower royalty and interest income across the businesses, lower net year-over-year gains on various fixed asset disposals, lower joint venture equity income at Carrier, and lower net year-over-year gains generated from business divestiture activity. These decreases were partially offset by lower net hedging costs on our cash management activities in 2009. Other income in 2009 includes an approximately $60 million gain at Carrier resulting from the contribution of a majority of its U.S. residential sales and distribution businesses into the new venture with Watsco, as well as a $52 million gain recognized at Otis on the re-measurement to fair value of an interest in a joint venture, and $17 million of favorable pretax interest income adjustments pertaining to global tax examination activity related primarily to the completion of our review of the 2004 to 2005 Internal Revenue Service (IRS) audit report.

The decrease in other income in 2008, as compared with 2007, was largely related to the absence of certain gains reflected in 2007. Other income in 2008 included gains generated during 2008 from business divestiture activity, including a $67 million gain at Carrier from the contribution of a business into a new venture operating in the Middle East and the Commonwealth of Independent States, an approximately $37 million non-cash gain recognized on the sale of a partial investment at Pratt & Whitney and a gain of approximately $25 million related to a disposal of a business at Hamilton Sundstrand. Also, other income in 2008 reflected a $38 million gain from the sale of marketable securities and an approximately $12 million favorable pre-tax interest adjustment related to the settlement of disputed adjustments from the 2000 through 2003 examination with the Appeals Division of the Internal Revenue Service (IRS). These gains were partially offset by the adverse impact of increased hedging costs on our cash management activities of approximately $80 million. The balance of other income was comprised of interest and joint venture income, royalties, and other miscellaneous operating activities. Other income for 2007 included approximately $150 million in gains resulting from the sale of marketable securities, an approximately $80 million gain recognized on the sale of land by Otis, gains of approximately $83 million on the disposal of certain non-core businesses, and approximately $28 million in pre-tax interest income relating to a re-evaluation of our tax liabilities and contingencies based on global tax examination activity during 2007, including completion of our review of the 2000 through 2003 IRS audit report and our related protest filing.

Gross Margin

 

(in millions of dollars)    2009     2008      2007

Gross margin

   $ 13,564     $ 15,482      $ 13,997

Percentage of sales

     25.9%        26.2%         25.5%
                         

 

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The 2009 year-over-year decrease in gross margin (product and service sales less the cost of product and services sold) as a percentage of sales of 30 basis points primarily reflects higher year-over-year restructuring charges (50 basis points). Continued focus on cost reduction, savings from previously initiated restructuring actions, net operational efficiencies, margin growth experienced at Otis from lower commodity prices and the continued shift toward higher margin contractual maintenance sales offset the adverse impacts of lower sales volumes, particularly in our higher margin aerospace aftermarket and transport refrigeration businesses.

The improvement in gross margin as a percentage of sales of 70 basis points in 2008 was due largely to the benefit from higher volumes, savings from previously initiated restructuring actions and net operational efficiencies (approximately 60 basis points combined). The absence of the 2007 EU Fine, net of reserves (approximately 40 basis points) was partially offset by the adverse impact of higher commodity costs, net of pricing (approximately 20 basis points) and increased restructuring costs (approximately 10 basis points) contributing to the remainder of the year-over-year change.

Research and Development

 

(in millions of dollars)    2009     2008      2007

Company-funded

   $ 1,558     $ 1,771      $ 1,678

Percentage of sales

     3.0%        3.0%         3.1%

Customer-funded

   $ 2,095     $ 2,008      $ 1,872

Percentage of sales

     4.0%        3.4%         3.4%
                         

The decrease in company-funded research and development in 2009, compared with 2008, principally reflects lower expenditures at Pratt & Whitney and Hamilton Sundstrand resulting from shifts in the timing of program development activities, lower requirements on key development programs, and the continued focus on cost reduction. The decrease at Pratt & Whitney was driven largely by the timing of program development activities, while the decrease at Hamilton Sundstrand primarily reflects lower expenditures on the Boeing 787-8 program with the first flight having taken place in December 2009. The increase in company-funded research and development in 2008, compared with 2007, was led by continued investments in Pratt & Whitney’s next generation product family including the PurePower PW1000G (PurePower) engine, which features Geared Turbofan (GTF) technology. General increases across the businesses comprised the remainder of the year-over-year increase. Company-funded research and development spending is subject to the variable nature of program development schedules.

The increase in customer-funded research and development in 2009, compared with 2008, largely reflects increases on various

commercial and space programs at Hamilton Sundstrand, and higher development spending on the CH-53K program at Sikorsky, partially offset by reduced expenditures at Pratt & Whitney on the Joint Strike Fighter development program as it nears completion. The increase in customer-funded research and development spending in 2008, as compared with 2007, relates largely to increased engineering effort in the J-2X propulsion program at Pratt & Whitney Rocketdyne as well as various space programs at Hamilton Sundstrand, while development spending on the Joint Strike Fighter program across the company decreased.

Company-funded research and development spending for 2010 is expected to increase by approximately $100 million from 2009 levels as a result of shifts in timing of program development activities, primarily in the aerospace businesses.

Selling, General and Administrative

 

(in millions of dollars)    2009     2008      2007

Selling, general and administrative

   $ 6,036     $ 6,724      $ 6,109

Percentage of sales

     11.5%        11.4%         11.1%
                         

The decrease in selling, general and administrative expenses in 2009, as compared with 2008, is due primarily to a continued focus on cost reduction and the impact from restructuring and cost saving initiatives undertaken in 2008 and 2009 in anticipation of adverse economic conditions. As a percentage of sales, selling, general and administrative expenses increased 10 basis points reflecting higher restructuring costs (approximately 30 basis points). The benefit from cost reduction actions in such areas as travel, employee attrition, employee salary related reductions, and the favorable impact of foreign exchange more than offset the adverse impact of the higher restructuring costs.

Increases in selling, general and administrative expenses in 2008 were due primarily to general increases across the businesses in support of higher volumes and the adverse impact of foreign currency translation. The increase in 2008 was further impacted by the effect of increased restructuring charges undertaken in anticipation of the tougher economic climate experienced in 2009, resulting in a 30 basis point increase in selling, general and administrative expenses as a percentage of sales from 2007 to 2008.

Interest Expense

 

(in millions of dollars)    2009     2008      2007

Interest expense

   $ 705     $ 689      $ 666

Average interest rate during the year

             

Short-term borrowings

     3.1%        5.6%         6.2%

Total debt

     5.8%        5.9%         6.2%
                         

 

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The increase in interest expense in 2009, as compared with 2008, is primarily attributable to higher interest charges related to our deferred compensation plan. Increased interest expense resulting from the issuances of $1.25 billion and $1.0 billion of long-term debt in December and May 2008, respectively, was partially offset by lower interest expense resulting from the redemption of $933 million in notes that were due in 2009 and to the lower cost associated with our commercial paper borrowings. The redemptions and repayments as well as the lower cost of borrowing noted above resulted in a decline in the average interest rate in 2009 as compared with 2008.

Interest expense increased in 2008, as compared with 2007, primarily as a result of the issuances of $1.0 billion of long-term debt in December 2007, bearing interest at 5.375%, and $1.0 billion of long-term debt in May 2008, as noted above. This increase was partially offset by lower interest charges related to our deferred compensation plan and lower interest accrued on unrecognized tax benefits. The issuance of $1.25 billion of long-term debt in December 2008 noted above did not have a significant impact to interest expense in 2008. The average interest rate for commercial paper decreased in 2008 as compared to 2007 generating the decrease in the average short-term borrowing rate. The overall average interest rate declined as the long-term debt issuances noted above were at interest rates lower than existing outstanding obligations.

The weighted-average interest rate applicable to debt outstanding at December 31, 2009 was 4.8% for short-term borrowings and 6.1% for total debt as compared to 5.3% and 5.9%, respectively, at December 31, 2008. The three month LIBOR rate as of December 31, 2009, 2008 and 2007 was 0.3%, 1.4% and 4.7%, respectively.

Income Taxes

 

      2009     2008      2007

Effective income tax rate

   27.4%      27.1%       28.8%
                   

The effective tax rates for 2009, 2008 and 2007 reflect tax benefits associated with lower tax rates on international earnings, which we intend to permanently reinvest outside the United States. The 2009 effective tax rate increased as compared to 2008 due to the absence of certain discrete items which had a net favorable impact in 2008. The 2009 effective tax rate reflects approximately $38 million of tax expense reductions relating to re-evaluation of our liabilities and contingencies based on global examination activity during the year including the IRS’s completion of 2004 and 2005 examination fieldwork and our related protest filing. As a result of the global examination activity, we recognized approximately $18 million of associated pre-tax interest income adjustments during 2009.

 

The 2008 effective tax rate reflects approximately $62 million of tax expense reductions, principally relating to re-evaluation of our liabilities and contingencies based upon resolution of disputed tax matters with the Appeals Division of the IRS for tax years 2000 through 2003.

The 2007 effective tax rate reflects approximately $80 million of tax expense reductions, principally relating to re-evaluation of our liabilities and contingencies based upon global examination activity, including the IRS’s completion of 2000 through 2003 examination fieldwork and our related protest filing, and development of claims for research and development tax credits. Principal adverse tax impacts to the 2007 effective tax rate related to the previously disclosed EU Fine and enacted tax law changes outside the United States.

We expect our effective income tax rate in 2010 to be approximately 29%, before the impacts of any discrete events.

For additional discussion of income taxes, see “Critical Accounting Estimates – Income Taxes” and Note 10 to the Consolidated Financial Statements.

Net Income and Earnings Per Share

 

(in millions of dollars, except per share amounts)    2009     2008      2007

Net income

   $ 4,179     $ 5,053      $ 4,548

Less: Noncontrolling interest in subsidiaries’ earnings

     350       364        324
                         

Net income attributable to common shareowners

   $ 3,829     $ 4,689      $ 4,224
                         

Diluted earnings per share

   $ 4.12     $ 4.90      $ 4.27
                         

In addition to the decline in net income associated with the overall decline in revenues in 2009, the general strength of the U.S. dollar against certain currencies, such as the Euro, through most of 2009 as compared with 2008 generated an adverse foreign currency impact on our operational results of $.22 per share in 2009. This year-over-year impact includes a net $.10 per share adverse impact from both foreign currency translation and hedging at P&WC. At P&WC, the strength of the U.S. dollar in 2009 generated positive foreign currency translation impact as the majority of P&WC’s revenues are denominated in U.S. dollars, while a significant portion of its costs are incurred in local currencies. To help mitigate the volatility of foreign currency exchange rates on our operating results, we maintain foreign currency hedging programs, the majority of which are entered into by P&WC. Due to the increase in the strength of the Canadian dollar to the U.S. dollar in early 2008, the hedges previously entered into generated an adverse foreign exchange impact as the U.S. dollar strengthened. As a result of hedging programs currently in place, P&WC’s 2010 full year operating results will include a beneficial impact of foreign currency translation, net of


 

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hedging, of approximately $100 million. In 2008 and 2007, foreign currency translation had a favorable impact of $.06 and $.09 per share, respectively. For additional discussion of foreign currency exposure, see “Market Risk and Risk Management – Foreign Currency Exposures.” Diluted earnings per share for 2009 were also favorably impacted by approximately $.03 per share as a result of the shares repurchased since January 1, 2009 under our share repurchase program.

Restructuring and Other Costs

We recorded net pre-tax restructuring and other costs totaling $830 million in 2009 and $357 million in 2008 for new and ongoing restructuring actions. We recorded these charges in the segments as follows:

 

(in millions of dollars)    2009     2008

Otis

   $ 158     $ 21

Carrier

     210       140

UTC Fire & Security

     112       63

Pratt & Whitney

     190       116

Hamilton Sundstrand

     88       16

Sikorsky

     7      

Eliminations and other

     62       1

General corporate expenses

     3      
                

Total

   $ 830     $ 357
                

The 2009 charges include $420 million in cost of sales, $364 million in selling, general and administrative expenses and $46 million in other income and, as described below, primarily relate to actions initiated during 2009 and 2008. Restructuring costs reflected in Eliminations and other largely reflect curtailment charges required under our domestic pension plan due to the significant headcount reductions associated with the various restructuring actions. The 2008 charges include $148 million in cost of sales, $205 million in selling, general and administrative expenses and $4 million in other income. The 2008 charges relate principally to actions initiated during 2008 and, to a lesser extent, residual trailing costs related to certain earlier actions.

Restructuring actions are an essential component of our operating margin improvement efforts and relate to both existing operations and those recently acquired. As a result of the severity of the global economic downturn, the level of restructuring initiated in 2009 was significantly in excess of that incurred in prior years. These actions were initiated to help mitigate the impact of the global economic downturn and better position us for a resumption of earnings growth expected in 2010. When completed, these actions will result in global employment reductions, primarily in overhead and selling, general and administrative functions of approximately 14,600. We have also acquired certain businesses at beneficial values in past years,

such as Kidde and Initial Electronic Security Group (IESG), with the expectation of restructuring the underlying cost structure in order to bring operating margins up to expected levels. Restructuring actions focus on streamlining costs through workforce reductions, the consolidation of manufacturing, sales and service facilities, and the transfer of work to more cost-effective locations. For acquisitions prior to January 1, 2009, the costs of restructuring actions at the acquired company contemplated at the date of acquisition are recorded under purchase accounting and actions initiated subsequently are recorded through operating results. However, effective January 1, 2009 under the Business Combinations Topic of the FASB ASC, restructuring costs associated with a business combination are expensed. We expect to incur approximately $350 million of restructuring costs in 2010, including approximately $100 million of trailing costs related to prior actions, associated with our continuing cost reduction efforts and to the integration of acquisitions. Although no specific plans for significant actions have been finalized at this time, we continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.

2009 Actions. During 2009, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions, the consolidation of field operations and the consolidation of repair and overhaul operations. We recorded net pre-tax restructuring and other charges totaling $802 million as follows: Otis $157 million, Carrier $205 million, UTC Fire & Security $103 million, Pratt & Whitney $174 million, Hamilton Sundstrand $90 million, Sikorsky $7 million, Eliminations and other $63 million and General corporate expenses $3 million. The charges included $389 million in cost of sales, $368 million in selling, general and administrative expenses and $45 million in other income. Those costs included $680 million for severance and related employee termination costs, $69 million for asset write-downs and $53 million for facility exit and lease termination costs.

We expect the 2009 actions to result in net workforce reductions of approximately 14,600 hourly and salaried employees, the exiting of approximately 4.5 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of December 31, 2009, we have completed net workforce reductions of approximately 11,100 employees, and 1.1 million net square feet of facilities have been exited. We are targeting the majority of the remaining workforce and facility related cost reduction actions for completion during 2010 and 2011. Approximately 60% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During 2009, we had cash outflows of approximately $324 million related to the 2009 actions. We expect to incur


 

7


 

additional restructuring and other charges of $97 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $700 million annually, of which approximately $280 million was realized in 2009.

On September 21, 2009, Pratt & Whitney announced plans to close a repair facility and an engine overhaul facility in Connecticut. For additional information concerning litigation related to Pratt & Whitney’s decision to close these two facilities, see Part I, Item 3, “Legal Proceedings” in our Form 10-K.

2008 Actions. During 2009, we recorded net pre-tax restructuring and other charges and reversals of $26 million for actions initiated in 2008. The 2008 actions relate to ongoing cost reduction efforts, including selling, general and administrative reductions and the consolidation of manufacturing facilities. We recorded the charges (reversals) in 2009 as follows: Otis $1 million, Carrier $5 million, UTC Fire & Security $9 million, Pratt & Whitney $16 million, Hamilton Sundstrand ($4 million) and Eliminations and other ($1 million). The charges and (reversals) included $29 million in cost of sales, ($4 million) in selling, general and administrative expenses and $1 million in other income. Those costs and reversals included $6 million for severance and related employee

termination costs, $1 million for asset write-downs and $19 million for facility exit and lease termination costs.

We expect the 2008 actions to result in net workforce reductions of approximately 6,200 hourly and salaried employees, the exiting of approximately 1.2 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of December 31, 2009, we have completed net workforce reductions of approximately 6,100 employees and exited 700,000 net square feet of facilities. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2010. Approximately 65% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During 2009, we had cash outflows of approximately $109 million related to the 2008 actions. We expect to incur additional restructuring and related charges of $2 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $400 million annually.

For additional discussion of restructuring, see Note 12 to the Consolidated Financial Statements.


 

Segment Review

 

      Revenues      Operating Profits      Operating Profit Margin
(in millions of dollars)    2009      2008      2007      2009      2008      2007      2009      2008      2007

Otis

   $ 11,779      $ 12,949      $ 11,885      $ 2,447      $ 2,477      $ 2,321      20.8%       19.1%       19.5%

Carrier

     11,413        14,944        14,644        740        1,316        1,381      6.5%       8.8%       9.4%

UTC Fire & Security

     5,531        6,462        5,754        493        542        443      8.9%       8.4%       7.7%

Pratt & Whitney

     12,577        14,041        13,086        1,835        2,122        2,011      14.6%       15.1%       15.4%

Hamilton Sundstrand

     5,599        6,207        5,636        857        1,099        967      15.3%       17.7%       17.2%

Sikorsky

     6,318        5,368        4,789        608        478        373      9.6%       8.9%       7.8%
                                                                          

Total segment

     53,217        59,971        55,794        6,980        8,034        7,496      13.1%       13.4%       13.4%

Eliminations and other

     (297)         (214)         (78)         (167)         (1)         (60)                  

General corporate expenses

                             (348)         (408)         (386)                  
                                                                          

Consolidated

   $ 52,920      $ 59,757      $ 55,716      $ 6,465      $ 7,625      $ 7,050      12.2%       12.8%       12.7%
                                                                          

 

 

Commercial Businesses

The financial performance of our commercial businesses can be influenced by a number of external factors including fluctuations in residential and commercial construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, tightening of credit markets and other global and political factors. Carrier’s financial performance can also be influenced by production and utilization of transport equipment, and for its residential business, weather conditions. Geographic and industry

diversity across the commercial businesses help to balance the impact of such factors on our consolidated operating results; however, the weak underlying global economic conditions across all markets in 2009 continued to adversely impact the commercial businesses to varying degrees with the most significant effects experienced at Carrier. A stronger U.S. dollar as compared to 2008, weak commercial construction, and weak demand in end markets have all posed operating challenges. While year-over-year order rates have largely stabilized at the end of 2009, with some improvement in the rates of decline compared to those


 

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experienced earlier in the year, the commercial construction market globally is expected to remain weak in 2010.

In 2009, 70% of total commercial business revenues were generated outside the United States, as compared to 72% in 2008. The following table shows revenues generated outside the United States for each of the commercial business segments:

 

      2009      2008

Otis

   80%       80%

Carrier

   55%       60%

UTC Fire & Security

   82%       83%
             

Otis is the world’s largest elevator and escalator manufacturing, installation and service company. Otis designs, manufactures, sells and installs a wide range of passenger and freight elevators for low-, medium- and high-speed applications, as well as a broad line of escalators and moving walkways. In addition to new equipment, Otis provides modernization products to upgrade elevators and escalators as well as maintenance services for both its products and those of other manufacturers. Otis serves customers in the commercial and residential property industries around the world. Otis sells directly to the end customer and, to a limited extent, through sales representatives and distributors.

 

     Factors Contributing to Total % Change
Year-Over-Year in:
     2009     2008
     Revenues     Operating
Profits
    Revenues     Operating
Profits

Organic revenue/
Operational operating profit

  (6)%      6%      7%      9%

Foreign currency translation

  (4)%      (4)%      3%      5%

Acquisitions and divestitures, net

  1%               

Restructuring

       (6)%          

Other

       3%      (1)%      (7)%
                       

Total % Change

  (9)%      (1)%      9%      7%
                       

2009 Compared with 2008

Otis’s revenues decreased $1,170 million (9%) in 2009, as compared with 2008. The organic revenue decline was attributable to a decrease in new equipment sales as difficult economic conditions adversely impacted global construction. New equipment orders declined 31% versus the prior year, which contributed to lower new equipment sales across all geographic regions. Otis’s operating profits decreased $30 million (1%) in 2009, as compared with 2008. Operational profit improvement resulted from increased volume and improved margins in the contractual maintenance business, lower commodity costs and the benefits from aggressive cost reduction initiatives. The 3% increase contributed by “Other” in 2009 reflects a gain recognized in the second quarter of 2009 on the re-measurement to fair value of a previously held equity interest in a joint venture resulting from

the purchase of a controlling interest, and the absence of provisions for certain accounting issues discovered at a subsidiary in Brazil in late 2008.

2008 Compared with 2007

Otis’s revenues increased $1,064 million (9%) in 2008, as compared with 2007. Organic revenue growth reflected increased new equipment and service volume, aided by the strong new equipment backlog entering 2008, as well as higher modernization and repair sales in North America and Europe, the latter benefiting from changes to elevator safety laws in France and Spain. The 1% decrease in “Other” reflects the absence of gains on the sale of land and a non-core business recorded in 2007. Otis’s operating profits increased $156 million (7%) in 2008, as compared with 2007. Operational profit improvement resulted from higher volumes, product cost reductions and improved field installation efficiencies as partially offset by higher commodity and labor costs. The 7% decrease contributed by “Other” in 2008, as compared to the same period of the prior year, reflects the absence in 2008 of gains realized on the sale of land and a non-core business in 2007 (combined 5%) and by provisions for certain accounting issues (2%) discovered at a subsidiary in Brazil in late 2008. Otis concluded its investigation into the Brazilian matter in early 2009.

Carrier is the world’s largest provider of HVAC and refrigeration solutions, including controls for residential, commercial, industrial and transportation applications. Carrier also provides installation, retrofit and aftermarket services for the products it sells and those of other manufacturers in the HVAC and refrigeration industries. In 2009, as part of its business transformation strategy, Carrier completed divestitures of several lower-margin businesses, acquired several higher-margin service businesses, and formed ventures in parts of the U.S., Europe, the Middle East and Australia. This included the acquisition of StrionAir, a leading air purification technology company, Logical Automation, a leading building automation controls company, and the formation of Carrier Enterprise, LLC, a venture with Watsco, Inc., to distribute Carrier, Bryant, Payne and Totaline residential and light commercial HVAC products in the U.S. sunbelt region and selected territories in the Caribbean and Latin America. Carrier also integrated into its operations UTC Power’s micro-turbine-based combined cooling, heating and power systems business. Carrier’s products and services are sold under Carrier and other brand names to building contractors and owners, homeowners, transportation companies, retail stores and food service companies. Carrier sells directly to the end customer and through manufacturers’ representatives, distributors, wholesalers, dealers and retail outlets. Certain of Carrier’s HVAC businesses are seasonal and can be impacted by weather. Carrier customarily offers its customers incentives to purchase products to ensure an adequate supply of its products in the distribution channels.


 

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     Factors Contributing to Total % Change
Year-Over-Year in:
     2009     2008
     Revenues     Operating
Profits
    Revenues     Operating
Profits

Organic revenue/
Operational operating profit

  (16)%      (34)%      (1)%      (5)%

Foreign currency translation

  (3)%      (1)%      2%      4%

Acquisitions and divestitures, net

  (5)%      (3)%      1%      1%

Restructuring

       (5)%           (8)%

Other

       (1)%           3%
                       

Total % Change

  (24)%      (44)%      2%      (5)%
                       

2009 Compared with 2008

Carrier’s revenues decreased $3,531 million (24%) in 2009, as compared with 2008. The decline in organic revenues is a result of continued weak market conditions across all businesses, particularly the higher-margin transport refrigeration business where organic revenues declined 37% in 2009. Carrier’s operating profits decreased $576 million (44%) in 2009 compared with 2008 as almost all businesses experienced earnings declines due to unfavorable market conditions. The operational profit decrease was primarily due to the volume decline (57%), especially in our higher margin businesses, the adverse cost impact from worldwide currency shifts (5%), and lower equity income from a joint venture in Japan (2%). These adverse impacts were partially offset by the favorable impact from aggressive cost reduction and restructuring actions, and lower net commodity costs (net combined 30%). The 1% decrease in “Other” primarily reflects lower gains from net acquisition and divestiture activities. The decrease contributed by “Acquisitions and divestitures, net” for both revenues and operating profits reflects the net year-over-year operational impact from acquisitions and divestitures completed in the preceding twelve months, including the transaction with Watsco, Inc.

2008 Compared with 2007

Carrier’s revenues increased $300 million (2%) in 2008, as compared with 2007. The decline in organic revenue was due to weak end markets in the Refrigeration business and a decline in the Residential and Light Commercial Systems business in North America resulting from the continued weakness in the U.S. housing market. These decreases more than offset growth in the Building Systems and Services business while the Residential and Light Commercial International business was essentially flat. The year-over-year impact from a gain generated on the contribution of a business into a new venture operating in the Middle East and the Commonwealth of Independent States was essentially offset by the absence of a gain in 2007 on the disposition of Carrier’s Fincoil-teollisuus Oy (Fincoil) heat exchanger business. Carrier’s operating profits decreased $65 million (5%) in 2008, as compared with 2007. The operational profit decrease primarily reflects the adverse impact of higher commodity costs, net of pricing of approximately $71 million. Profit growth in Building

Systems and Services, product cost reductions, and benefits from prior restructuring actions, were more than offset by lower earnings in the Refrigeration and Residential and Light Commercial Systems International businesses and the adverse impact of higher costs on cross border transactions (4%), as a result of significant currency shifts experienced during the year. The 3% increase contributed by “Other” primarily reflects the absence of the adverse impact of a 2007 settlement of a gas furnace litigation matter. A gain generated in 2008 from the contribution of a business to a new venture (5%) was mostly offset by the absence of a gain (4%) recorded in 2007 on the disposition of Fincoil.

UTC Fire & Security is a global provider of security and fire safety products and services. We created the UTC Fire & Security segment in the second quarter of 2005 upon acquiring Kidde and adding the Kidde industrial, retail and commercial fire safety businesses to the former Chubb segment. UTC Fire & Security provides electronic security products such as intruder alarms, access control systems and video surveillance systems and designs and manufactures a wide range of fire safety products including specialty hazard detection and fixed suppression products, portable fire extinguishers and other firefighting equipment. Services provided to the electronic security and fire safety industries include systems integration, installation, maintenance and inspection services. UTC Fire & Security also provides monitoring, response and security personnel services, including cash-in-transit security, to complement its electronic security and fire safety businesses. In November 2009, we entered into an agreement with GE to purchase the GE Security business. Subject to regulatory approvals and the satisfaction of customary closing conditions, the closing is anticipated to take place early in the second quarter of 2010. GE Security, part of GE Technology Infrastructure, supplies security and fire safety technologies for commercial and residential applications through a broad product portfolio that includes fire detection and life safety systems, intrusion alarms, video surveillance and access control systems. We intend to incorporate the GE Security business within the UTC Fire & Security segment, which will significantly enhance UTC Fire & Security’s geographic diversity with GE Security’s strong North American presence and increased product and technology offerings. UTC Fire & Security products and services are used by governments, financial institutions, architects, building owners and developers, security and fire consultants and other end-users requiring a high level of security and fire protection for their businesses and residences. In 2009, we also completed the acquisition of GST Holdings Limited (GST), a fire alarm provider in China. With the acquisition of the remaining 71% of the outstanding shares of GST, UTC Fire & Security further strengthened its presence in the Chinese fire safety industry. UTC Fire & Security provides its products and services under Chubb, Kidde and other brand names and sells


 




10


 

directly to the customer as well as through manufacturer representatives, distributors, dealers and U.S. retail distribution.

 

     Factors Contributing to Total % Change
Year-Over-Year in:
     2009     2008
     Revenues     Operating
Profits
    Revenues     Operating
Profits

Organic revenue/
Operational operating profit

  (7)%      4%      3%      18%

Foreign currency translation

  (6)%      (9)%           (1)%

Acquisitions and divestitures, net

  (1)%      4%      9%      11%

Restructuring

       (9)%           (5)%

Other

       1%           (1)%
                       

Total % Change

  (14)%      (9)%      12%      22%
                       

2009 Compared with 2008

UTC Fire & Security’s revenues decreased $931 million (14%) in 2009, as compared with 2008. Organic revenue contraction (7%) was primarily caused by declines in both the Americas and United Kingdom Fire Safety and Electronic Security businesses. UTC Fire & Security’s operating profits decreased $49 million (9%) in 2009, as compared with 2008. The operational profit improvement (4%) was due principally to the integration of field operations, the benefits of net cost reductions from previous restructuring actions, and the integration and continuing productivity and cost control initiatives which, combined, more than offset the impact of the lower revenues. The increase contributed by acquisitions and divestitures reflects the net year-over-year impact from acquisition and divestitures completed in the preceding twelve months, including the third quarter of 2009 acquisition of additional shares of GST, a fire alarm system provider in China.

2008 Compared with 2007

UTC Fire & Security’s revenues increased $708 million (12%) in 2008, as compared with 2007. Organic revenue growth (3%) was primarily contributed by the North American and European Fire Safety businesses (2%) due to strength in the oil & gas and marine industries and in Asia. UTC Fire & Security’s operating profits increased $99 million (22%) in 2008, as compared with 2007. The operational profit improvement (18%) was due principally to increased sales volume, the benefits of net cost reductions from previous restructuring and integration and continuing productivity initiatives.

Aerospace Businesses

The financial performance of Pratt & Whitney, Hamilton Sundstrand and Sikorsky is directly tied to the economic conditions of the commercial aerospace and defense industries. In particular, Pratt & Whitney experiences intense competition for new commercial airframe/engine combinations. Engine suppliers

may offer substantial discounts and other financial incentives, performance and operating cost guarantees, participation in financing arrangements and maintenance agreements. At times, the aerospace businesses also enter into firm fixed-price development contracts, which may require the company to bear cost overruns related to unforeseen technical and design challenges that arise during the development stage of the program. Customer selections of engines and components can also have a significant impact on later sales of parts and service. Predicted traffic levels, load factors, worldwide airline profits, general economic activity and global defense spending have been reliable indicators for new aircraft and aftermarket orders within the aerospace industry. Spare part sales and aftermarket service trends are affected by many factors, including usage, technological improvements, pricing, regulatory changes and the retirement of older aircraft. Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits.

The weak global economic conditions and reduced air travel experienced by the global aerospace industry in 2009 imposed a difficult operating environment and resulted in significant losses for most airlines. As a result, airframers have seen lower levels of orders for aircraft compared to 2008. Due to the weak demand for business and general aviation aircraft, as corporations have cut back on discretionary spending, business jet OEMs experienced lower order levels. Accordingly, business jet OEMs made downward revisions to their production schedules, resulting in additional pressure on P&WC. These factors have led to a 21% decrease in 2009 year-over-year engine shipments at P&WC, with continued declines expected in 2010. In an effort to combat the impact of the economic environment experienced in 2009, airlines slashed ticket prices to lure travelers, reduced capacity by idling some aircraft, retired older and less fuel efficient aircraft, and have delayed orders and deliveries of new planes. Continued weak passenger and cargo traffic, capacity reductions, lower aircraft utilization, and cash conservation measures at some airlines have led to a corresponding decrease in commercial aerospace aftermarket volume at both Pratt & Whitney and Hamilton Sundstrand, and accordingly, consolidated commercial aerospace aftermarket revenue declined 13% in 2009 as compared to 2008. This includes an approximately 25% decline in Pratt & Whitney commercial spares sales in 2009, as compared with 2008. We expect commercial aerospace aftermarket revenues will grow in 2010, although at a moderate rate.

While we have seen improving comparable airline traffic trends in the second half of 2009, full year 2009 airline traffic contracted approximately 3% compared to being essentially flat in 2008. Although we project airline traffic growth in 2010, lower business


 

11


 

and first class travel are expected to continue to put significant pressure on airline profitability. As a result, airlines are expected to continue to remain in a cash conservation mode. Our expectation is that the 2010 airframer production rates will be slightly lower than 2009 levels as a result of the pressure on airline profitability and financing issues facing both the airlines and the business jet market.

The contraction in the global liquidity markets has adversely impacted the ability of commercial customers to obtain financing for helicopters. During 2009, there were several cancellations of commercial orders and total commercial helicopter deliveries were down approximately 20%. However, strong government military spending is continuing to drive military helicopter demand and, as a result, Sikorsky’s military backlog remains very strong. Across all segments, military OEM volume increased 20% in 2009, as compared with 2008, led by Sikorsky. As a result of the strong military helicopter demand and our existing backlogs, we expect further growth in helicopter deliveries in 2010. Total sales to the U.S. government of $9.3 billion, $8.0 billion, and $7.5 billion in 2009, 2008, and 2007, respectively, were 18% of total UTC sales in 2009 and 14% in both 2008 and 2007. The defense portion of our aerospace business is affected by changes in market demand and the global political environment. Our participation in long-term production and development programs for the U.S. government has contributed positively to our results in 2009 and is expected to continue to benefit results in 2010.

Pratt & Whitney is among the world’s leading suppliers of aircraft engines for the commercial, military, business jet and general aviation markets. Pratt & Whitney’s Global Services organization provides maintenance, repair and overhaul services, including the sale of spare parts, as well as fleet management services for large commercial engines. Pratt & Whitney produces families of engines for wide and narrow body aircraft in the commercial and military markets. Pratt & Whitney also sells engines for industrial applications and space propulsion systems. P&WC is a world leader in the production of engines powering business, regional, light jet, utility and military aircraft and helicopters. Pratt & Whitney Rocketdyne (PWR) is a leader in the design, development and manufacture of sophisticated aerospace propulsion systems for military and commercial applications, including the U.S. space shuttle program. Pratt & Whitney’s products are sold principally to aircraft manufacturers, airlines and other aircraft operators, aircraft leasing companies, space launch vehicle providers and U.S. and foreign governments. Pratt & Whitney’s products and services must adhere to strict regulatory and market driven safety and performance standards. The frequently changing nature of these standards, along with the long duration of aircraft engine

programs, creates uncertainty regarding engine program profitability. The vast majority of sales are made directly to the end customer and, to a limited extent, through independent distributors and foreign sales representatives.

Both Mitsubishi Heavy Industries Ltd. (MHI) and Bombardier selected Pratt & Whitney’s PurePower engine to exclusively power their new aircraft. Both the Mitsubishi Regional Jet and the Bombardier C Series family of passenger aircraft are scheduled to enter service in 2013. Irkut Corporation selected the PurePower to power their planned new MC-21 single aisle aircraft. The PurePower engine family, featuring Geared Turbofan (GTF) technology targets a significant reduction in fuel burn and noise levels with lower environmental emissions and operating costs than current production of advanced turbofan engines. Ground and flight testing for the PurePower demonstrator engine was successfully completed in 2009. The success of these aircraft and the PurePower engine is dependent upon many factors including technological challenges, aircraft demand, and regulatory approval. Based on these factors, additional investment in the PurePower program will be required, with potential additional investment in the underlying aircraft programs being dependent on successful launch by the air-framers and other conditions.

In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into collaboration agreements in which revenues, costs and risks are shared. At December 31, 2009, the interests of participants in Pratt & Whitney-directed jet engine programs ranged from 14% to 48%. In addition, Pratt & Whitney has interests in other engine programs, including a 33% interest in the International Aero Engines (IAE) collaboration that sells and supports V2500® engines for the Airbus A320 family of aircraft. At December 31, 2009, a portion of Pratt & Whitney’s interest in IAE (equivalent to 4% of the overall IAE collaboration) was held by other participants. Pratt & Whitney also has a 50% interest in the Engine Alliance (EA), a joint venture with GE Aviation, undertaken to develop, market and manufacture the GP7000 engine for the Airbus A380 aircraft. At December 31, 2009, 40% of Pratt & Whitney’s 50% interest in the EA was held by other participants. During 2009, we also entered into collaboration arrangements for the above mentioned PurePower engine programs. Effective January 1, 2009, we have adopted the Collaborative Arrangements Topic of the FASB ASC, which requires that participants in a collaborative arrangement report costs incurred and revenues generated from the arrangement on a gross basis in the appropriate line items in each company’s financial statements. For additional discussion, see Note 15 to the Consolidated Financial Statements.


 

12


 

     Factors Contributing to Total % Change
Year-Over-Year in:
     2009     2008
     Revenues     Operating
Profits
    Revenues     Operating
Profits

Organic revenue */ Operational operating profit *

  (8)%      (5)%      7%      13%

Foreign currency (including P&WC net hedging) *

  (2)%      (6)%           (3)%

Restructuring

       (3)%           (3)%

Other

                 (1)%
                       

Total % Change

  (10)%      (14)%      7%      6%
                       

 

* As discussed further in the “Business Overview” and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, for Pratt & Whitney only, the transactional impact of foreign exchange hedging at P&WC has been netted against the translational foreign exchange impact for presentation purposes in the above table. For all other segments, these foreign exchange transactional impacts are included within the organic revenue/operational operating profit caption in their respective tables. Due to its significance to Pratt & Whitney’s overall operating results, we believe it is useful to segregate the foreign exchange transactional impact in order to clearly identify the underlying financial performance.

2009 Compared with 2008

Pratt & Whitney’s revenues decreased $1,464 million (10%) in 2009, as compared with 2008. The decrease is primarily attributable to decreased engine shipments and lower aftermarket volume at P&WC (4%), lower commercial spares and aftermarket volume (4%), and the adverse impact of net hedging activity (2%). Pratt & Whitney’s operating profits decreased $287 million (14%) in 2009, as compared with 2008. The operational decline (5%) was primarily driven by lower aftermarket volumes and decreased engine shipments in the large commercial engine business (9%) and at P&WC (5%), partially offset by the favorable impact of lower research and development spending (6%) and the profit contribution from higher military engine volumes (2%).

2008 Compared with 2007

Pratt & Whitney’s revenues increased $955 million (7%) in 2008, as compared with 2007. This increase is primarily attributable to higher engine deliveries at P&WC (4%), increased commercial engine revenue and aftermarket services volume, partially offset by commercial spares (net combined 1%), and increased volume at Pratt & Whitney Power Systems (1%). Increased volume at PWR (1%) was offset by lower military engine volumes. Pratt & Whitney’s operating profits increased $111 million (6%) in 2008, as compared with 2007. The operational profit increase (13%) is primarily attributable to the profit contributions from higher engine deliveries and favorable engine mix at P&WC (7%) and increased volume at PWR (2%). The majority of the remainder of the operational profit increase reflects the favorable impact of commercial engine mix, a commercial engine program adjustment, and lower net commodity costs (combined 3%). The 1% decrease in “Other” reflects the absence of the favorable impact of a contract termination in 2007 (3%) partially offset by a gain in 2008 from the sale of a partial investment (2%).

 

Hamilton Sundstrand is among the world’s leading suppliers of technologically advanced aerospace and industrial products and aftermarket services for diversified industries worldwide. Hamilton Sundstrand’s aerospace products, such as power generation, management and distribution systems, flight systems, engine control systems, environmental control systems, fire protection and detection systems, auxiliary power units and propeller systems, serve commercial, military, regional, business and general aviation, as well as military ground vehicle, space and undersea applications. In 2009, UTC completed the transition of the program management of UTC Power’s space and defense fuel cell power plant business to Hamilton Sundstrand’s energy, space and defense business. Aftermarket services include spare parts, overhaul and repair, engineering and technical support and fleet maintenance programs. Hamilton Sundstrand sells aerospace products to airframe manufacturers, the U.S. and foreign governments, aircraft operators and independent distributors. Hamilton Sundstrand’s principal industrial products, such as air compressors, metering pumps and fluid handling equipment, serve industries involved with chemical and hydrocarbon processing, oil and gas production, water and wastewater treatment and construction. Hamilton Sundstrand sells these products under the Sullair, Sundyne, Milton Roy and other brand names directly to end users, and through manufacturer representatives and distributors.

 

     Factors Contributing to Total % Change
Year-Over-Year in:
     2009     2008
     Revenues     Operating
Profits
    Revenues     Operating
Profits

Organic revenue/
Operational operating profit

  (7)%      (11)%      9%      7%

Foreign currency translation

  (1)%      (1)%      1%      1%

Acquisitions and divestitures, net

  (2)%      (1)%      (1)%     

Restructuring

       (7)%           1%

Other

       (2)%      1%      5%
                       

Total % Change

  (10)%      (22)%      10%      14%
                       

2009 Compared with 2008

Hamilton Sundstrand’s revenues decreased $608 million (10%) in 2009, as compared with 2008. The organic revenue decline reflects lower volumes in both the industrial (4%) and aerospace (3%) businesses. The decrease within aerospace was primarily attributable to aftermarket volume declines. Hamilton Sundstrand’s operating profits decreased $242 million (22%) in 2009, as compared with 2008. The decrease in operational profit reflects declines in the aerospace (13%) and industrial (4%) businesses, partially offset by lower year-over-year research and development costs (6%). The 2% decrease in “Other” primarily reflects the net year-over-year impact of gains recognized in 2008 relating to divestiture activities.


 

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2008 Compared with 2007

Hamilton Sundstrand’s revenues increased $571 million (10%) in 2008, as compared with 2007. The organic revenue growth reflects volume growth in both the aerospace (7%) and industrial (2%) businesses. The increase within aerospace was primarily attributable to OEM volume growth. Hamilton Sundstrand’s operating profits increased $132 million (14%) in 2008, as compared with 2007. The increase in operational profit reflects growth in the aerospace (6%) and industrial businesses (2%), partially offset by higher year-over-year research and development costs (1%). The 5% increase contributed by “Other” primarily reflects the favorable impact of gains related to divestiture activity (3%).

Sikorsky is one of the world’s largest manufacturers of military and commercial helicopters and also provides aftermarket helicopter and aircraft parts and services. Current major production programs at Sikorsky include the UH-60M Black Hawk medium-transport helicopters and HH-60M Medevac helicopters for the U.S. and foreign governments, the S-70 Black Hawk for foreign governments, the MH-60S and MH-60R helicopters for the U.S. Navy, the International Naval Hawk for multiple naval missions, and the S-76 and the S-92 helicopters for commercial operations. The UH-60M helicopter is the latest and most modern in a series of Black Hawk variants that Sikorsky has been delivering to the U.S. Army since 1978 and requires significant additional assembly hours relative to the previous variants. In December 2007, the U.S. government and Sikorsky signed a five-year, multi-service contract for 537 H-60 helicopters to be delivered to the U.S. Army and U.S. Navy, which include the UH-60M, HH-60M, MH-60S and MH-60R aircraft. The contract value for expected deliveries over the five year term is approximately $8.2 billion and includes options for an additional 263 aircraft, spares, and kits, with the total contract value potentially reaching $11.6 billion making it the largest contract in UTC and Sikorsky history. Actual production quantities will be determined year by year over the life of the program based on funding allocations set by Congress and Pentagon acquisition priorities. The deliveries of the aircraft are scheduled to be made through 2012. Sikorsky is also developing the CH-53K next generation heavy lift helicopter for the U.S. Marine Corps and the CH-148, a derivative of the H-92 helicopter, a military variant of the S-92 helicopter, for the Canadian government. The latter is being developed under an approximately $3 billion firm, fixed-price contract that provides for the development, production, and 22-year logistical support of 28 helicopters. This is the largest and most expansive fixed-price development contract in Sikorsky’s history. In December 2008, Sikorsky and the Canadian government executed amendments to the contract that revised the delivery schedule and contract specifications. The first test flight was successfully conducted in November 2008 and the contract provides for delivery of the first interim configuration

helicopter in the fourth quarter of 2010. Sikorsky is in discussions with the Canadian government concerning an anticipated delay in completing certain elements of the specification for the interim aircraft. Sikorsky’s aftermarket business includes spare parts sales, overhaul and repair services, maintenance contracts, and logistics support programs for helicopters and other aircraft. Sales are made directly by Sikorsky and by its subsidiaries and joint ventures. Sikorsky is increasingly engaging in logistics support programs and partnering with its government and commercial customers to manage and provide maintenance and repair services.

 

     Factors Contributing to Total % Change
Year-Over-Year in:
     2009     2008
     Revenues     Operating
Profits
    Revenues     Operating
Profits

Organic revenue/
Operational operating profit

  18%      36%      12%      31%

Acquisitions and divestitures, net

                 (1)%

Restructuring

       (1)%           (1)%

Other

       (8)%           (1)%
                       

Total % Change

  18%      27%      12%      28%
                       

2009 Compared with 2008

Sikorsky’s revenues increased $950 million (18%) in 2009, as compared with 2008. The organic revenue increase was primarily driven by higher volumes of military aircraft deliveries partially offset by a reduction in commercial aircraft sales due to a competitive marketplace. Sikorsky’s operating profits increased $130 million (27%) in 2009, as compared with 2008. The operational profit improvement was primarily attributable to increased aircraft deliveries and favorable aircraft mix (41%) within the military market, partially offset by reduced operational profit (10%) within commercial operations due primarily to a competitive marketplace. The remainder of the increase is primarily comprised of favorable contract adjustments. The 8% decrease in “Other” primarily reflects the adverse impact associated with a new union contract.

2008 Compared with 2007

Sikorsky’s revenues increased $579 million (12%) in 2008, as compared with 2007. The organic revenue increase was due to the higher volume of military aircraft deliveries and a favorable aircraft mix between military and commercial programs. Sikorsky’s operating profits increased $105 million (28%) in 2008, as compared with 2007. The operational profit improvement was primarily attributable to increased military aircraft deliveries and favorable aircraft mix for both military and commercial programs (combined 42%) partially offset by increased selling, general, and administrative expenses (7%) and research and development (6%).


 



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Eliminations and other

Eliminations and other reflects the elimination of revenues and operating profit transacted between segments, as well as the operating results of certain smaller businesses such as UTC Power. The revenues reduction of $214 million in 2008 increased to $297 million in 2009 largely as a result of the transfer of certain programs from UTC Power to Carrier, Pratt & Whitney and Hamilton Sundstrand. The increase in the operating profit elimination in 2009, as compared with 2008, is primarily attributable to curtailment charges related to the impact of headcount reductions on the domestic pension plans, and to increased inventory reserves and project related reserves recorded at UTC Power.

General corporate expenses

General corporate expenses declined in 2009 as compared with 2008 as a result of lower corporate office expenses associated with restructuring actions undertaken and a focus on cost reduction efforts during 2009.

Liquidity and Financial Condition

 

(in millions of dollars)    2009     2008

Cash and cash equivalents

   $ 4,449      $ 4,327

Total debt

     9,744        11,476

Net debt (total debt less cash and cash equivalents)

     5,295        7,149

Total equity

     20,999        16,681

Total capitalization (debt plus equity)

     30,743        28,157

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

     26,294        23,830

Debt to total capitalization

     32%        41%

Net debt to net capitalization

     20%        30%
                

 

Note 1   As of January 1, 2009, we adopted the provisions under the Consolidation Topic of the FASB ASC as it relates to the accounting and reporting standards for noncontrolling interests (previously referred to as minority interests) in consolidated subsidiaries as reported in consolidated financial statements. These provisions require that the carrying value of noncontrolling interests be removed from the mezzanine section of the balance sheet and reclassified as equity. As a result of this adoption, we reclassified noncontrolling interests in the amount of $918 million from the mezzanine section to equity in the December 31, 2008 consolidated balance sheet. In addition, we adopted the FASB Accounting Standards Update (ASU) for redeemable equity instruments, applicable for all noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interest). The standards require redeemable noncontrolling interest to be reported in the mezzanine equity section of the consolidated balance sheet at the greater of redemption value or initial carrying value. As a result of this adoption, we have classified certain “redeemable noncontrolling interests” in the mezzanine section in the accompanying consolidated balance sheets and have increased them to redemption value, where required, resulting in a $154 million decrease to equity in the December 31, 2008 consolidated balance sheet. Additional discussion of the accounting for noncontrolling interests is included in Note 9 to the Consolidated Financial Statements.

Our debt to total capitalization and net debt to net capitalization levels improved substantially during 2009. As discussed further below, total debt was reduced by approximately $1.7 billion, including the repayment of $933 million of notes that were due in

2009. Additionally, our equity position benefited from the reclassification of noncontrolling interests required by the Consolidations Topic of the FASB ASC, and from the reversal of unrealized losses recorded through Accumulated Other Comprehensive Income (Loss) in Equity. Due to the poor global equity market performance in 2008, we recorded $6.5 billion of unrealized losses in equity, reflecting approximately $4.2 billion of pension and postretirement benefit plans losses, resulting from changes in the valuation of pension assets, and approximately $2 billion of negative foreign currency translation adjustments. During 2009, improvements to the equity markets resulted in the reversal of approximately $1.1 billion of these losses. Lastly, with the strength of the U.S. dollar during most of 2009, approximately $1.0 billion of positive foreign currency translation adjustments were recorded through equity.

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows, which, after netting out capital expenditures, we target to equal or exceed net income attributable to common shareowners. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, customer financing requirements, investments in businesses, dividends, common stock repurchases, pension funding, access to the commercial paper markets, adequacy of available bank lines of credit, and the ability to attract long-term capital at satisfactory terms.

Distress in the financial markets over most of the last two years has had an adverse impact on financial market activities including, among other things, the creation of extreme volatility in security prices, severely diminishing liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. We have assessed the implications of these factors on our current business, are closely monitoring the impact on our customers and suppliers, and have determined that while there has been some impact to working capital, overall there has not been a significant effect on our financial position, results of operations or liquidity during 2009. Our pension plans have not experienced any significant impact on liquidity or counterparty exposure due to the volatility in the credit markets. As a result of losses experienced in the global equity markets in 2008, our domestic pension funds experienced a negative return on assets of approximately 27% in 2008. The negative return on our domestic plans in 2008 combined with a change in discount rate in the prior year increased pension costs by approximately $225 million in 2009 as compared to 2008. The equity markets improved substantially during the course of 2009, resulting in a 21% positive return on assets for 2009. As a result of the positive returns, additional funding during 2009, and a change to the final average earnings formula (as discussed in “Critical Accounting


 

15


 

Estimates”), pension expense in 2010 is expected to be slightly lower than 2009 levels.

Approximately 88% of our domestic pension plans are invested in readily-liquid investments, including equity, fixed income, asset backed receivables and structured products. The balance of our domestic pension plans (12%) is invested in less-liquid but market-valued investments, including real estate and private equity.

As discussed further below, our strong debt ratings and financial position have historically enabled us to issue long-term debt at favorable market rates, including the $1.0 billion of long-term debt issuance in May 2008 and $1.25 billion of long-term debt issuance in December 2008. We used the net proceeds from our December 2008 issuance of $1.25 billion in long-term debt to repay a portion of our outstanding commercial paper borrowings at that time, as well as a portion of our outstanding borrowings from our multicurrency revolving credit facility. In February 2009, we redeemed the entire $500 million outstanding principal amount of our LIBOR+.07% floating rate notes that were due June 1, 2009 at a redemption price in U.S. dollars equal to 100% of the principal amount, plus interest accrued. On June 1, 2009, we repaid our $400 million of 6.500% notes due 2009 which matured on the same date. In December 2009, we redeemed the entire $33 million outstanding principal amount of our 7.675% ESOP debt that was due December 10, 2009 at a redemption price in U.S. dollars equal to 100% of the principal amount, plus interest accrued.

Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing cash-flow-to-debt and debt-to-capitalization levels as well as our current credit standing. Our credit ratings are reviewed regularly by major debt rating agencies such as Standard and Poor’s, Moody’s Investors Service and Fitch Ratings. In reports published in 2009, Standard and Poor’s affirmed our short-term debt rating as A-1 and our long-term debt rating as A, respectively. Similarly, in 2009, Moody’s Investors Service also affirmed its corporate rating on our short-term debt rating as P-1 and our long-term debt rating as A2. Fitch Ratings also published data in 2009, affirming UTC’s short-term debt rating as F1 and our long-term debt rating as A+. In November 2009 Standard and Poor’s, Moody’s Investors Service and Fitch Ratings all confirmed their respective ratings and stated those ratings would not change as a result of the pending acquisition of GE Security. We continue to have access to the commercial paper markets and our existing credit facilities, and expect to continue to generate strong operating cash flows. While the impact of continued market volatility cannot be predicted, we believe we have sufficient operating flexibility, cash reserves and funding sources to maintain adequate amounts of liquidity and to meet our future operating cash needs.

 

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

We believe our future operating cash flows will be sufficient to meet our future operating cash needs. Further, our ability to obtain debt or equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required.

Cash Flow from Operating Activities

 

(in millions of dollars)    2009     2008

Net cash flows provided by operating activities

   $ 5,353     $ 6,161
                

The decrease in cash generated from operating activities in 2009 as compared with 2008, is due largely to the decline in net income attributable to common shareowners, as a result of lower volumes, and the $1.3 billion of contributions to our global defined benefit pension plans made in 2009. This impact was partially mitigated through a focused effort at reducing working capital levels. During 2009, working capital was a source of cash of $1.1 billion, compared to a cash outflow of $230 million during 2008. The year-over-year improvement was largely attributable to significant reductions in inventory and accounts receivable as partially offset by a decline in accounts payable levels. The declines in sales volumes led to inventory reductions across all businesses except Sikorsky, with a nearly $450 million year-over-year reduction at Carrier generating the majority of the improvement. The increase at Sikorsky of approximately $240 million was augmented by a decline in advances of $168 million and reflects the demands of significant growth that Sikorsky is currently experiencing. Accounts receivable provided approximately $1 billion of cash in 2009 as compared with a use of cash of approximately $550 million in 2008. The year-over-year improvement reflects both the decline in volumes as well as a consistently strong focus on collections throughout 2009. Partially offsetting the benefit of reduced inventory and accounts receivable levels was a year-over-year decrease in accounts payable of approximately $1 billion associated with the corresponding declines in volume and inventory levels.

The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. We can contribute cash or company stock


 

16


 

to our plans at our discretion, subject to applicable regulations. Total cash contributions to our global defined benefit pension plans during 2009 and 2008 were approximately $1.3 billion and $200 million, respectively. We also contributed $250 million in UTC common stock to these plans during 2008. As of December 31, 2009, the total investment by the defined benefit pension plans in our securities is approximately 4% of total plan assets. We expect to make contributions of approximately $600 million to our pension plans in 2010, including approximately $400 million to our domestic plans. Expected contributions to our defined pension plans in 2010 will meet or exceed the current funding requirements.

Cash Flow from Investing Activities

 

(in millions of dollars)    2009     2008  

Net cash flows used in investing activities

   $ (1,104 )     $ (2,336
                  

The year-over-year decrease in the net use of cash flows for investing activities is largely a result of lower capital expenditures of $390 million and a decrease of $549 million in acquisitions activity in 2009 as compared with 2008. Capital expenditures have been curtailed across the businesses in line with the volume reductions as a result of the challenging economic climate experienced in 2009.

Customer financing activities was a net use of cash of $91 million in 2009, compared to a net use of cash of $147 million for 2008. While we expect that 2010 customer financing activity will be a net use of funds, actual funding is subject to usage under existing customer financing commitments during the remainder of the year. We may also arrange for third-party investors to assume a portion of our commitments. We had financing and rental commitments of approximately $909 million and $1,142 million related to commercial aircraft at December 31, 2009 and 2008, respectively, of which as much as $116 million may be required to be disbursed during 2010. Refer to Note 4 to the Consolidated Financial Statements for additional discussion of our commercial aerospace industry assets and commitments.

The net investment in businesses in 2009 was $545 million compared with $915 million for 2008. The cash investment in businesses across all of our operations in 2009 was $703 million and primarily consisted of a number of small acquisitions in both our aerospace and commercial businesses, including the acquisition of a controlling interest in GST Holdings Limited (GST), a fire alarm system provider in China. The acquisition of these additional shares in GST was partially funded from cash that was previously restricted. Cash investment in businesses across all of our operations in 2008 was $1,252 million and primarily consisted of a number of small acquisitions in our commercial businesses. We expect total investments in businesses in 2010 to

approximate $3 billion, including the recently announced agreement to purchase the GE Security business from GE for approximately $1.8 billion; however, actual acquisition spending may vary depending upon the timing, availability and appropriate value of acquisition opportunities. Subject to regulatory approvals and the satisfaction of customary closing conditions, the closing of the GE Security acquisition is anticipated to take place early in the second quarter of 2010.

Cash Flow from Financing Activities

 

(in millions of dollars)    2009     2008  

Net cash flows used in financing activities

   $ (4,191 )     $ (2,238
                  

The timing and levels of certain cash flow activities, such as acquisitions and repurchases of our stock, have resulted in the issuance of both long-term and short-term debt. Commercial paper borrowings and revolving credit facilities provide short-term liquidity to supplement operating cash flows and are used for general corporate purposes, including the funding of potential acquisitions and repurchases of our stock. At December 31, 2009, we had two committed credit agreements from banks permitting aggregate borrowings of up to $2.5 billion. One credit commitment is a $1.5 billion revolving credit agreement. As of December 31, 2009 there were no borrowings under this revolving credit agreement, which expires in October 2011. We also have a $1.0 billion multicurrency revolving credit agreement that is available for general funding purposes, including acquisitions. During 2009, we repaid approximately $460 million which had been borrowed under the multicurrency revolving credit agreement as of December 31, 2008. At December 31, 2009, there were no borrowings under this revolving credit agreement, which expires in November 2011. The undrawn portions of both the $1.5 billion revolving credit agreement and $1.0 billion multicurrency revolving credit agreement are also available to serve as backup facilities for the issuance of commercial paper. In December 2008, we increased our maximum commercial paper borrowing authority from $1.5 billion to $2.5 billion. In addition, at December 31, 2009, approximately $3.1 billion was available under short-term lines of credit with local banks at our various domestic and international subsidiaries. We had no commercial paper outstanding at December 31, 2009.

In February 2009, we redeemed the entire $500 million outstanding principal amount of our LIBOR+.07% floating rate notes that were due June 1, 2009 at a redemption price in U.S. dollars equal to 100% of the principal amount, plus interest accrued. On June 1, 2009, we repaid our $400 million of 6.500% notes due 2009 which matured on the same date. In December 2009, we redeemed the entire $33 million outstanding principal amount of our 7.675% ESOP debt that was due December 10, 2009 at a redemption price in U.S. dollars equal to 100% of the


 

17


 

principal amount, plus interest accrued. In December 2008 and May 2008, we issued $1.25 billion and $1.0 billion, respectively, of long-term debt. The proceeds of the May 2008 issuance were primarily used for general corporate purposes, including financing acquisitions and repurchasing our stock. The proceeds of the December 2008 issuance were primarily used to repay commercial paper borrowings and to repay outstanding borrowings under our multicurrency revolving credit facility described above.

Financing cash outflows for 2009 and 2008 included the repurchase of 19.1 million and 50.4 million shares of our common stock for approximately $1.1 billion and $3.2 billion, respectively, under an existing 60 million share repurchase program. In addition to management’s view that the repurchase of our common stock is a beneficial investment, we also repurchase to offset the dilutive effect of the issuance of stock and options under the stock-based employee benefit programs. At December 31, 2009, we had remaining authority to repurchase approximately 9 million shares under the current program. We expect total share repurchases in 2010 to approximate $1.5 billion; however, total repurchases may vary depending upon various factors including the level of other investing activities.

We paid dividends of $.385 per share in the first quarter of 2009 for a total of $339 million, $.385 per share in the second quarter for a total of $340 million, $.385 per share in the third quarter for a total of $339 million, and $.385 per share in the fourth quarter for a total of $338 million. During 2008, $1,210 million of cash dividends were paid to shareowners.

Critical Accounting Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Consolidated Financial Statements describes the significant accounting policies used in preparation of the Consolidated Financial Statements. Management believes the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The most significant areas involving management judgments and estimates are described below. Actual results in these areas could differ from management’s estimates.

Long-term Contract Accounting. We utilize percentage of completion accounting on certain of our long-term contracts. The percentage of completion method requires estimates of future revenues and costs over the full term of product and/or service delivery. We also utilize the completed-contract method of accounting on certain lesser value commercial contracts. Under the completed-contract method, sales and cost of sales are recognized when a contract is completed.

 

Losses, if any, on long-term contracts are provided for when anticipated. We recognize loss provisions on original equipment contracts to the extent that estimated inventoriable manufacturing, engineering, product warranty and product performance guarantee costs, as appropriate, exceed the projected revenue from the products contemplated under the contractual arrangement. For new commitments, we generally record loss provisions at the earlier of contract announcement or contract signing except for certain requirements contracts under which losses are recorded based upon receipt of the purchase order. For existing commitments, anticipated losses on contracts are recognized in the period in which losses become evident. Products contemplated under the contractual arrangement include products purchased under the contract and, in the large commercial engine business, future highly probable sales of replacement parts required by regulation that are expected to be purchased subsequently for incorporation into the original equipment. Revenue projections used in determining contract loss provisions are based upon estimates of the quantity, pricing and timing of future product deliveries. We generally recognize losses on shipment to the extent that inventoriable manufacturing costs, estimated warranty costs and product performance guarantee costs, as appropriate, exceed revenue realized. We measure the extent of progress toward completion on our long-term commercial aerospace equipment and helicopter contracts using units of delivery. In addition, we use the cost-to-cost method for elevator and escalator sales, installation and modernization contracts in the commercial businesses. For long-term aftermarket contracts, we recognize revenue over the contract period in proportion to the costs expected to be incurred in performing services under the contract. Contract accounting also requires estimates of future costs over the performance period of the contract as well as an estimate of award fees and other sources of revenue.

Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management’s judgment. The long-term nature of these contracts, the complexity of the products, and the strict safety and performance standards under which they are regulated can affect our ability to estimate costs precisely. As a result, we review and update our cost estimates on significant contracts on a quarterly basis, and no less frequently than annually for all others, or when circumstances change and warrant a modification to a previous estimate. We record adjustments to contract loss provisions in earnings when identified.

Income Taxes. The future tax benefit arising from net deductible temporary differences and tax carryforwards is $3.8 billion at December 31, 2009 and $5.2 billion at December 31, 2008. Management believes that our earnings during the periods when the temporary differences become deductible will be sufficient to


 

18


 

realize the related future income tax benefits. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided.

In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through an increase to tax expense in the period in which that determination is made or when tax law changes are enacted. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease to tax expense in the period in which that determination is made. Effective with our January 1, 2009 adoption of the provisions of the Business Combinations Topic of the FASB ASC, adjustments for valuation allowances on deferred taxes and acquired tax contingencies associated with a business combination will generally affect income tax expense as opposed to being recorded as an adjustment to goodwill.

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. See Notes 1 and 10 to the Consolidated Financial Statements for further discussion.

Goodwill and Intangible Assets. Our investments in businesses in 2009 totaled $703 million, of which there was no debt assumed. The assets and liabilities of acquired businesses are recorded under the purchase method of accounting at their estimated fair values at the dates of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Intangible assets consist of service portfolios, patents and trademarks, customer relationships and other intangible assets.

 

Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing. This testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value. The identification and measurement of goodwill impairment involves the estimation of the fair value of reporting units. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment, which primarily incorporates management assumptions about expected future cash flows and contemplates other valuation techniques. Future cash flows can be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities. We completed our assessment of goodwill as of July 1, 2009 and determined that no impairment existed at that date. Although no significant goodwill impairment has been recorded to date, there can be no assurances that future goodwill impairments will not occur. However, a 10% decrease in the estimated fair value of any of our reporting units at the date of our 2009 assessment would not have resulted in a goodwill impairment charge. See Note 2 to the Consolidated Financial Statements for further discussion.

Product Performance. We extend performance and operating cost guarantees beyond our normal service and warranty policies for extended periods on some of our products, particularly commercial aircraft engines. Liability under such guarantees is based upon future product performance and durability. In addition, we incur discretionary costs to service our products in connection with product performance issues. We accrue for such costs that are probable and can be reasonably estimated. The costs associated with these product performance and operating cost guarantees require estimates over the full terms of the agreements, and require management to consider factors such as the extent of future maintenance requirements and the future cost of material and labor to perform the services. These cost estimates are largely based upon historical experience. See Note 14 to the Consolidated Financial Statements for further discussion.

Contracting with the U.S. Government. Our contracts with the U.S. government are subject to government oversight and audit. 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 have involved substantial amounts. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and continue to litigate certain cases. In addition, we accrue for liabilities associated with those government contracting matters that are probable and can be reasonably estimated. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution. See Note 16 to


 

19


 

the Consolidated Financial Statements for further discussion. We recorded sales to the U.S. government of $9.3 billion, $8.0 billion, and $7.5 billion in 2009, 2008, and 2007, respectively.

Employee Benefit Plans. We sponsor domestic and foreign defined benefit pension and other postretirement plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on plan assets, rate of increase in employee compensation levels, and health care cost increase projections. Assumptions are determined based on company data and appropriate market indicators, and are evaluated each year at December 31. A change in any of these assumptions would have an effect on net periodic pension and postretirement benefit costs reported in the Consolidated Financial Statements.

In the following table, we show the sensitivity of our pension and other postretirement benefit plan liabilities and net periodic cost to a 25 basis point change in the discount rate as of December 31, 2009.

 

(in millions of dollars)         Change in
Discount Rate
Increase by
25 bps
    Change in
Discount Rate
Decrease by
25 bps

Pension plans

        

Projected benefit obligation

   $ (638 )     $ 660

Net periodic pension cost

     (64     66

Other postretirement benefit plans

        

Accumulated postretirement benefit obligation

     (13     14

Net periodic postretirement benefit cost

           
                    

Pension expense is also sensitive to changes in the expected long-term rate of asset return. An increase or decrease of 25 basis points in the expected long-term rate of asset return would have decreased or increased 2009 pension expense by approximately $50 million.

The weighted-average discount rate used to measure pension liabilities and costs is set by reference to UTC specific analysis using each plan’s specific cash flows and then compared to high-quality bond indices for reasonableness. Global market interest rates have decreased in 2009 as compared with 2008 and, as a result, the weighted-average discount rate used to measure pension liabilities decreased from 6.1% in 2008 to 5.9% in 2009. In December 2009, we amended the salaried retirement plans (qualified and non-qualified) to change the retirement formula effective January 1, 2015. At that time, final average earnings (FAE) and credited service will stop under the formula applicable for hires before July 1, 2002. Employees hired after 2009 will not be eligible for any defined benefit pension plan and will instead receive an enhanced benefit under the UTC Savings Plan. As a result of the change in discount rate, FAE amendment, additional 2009 funding

and positive asset returns generated in 2009, pension expense in 2010 is expected to be slightly lower than 2009 levels. See Note 11 to the Consolidated Financial Statements for further discussion.

Inventory Valuation Reserves. Inventory valuation reserves are established in order to report inventories at the lower of cost or market value on our Consolidated Balance Sheet. The determination of inventory valuation reserves requires management to make estimates and judgments on the future salability of inventories. Valuation reserves for excess, obsolete, and slow-moving inventory are estimated by comparing the inventory levels of individual parts to both future sales forecasts or production requirements and historical usage rates in order to identify inventory where the resale value or replacement value is less than inventoriable cost. Other factors that management considers in determining these reserves include whether individual inventory parts meet current specifications and cannot be substituted for a part currently being sold or used as a service part, overall market conditions, and other inventory management initiatives.

As of December 31, 2009 and 2008 we had $683 million and $497 million, respectively, of inventory valuation reserves recorded. Although management believes these reserves are adequate, any abrupt changes in market conditions may require us to record additional inventory valuation reserves.

Off-Balance Sheet Arrangements and Contractual Obligations

We extend a variety of financial guarantees to third parties in support of unconsolidated affiliates and for potential financing requirements of commercial aerospace customers. We also have obligations arising from sales of certain businesses and assets, including representations and warranties and related indemnities for environmental, health and safety, tax and employment matters. Circumstances that could cause the contingent obligations and liabilities arising from these arrangements to come to fruition are changes in an underlying transaction (e.g., hazardous waste discoveries, etc.), nonperformance under a contract, customer requests for financing, or deterioration in the financial condition of the guaranteed party.

A summary of our consolidated contractual obligations and commitments as of December 31, 2009 is as follows:

 

              Payments Due by Period
(in millions of dollars)   Total     Less than
1 Year
    1-3
Years
    3-5
Years
    More than
5 Years

Long-term debt *

  $ 9,490     $ 1,233     $ 1,082     $ 8     $ 7,167

Operating leases

    1,571       420       568       258       325

Purchase obligations

    12,854       7,885       3,827       1,069       73

Other long-term liabilities

    5,742       1,274       1,606       1,605       1,257
                                       

Total contractual obligations

  $ 29,657     $ 10,812     $ 7,083     $ 2,940     $ 8,822
                                           

 

* Principal only; excludes associated interest payments

 

20


 

Purchase obligations include amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity, delivery and termination liability. Approximately 31% of the purchase obligations disclosed above represent purchase orders for products to be delivered under firm contracts with the U.S. government for which we have full recourse under normal contract termination clauses.

Other long-term liabilities primarily include those amounts on our December 31, 2009 balance sheet representing obligations under product service and warranty policies, performance and operating cost guarantees, estimated environmental remediation costs and expected contributions under employee benefit programs. The timing of expected cash flows associated with these obligations is based upon management’s estimates over the terms of these agreements and is largely based upon historical experience.

The above table does not reflect unrecognized tax benefits of $793 million, the timing of which is uncertain, except for approximately $40 million that may become payable during 2010. Refer to Note 10 to the Consolidated Financial Statements for additional discussion on unrecognized tax benefits. In addition, the above table does not include approximately $600 million of expected contributions to our global pension plans in 2010, including approximately $400 million to our domestic plans.

Commercial Commitments

 

              Amount of Commitment Expiration per Period
(in millions of
dollars)
  Committed     Less than
1 Year
    1-3
Years
    3-5
Years
    More than
5 Years

Commercial aerospace financing and rental commitments

  $ 909     $ 116     $ 129     $ 13     $ 651

IAE financing arrangements

    1,186       247       499       127       313

Unconsolidated subsidiary debt guarantees

    243       160       8              75

Commercial aerospace financing arrangements

    320       1       73       10       236

Commercial customer financing arrangements

    229       229                    

Performance guarantees

    39       33       6             
                                       

Total commercial
commitments

  $ 2,926     $ 786     $ 715     $ 150     $ 1,275
                                       

Refer to Notes 4, 14, and 16 to the Consolidated Financial Statements for additional discussion on contractual and commercial commitments.

Market Risk and Risk Management

We are exposed to fluctuations in foreign currency exchange rates, interest rates and commodity prices. To manage certain of those exposures, we use derivative instruments, including swaps, forward contracts and options. Derivative instruments utilized by us in our hedging activities are viewed as risk management tools,

involve little complexity and are not used for trading or speculative purposes. We diversify the counterparties used and monitor the concentration of risk to limit our counterparty exposure.

We have evaluated our exposure to changes in foreign currency exchange rates, interest rates and commodity prices in our market risk sensitive instruments, which are primarily cash, debt and derivative instruments, using a value at risk analysis. Based on a 95% confidence level and a one-day holding period, at December 31, 2009, the potential loss in fair value on our market risk sensitive instruments was not material in relation to our financial position, results of operations or cash flows. Our calculated value at risk exposure represents an estimate of reasonably possible net losses based on volatilities and correlations and is not necessarily indicative of actual results. Refer to Notes 1, 8 and 13 to the Consolidated Financial Statements for additional discussion of foreign currency exchange, interest rates and financial instruments.

Foreign Currency Exposures. We have a large volume of foreign currency exposures that result from our international sales, purchases, investments, borrowings and other international transactions. International segment revenues, including U.S. export sales, averaged approximately $34 billion over the last three years. We actively manage foreign currency exposures that are associated with committed foreign currency purchases and sales and other assets and liabilities created in the normal course of business at the operating unit level. More than insignificant exposures that cannot be naturally offset within an operating unit are hedged with foreign currency derivatives. We also have a significant amount of foreign currency net asset exposures. Currently, we do not hold any derivative contracts that hedge our foreign currency net asset exposures but may consider such strategies in the future.

Within aerospace, our revenues are typically denominated in U.S. dollars under accepted industry convention. However, for our non-U.S. based entities, such as P&WC, a substantial portion of their costs are incurred in local currencies. Consequently, there is a foreign currency exchange impact and risk to operational results as U.S. dollars must be converted to local currencies such as the Canadian dollar in order to meet local currency cost obligations. In order to minimize the exposure that exists from changes in the exchange rate of the U.S. dollar against these other currencies, we hedge a certain portion of revenues to secure the rates at which U.S. dollars will be converted. The majority of this hedging activity occurs at P&WC. At P&WC, firm and forecasted sales for both engines and spare parts are hedged at varying amounts up to 24 months on the U.S. dollar revenue exposure as represented by the excess of U.S. dollar revenues over U.S. dollar denominated purchases. Hedging gains and losses resulting from movements in foreign currency exchange rates are partially offset


 

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by the foreign currency translation impacts that are generated on the translation of local currency operating results into U.S. dollars for reporting purposes. While the objective of the hedging program is to minimize the foreign currency exchange impact on operating results, there are typically variances between the hedging gains or losses and the translational impact due to the length of hedging contracts, changes in the revenue profile, volatility in the exchange rates and other such operational considerations.

Interest Rate Exposures. Our long-term debt portfolio consists mostly of fixed-rate instruments. From time to time, we may hedge to floating rates using interest rate swaps. The hedges are designated as fair value hedges and the gains and losses on the swaps are reported in interest expense, reflecting that portion of interest expense at a variable rate. We issue commercial paper, which exposes us to changes in interest rates. Currently, we do not hold any derivative contracts that hedge our interest exposures, but may consider such strategies in the future.

Commodity Price Exposures. We are exposed to volatility in the prices of raw materials used in some of our products and from time to time we may use forward contracts in limited circumstances to manage some of those exposures. In the future, if hedges are used, gains and losses may affect earnings. There were no significant outstanding commodity hedges as of December 31, 2009.

Environmental Matters

Our operations are subject to environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over our foreign operations. As a result, we have established, and continually update, policies relating to environmental standards of performance for our operations worldwide. We believe that expenditures necessary to comply with the present regulations governing environmental protection will not have a material effect upon our competitive position, results of operations, cash flows or financial condition.

We have identified 582 locations, mostly in the United States, at which we may have some liability for remediating contamination. We have resolved our liability at 242 of these locations. We do not believe that any individual location’s exposure will have a material effect on our results of operations. Sites in the investigation, remediation or operation and maintenance stage represent approximately 91% of our accrued environmental liability.

We have been identified as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA or Superfund) at 107 sites. The number of Superfund sites, in and of itself, does not represent a relevant measure of liability because the nature and extent of

environmental concerns vary from site to site and our share of responsibility varies from sole responsibility to very little responsibility. In estimating our liability for remediation, we consider our likely proportionate share of the anticipated remediation expense and the ability of other potentially responsible parties to fulfill their obligations.

At December 31, 2009, we had $539 million reserved for environmental remediation. Cash outflows for environmental remediation were $49 million in 2009 and $46 million in both 2008 and 2007. We estimate that ongoing environmental remediation expenditures in each of the next two years will not exceed approximately $70 million.

Government Matters

As described in the “Critical Accounting Estimates – Contracting with the U.S. government,” our contracts with the U.S. government are subject to audits. Such audits may recommend that certain contract prices should be reduced to comply with various government regulations. We are also the subject of one or more investigations and legal proceedings initiated by the U.S. government with respect to government contract matters.

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

In December 2008, the Department of Defense (DOD) issued a contract claim against Sikorsky to recover overpayments the DOD


 

22


 

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 government contracts. The DOD claims that Sikorsky’s liability is approximately $83 million (including interest through December 2009). We believe this claim is without merit and Sikorsky filed an appeal in December 2009 with the U.S. Court of Federal Claims.

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.

Other Matters

Additional discussion of our environmental, U.S. government contract matters, product performance and other contingent liabilities is included in “Critical Accounting Estimates” and Notes 1, 14 and 16 to the Consolidated Financial Statements. For additional discussion of our legal proceedings, see Item 3, “Legal Proceedings,” in our Annual Report on Form 10-K for 2009 (2009 Form 10-K).

New Accounting Pronouncements

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. We are currently evaluating this new ASU.

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements.” This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance will include factors to help companies determine what software elements are considered “essential to the functionality.” The

amendments will now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. We are currently evaluating this new ASU.

In December 2009, the FASB issued ASU No. 2009-16, “Accounting for Transfers of Financial Assets.” This ASU incorporates SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (SFAS 166), issued by the FASB in June 2009, within the FASB ASC. This ASU removes the concept of a qualifying special-purpose entity and establishes a new “participating interest” definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarifies and amends the derecognition criteria for a transfer to be accounted for as a sale, and changes the amount that can be recognized as a gain or loss on a transfer accounted for as a sale when beneficial interests are received by the transferor. Enhanced disclosures are also required to provide information about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This ASU must be applied as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. We have evaluated this new ASU and have determined that there are no significant impacts to our financial position or results of operations.

In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” This ASU incorporates SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167), issued by the FASB in June 2009, within the FASB ASC. This ASU amends previous accounting related to the Consolidation of Variable Interest Entities to require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity (VIE) based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Also, this ASU requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. This ASU will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application


 

23


 

is prohibited. We have evaluated this new ASU and have determined that our involvement with variable interest entities is not significant and therefore there are no significant impacts to our financial position or results of operations.

Cautionary Note Concerning Factors That May Affect Future Results

This annual report contains statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements” under the securities laws. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These forward-looking statements are intended to provide management’s current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “guidance” and other words of similar meaning in connection with a discussion of future operating or financial performance. These include, among others, statements relating to:

 

 

future revenues, earnings, cash flow, uses of cash and other measures of financial performance;

 

 

the effect of economic conditions in the United States and globally, including the financial condition of our customers and suppliers;

 

 

new business opportunities;

 

 

restructuring costs and savings;

 

 

the scope, nature or impact of acquisition and divestiture activity including integration of acquired businesses into our existing businesses;

 

 

the development, production and support of advanced technologies and new products and services;

 

 

the anticipated benefits of diversification and balance of operations across product lines, regions and industries;

 

 

the impact of the negotiation of collective bargaining agreements;

 

 

the outcome of contingencies;

 

 

future repurchases of common stock;

 

 

future levels of indebtedness and capital spending;

 

 

future availability of and access to credit markets;

 

 

pension plan assumptions and future contributions; and

 

 

the effect of changes in tax, environmental and other laws and regulations in the United States and other countries in which we operate.

All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Our Annual Report

on Form 10-K for 2009 includes important information as to these factors that may cause actual results to vary materially from those stated in the forward-looking statements in the “Business” section under the headings “General,” “Description of Business by Segment” and “Other Matters Relating to Our Business as a Whole,” and in the “Risk Factors” and “Legal Proceedings” sections. For additional information identifying factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Forms 10-K, 10-Q and 8-K filed with the SEC from time to time.

Management’s Report on Internal Control over Financial Reporting

The management of UTC is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of UTC’s internal control over financial reporting as of December 31, 2009. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Management concluded that based on its assessment, UTC’s internal control over financial reporting was effective as of December 31, 2009. The effectiveness of UTC’s internal control over financial reporting, as of December 31, 2009, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

 

/s/ Louis R. Chênevert
Louis R. Chênevert
Chairman & Chief Executive Officer
/s/ Gregory J. Hayes
Gregory J. Hayes
Senior Vice President and Chief Financial Officer
/s/ Margaret M. Smyth
Margaret M. Smyth
Vice President, Controller

 

24


 

Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of changes in equity present fairly, in all material respects, the financial position of United Technologies Corporation and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Corporation’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in the Notes to the consolidated financial statements, the Corporation changed the manner in which it accounts for defined benefit pension and other postretirement plans and uncertain tax positions in 2007. As discussed in the Notes to the consolidated financial statements, the Corporation

changed the manner in which it discloses fair value, the manner in which it accounts for business combinations, noncontrolling interests and collaborative arrangements, and the manner in which it provides disclosures about derivative and hedging activities, subsequent events, and fair value of financial instruments in 2009.

A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

February 11, 2010


 

25


Consolidated Statement of Operations

 

(in millions of dollars, except per share amounts)      2009        2008        2007
     

Revenues:

                    

Product sales

     $ 37,332         $ 43,234         $ 40,182

Service sales

       15,093           15,885           14,694

Other income, net

       495           638           840
                                
       52,920           59,757           55,716
     

Costs and Expenses:

                    

Cost of products sold

       28,905           32,833           30,869

Cost of services sold

       9,956           10,804           10,010

Research and development

       1,558           1,771           1,678

Selling, general and administrative

       6,036           6,724           6,109
                                

Operating profit

       6,465           7,625           7,050

Interest

       705           689           666
                                

Income before income taxes

       5,760           6,936           6,384

Income tax expense

       1,581           1,883           1,836
                                

Net income

       4,179           5,053           4,548

Less: Noncontrolling interest in subsidiaries’ earnings

       350           364           324
                                
     

Net income attributable to common shareowners

     $ 3,829         $ 4,689         $ 4,224
                                
     

Earnings per share of common stock

                    

Basic

     $ 4.17         $ 5.00         $ 4.38

Diluted

     $ 4.12         $ 4.90         $ 4.27

 

Dividends per share of common stock

     $ 1.54         $ 1.35         $ 1.17

 

Average number of shares outstanding:

                    

Basic shares

       917           938           964

Diluted shares

       929           956           989
                                

See accompanying Notes to Consolidated Financial Statements

 

26


Consolidated Balance Sheet

 

(in millions of dollars, except per share amounts – shares in thousands)      2009        2008  
   

Assets

             

Cash and cash equivalents

     $ 4,449        $ 4,327  

Accounts receivable (net of allowance for doubtful accounts of $390 and $332)

       8,469          9,480  

Inventories and contracts in progress, net

       7,509          8,340  

Future income tax benefits, current

       1,689          1,551  

Other assets, current

       1,078          769  
                       

Total Current Assets

       23,194          24,467  
                       

Customer financing assets

       1,047          1,002  

Future income tax benefits

       2,102          3,633  

Fixed assets, net

       6,364          6,348  

Goodwill

       16,298          15,363  

Intangible assets

       3,538          3,443  

Other assets

       3,219          2,581  
                       

Total Assets

     $ 55,762        $ 56,837  
                       
   

Liabilities and Equity

             

Short-term borrowings

     $ 254        $ 1,023  

Accounts payable

       4,634          5,594  

Accrued liabilities

       11,792          12,069  

Long-term debt currently due

       1,233          1,116  
                       

Total Current Liabilities

       17,913          19,802  
                       

Long-term debt

       8,257          9,337  

Future pension and postretirement benefit obligations

       4,150          6,574  

Other long-term liabilities

       4,054          4,198  
                       

Total Liabilities

       34,374          39,911  
                       

Commitments and contingent liabilities (Notes 4 and 16)

             

Redeemable noncontrolling interest

       389          245  

Shareowners’ Equity:

             

Capital Stock:

             

Preferred Stock, $1 par value; 250,000 shares authorized; None issued or outstanding

                   

Common Stock, $1 par value; 4,000,000 shares authorized; 1,381,700 and 1,370,054 shares issued

       11,746          11,179  

Treasury Stock - 444,958 and 426,113 common shares at cost

       (15,408        (14,316

Retained earnings

       27,396          25,034  

Unearned ESOP shares

       (181        (200

Accumulated other comprehensive income (loss):

             

Foreign currency translation

       379          (641

Other

       (3,866        (5,293
                     

Total Accumulated other comprehensive loss

       (3,487        (5,934
                       

Total Shareowners’ Equity

       20,066          15,763  

Noncontrolling interest

       933          918  
                       

Total Equity

       20,999          16,681  
                       

Total Liabilities and Equity

     $ 55,762        $ 56,837  
                       

See accompanying Notes to Consolidated Financial Statements

 

27


Consolidated Statement of Cash Flows

 

(in millions of dollars)    2009     2008     2007  

Operating Activities:

            

Net income attributable to common shareowners

   $ 3,829      $ 4,689      $ 4,224   

Noncontrolling interest in subsidiaries’ earnings

     350        364        324   
                          

Net income

     4,179        5,053        4,548   

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

            

Depreciation and amortization

     1,258        1,321        1,173   

Deferred income tax provision

     451        45        58   

Stock compensation cost

     153        211        198   

Change in:

            

Accounts receivable

     955        (546     (534

Inventories and contracts in progress

     695        (562     (1,111

Other current assets

     (3     35        44   

Accounts payable and accrued liabilities

     (582     843        1,633   

Global pension contributions

     (1,270     (193     (182

Other operating activities, net

     (483     (46     (497
                          

Net cash flows provided by operating activities

     5,353        6,161        5,330   
                          

Investing Activities:

            

Capital expenditures

     (826     (1,216     (1,153

Increase in customer financing assets

     (171     (285     (411

Decrease in customer financing assets

     80        138        272   

Investments in businesses

     (703     (1,252     (2,037

Dispositions of businesses

     158        337        298   

Other investing activities, net

     358        (58     (151
                          

Net cash flows used in investing activities

     (1,104     (2,336     (3,182
                          

Financing Activities:

            

Issuance of long-term debt

     37        2,248        1,032   

Repayment of long-term debt

     (1,012     (48     (330

(Decrease) increase in short-term borrowings, net

     (762     91        191   

Common Stock issued under employee stock plans

     342        163        415   

Dividends paid on Common Stock

     (1,356     (1,210     (1,080

Repurchase of Common Stock

     (1,100     (3,160     (2,001

Other financing activities, net

     (340     (322     (182
                          

Net cash flows used in financing activities

     (4,191     (2,238     (1,955
                          

Effect of foreign exchange rate changes on cash and cash equivalents

     64        (164     165   
                          

Net increase in cash and cash equivalents

     122        1,423        358   

Cash and cash equivalents, beginning of year

     4,327        2,904        2,546   
                          

Cash and cash equivalents, end of year

   $ 4,449      $ 4,327      $ 2,904   
                          

Supplemental Disclosure of Cash Flow Information:

            

Interest paid, net of amounts capitalized

   $ 704      $ 659      $ 629   

Income taxes paid, net of refunds

   $ 1,396      $ 1,912      $ 1,818   

Non-cash investing and financing activities include:

            

Contributions of UTC Common Stock to domestic defined benefit pension plans of $0, $250 and
$150 in 2009, 2008 and 2007, respectively.

            
                          

 

See accompanying Notes to Consolidated Financial Statements

 

28


Consolidated Statement of Changes in Equity

 

                   
(in millions of dollars)     

Common Stock

      

 

Treasury Stock

 

Balance at December 31, 2006

     $ 9,622         $ (9,413
                       

Effect of changing pension plan measurement date, net of taxes of $193 (Note 11)

           

Adoption of accounting for uncertainty in income taxes (Note 10)

           

Adoption of accounting for redeemable noncontrolling interests (Note 9)

           
                       

Opening balance at January 1, 2007, as adjusted

     $ 9,622         $ (9,413

Comprehensive income (loss):

           

Net income

           

Redeemable noncontrolling interest in subsidiaries earnings

           

Other comprehensive income (loss), net of tax:

           

Foreign currency translation adjustments

           

Change in pension and post-retirement benefit plans, net of income taxes of $419

           

Adjustment for sale of securities, net of tax benefit of $50

           

Unrealized cash flow hedging gain, net of income taxes of $58

           
                       

Total other comprehensive income, net of tax

           
                       

Comprehensive income

           
                       

Common Stock issued under employee plans (13.8 million shares), net of tax benefit of $130

       863           13   

Common Stock contributed to defined benefit pension plans (2.3 million shares)

       87           63   

Common Stock repurchased (28.3 million shares)

            (2,001

Dividends on Common Stock

           

Dividends on ESOP Common Stock

           

Dividends attributable to noncontrolling interest

           

Redeemable noncontrolling interest accretion

           

Other changes in noncontrolling interest

           
                       

Balance at December 31, 2007

     $ 10,572         $ (11,338
                       

Comprehensive income (loss):

           

Net income

           

Redeemable noncontrolling interest in subsidiaries earnings

           

Other comprehensive income (loss), net of tax:

           

Foreign currency translation adjustments

           

Change in pension and post-retirement benefit plans, net of tax benefit of $2,512

           

Adjustment for sale of securities, net of tax benefit of $41

           

Unrealized cash flow hedging loss, net of tax benefit of $127

           
                       

Total other comprehensive income (loss), net of tax

           
                       

Comprehensive income (loss)

           
                       

Common Stock issued under employee plans (5.7 million shares), net of tax benefit of $32

       525           14   

Common Stock contributed to defined benefit pension plans (5.0 million shares)

       82           168   

Common Stock repurchased (50.4 million shares)

            (3,160

Dividends on Common Stock

           

Dividends on ESOP Common Stock

           

Dividends attributable to noncontrolling interest

           

Redeemable noncontrolling interest accretion

           

Other changes in noncontrolling interest

           
                       

Balance at December 31, 2008

     $ 11,179         $ (14,316
                       

Comprehensive income (loss):

           

Net income

           

Redeemable noncontrolling interest in subsidiaries earnings

           

Other comprehensive income (loss), net of tax:

           

Foreign currency translation adjustments

           

Change in pension and post-retirement benefit plans, net of income taxes of $569

           

Adjustment for sale of securities, net of income taxes of $66

           

Unrealized cash flow hedging gain, net of income taxes of $106

           
                       

Total other comprehensive income (loss), net of tax

           
                       

Comprehensive income (loss)

           
                       

Common Stock issued under employee plans (11.9 million shares), net of tax benefit of $50

       634           8   

Common Stock repurchased (19.1 million shares)

            (1,100

Dividends on Common Stock

           

Dividends on ESOP Common Stock

           

Dividends attributable to noncontrolling interest

           

Redeemable noncontrolling interest accretion

           

Purchase of subsidiary shares in noncontrolling interest

       (67       

Acquired noncontrolling interest

           

Other changes in noncontrolling interest

           
                       

Balance at December 31, 2009

     $ 11,746         $ (15,408
                       

See accompanying Notes to Consolidated Financial Statements

 

29


 

Shareowners’ Equity                             
Retained Earnings        Unearned ESOP Shares        Accumulated Other
Comprehensive Income (Loss)
       Noncontrolling Interest        Total Equity        Redeemable
Noncontrolling Interest
 
$ 18,754         $ (227      $ (1,439      $ 755         $ 18,052         $ 81   
                                                            
  (45             470                  425          
  (19                           (19       
  (114                           (114      $ 114   
                                                            
$ 18,576         $ (227      $ (969      $ 755         $ 18,344         $ 195   
                                  
  4,224                       324           4,548          
                     (14        (14        14   
                                  
              716           44           760           10   
              776                  776          
              (84               (84       
              139                  139          
                                                            
                            1,591          
                                                            
                            6,125          
                                                            
  (36        13                         853          
                            150          
                            (2,001       
  (1,080                           (1,080       
  (47                           (47       
                     (246        (246        (23
  (6                           (6        6   
                     (28        (28        1   
                                                            
$ 21,631         $ (214      $ 578         $ 835         $ 22,064         $ 203   
                                                            
                                  
  4,689                       364           5,053          
                     (19        (19        19   
                                  
              (1,990        1           (1,989        38   
              (4,153               (4,153       
              (59               (59