Annual Reports

 
Quarterly Reports

  • 10-Q (Jul 25, 2014)
  • 10-Q (Apr 25, 2014)
  • 10-Q (Oct 25, 2013)
  • 10-Q (Jul 26, 2013)
  • 10-Q (Apr 26, 2013)
  • 10-Q (Oct 26, 2012)

 
8-K

 
Other

United Technologies 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-15
  4. Ex-31.1
  5. Ex-31.2
  6. Ex-31.3
  7. Ex-32
  8. Ex-32
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2010

OR

 

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

For the transition period from              to             

Commission file number 1-812

 

 

UNITED TECHNOLOGIES CORPORATION

 

 

 

DELAWARE   06-0570975

One Financial Plaza, Hartford, Connecticut 06103

(860) 728-7000

 

 

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

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

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

 

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

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

At June 30, 2010 there were 929,069,716 shares of Common Stock outstanding.

 

 

 


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

Quarter Ended June 30, 2010

 

     Page

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements:

   3

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

   3

Condensed Consolidated Statement of Operations for the six months ended June 30, 2010 and 2009

   4

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

   5

Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2010 and 2009

   6

Notes to Condensed Consolidated Financial Statements

   7

Report of Independent Registered Public Accounting Firm

   23

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

   24

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   40

Item 4. Controls and Procedures

   40

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

   41

Item 1A. Risk Factors

   41

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

   45

Item 6. Exhibits

   46

SIGNATURES

   47

EXHIBIT INDEX

   48

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

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

     Quarter Ended June 30,

(in millions, except per share amounts)

   2010    2009

Revenues:

     

Product sales

   $ 9,967    $ 9,327

Service sales

     3,835      3,733

Other income, net

     88      136
             
     13,890      13,196
             

Costs and Expenses:

     

Cost of products sold

     7,466      7,111

Cost of services sold

     2,549      2,490

Research and development

     459      384

Selling, general and administrative

     1,491      1,574
             

Operating profit

     1,925      1,637

Interest expense

     192      177
             

Income before income taxes

     1,733      1,460

Income tax expense

     521      394
             

Net income

     1,212      1,066

Less: Noncontrolling interest in subsidiaries’ earnings

     102      90
             

Net income attributable to common shareowners

   $ 1,110    $ 976
             

Earnings Per Share of Common Stock:

     

Basic

   $ 1.22    $ 1.06

Diluted

   $ 1.20    $ 1.05

Dividends Per Share of Common Stock

   $ .43    $ .39

Weighted average number of shares outstanding:

     

Basic shares

     910      919

Diluted shares

     925      929

See accompanying Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

     Six Months Ended June 30,

(in millions, except per share amounts)

   2010    2009

Revenues:

     

Product sales

   $ 18,352    $ 17,989

Service sales

     7,490      7,270

Other income, net

     139      186
             
     25,981      25,445
             

Costs and Expenses:

     

Cost of products sold

     13,825      13,867

Cost of services sold

     4,922      4,841

Research and development

     856      793

Selling, general and administrative

     2,915      3,057
             

Operating profit

     3,463      2,887

Interest expense

     378      352
             

Income before income taxes

     3,085      2,535

Income tax expense

     926      670
             

Net income

     2,159      1,865

Less: Noncontrolling interest in subsidiaries’ earnings

     183      167
             

Net income attributable to common shareowners

   $ 1,976    $ 1,698
             

Earnings Per Share of Common Stock:

     

Basic

   $ 2.17    $ 1.85

Diluted

   $ 2.13    $ 1.83

Dividends Per Share of Common Stock

   $ .85    $ .77

Weighted average number of shares outstanding:

     

Basic shares

     912      919

Diluted shares

     927      927

See accompanying Notes to Condensed Consolidated Financial Statements

 

4


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 

     June 30,     December 31,  

(in millions)

   2010     2009  
Assets     

Cash and cash equivalents

   $ 4,997     $ 4,449  

Accounts receivable, net

     8,881       8,469  

Inventories and contracts in progress, net

     8,083       7,509  

Future income tax benefits, current

     1,624       1,689  

Other assets, current

     816       1,078  
                

Total Current Assets

     24,401       23,194  
                

Customer financing assets

     1,103       1,047  

Future income tax benefits

     2,037       2,102  

Fixed assets

     15,519       15,677  

Less: Accumulated depreciation

     (9,429     (9,313
                

Fixed assets, net

     6,090       6,364  
                

Goodwill

     16,914       16,298  

Intangible assets, net

     3,899       3,538  

Other assets

     3,899       3,219  
                

Total Assets

   $ 58,343     $ 55,762  
                
Liabilities and Equity     

Short-term borrowings

   $ 1,422     $ 254  

Accounts payable

     5,057       4,634  

Accrued liabilities

     11,679       11,792  

Long-term debt currently due

     604       1,233  
                

Total Current Liabilities

     18,762       17,913  
                

Long-term debt

     10,039       8,257  

Future pension and postretirement benefit obligations

     3,996       4,150  

Other long-term liabilities

     4,320       4,054  
                

Total Liabilities

     37,117       34,374  
                

Redeemable noncontrolling interest

     311       389  

Shareowners’ Equity:

    

Common Stock

     12,205       11,746  

Treasury Stock

     (16,431     (15,408

Retained earnings

     28,569       27,396  

Unearned ESOP shares

     (172     (181

Accumulated other comprehensive loss

     (4,238     (3,487
                

Total Shareowners’ Equity

     19,933       20,066  

Noncontrolling interest

     982       933  
                

Total Equity

     20,915       20,999  
                

Total Liabilities and Equity

   $ 58,343     $ 55,762  
                

See accompanying Notes to Condensed Consolidated Financial Statements

 

5


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

     Six Months Ended June 30,  

(in millions)

   2010     2009  

Operating Activities:

    

Net income attributable to common shareowners

   $ 1,976     $ 1,698  

Noncontrolling interest in subsidiaries’ earnings

     183       167  
                

Net income

     2,159       1,865  

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

    

Depreciation and amortization

     666       609  

Deferred income tax (benefit) provision

     (128     23  

Stock compensation cost

     88       78  

Change in:

    

Accounts receivable

     (552     821  

Inventories and contracts in progress

     (653     (320

Other current assets

     (26     (75

Accounts payable and accrued liabilities

     834       (622

Global pension contributions*

     (261     (451

Other operating activities, net

     427       97  
                

Net cash flows provided by operating activities

     2,554       2,025  
                

Investing Activities:

    

Capital expenditures

     (302     (340

Investments in businesses

     (2,368     (197

Dispositions of businesses

     132       44  

Increase in customer financing assets, net

     (28     (38

Other investing activities, net

     207       4  
                

Net cash flows used in investing activities

     (2,359     (527
                

Financing Activities:

    

Issuance (repayment) of long-term debt, net

     1,106       (876

Increase in short-term borrowings, net

     1,174       248  

Common Stock issued under employee stock plans

     162       101  

Dividends paid on Common Stock

     (744     (679

Repurchase of Common Stock

     (1,150     (350

Other financing activities, net

     (143     (229
                

Net cash flows provided by (used in) financing activities

     405       (1,785
                

Effect of foreign exchange rate changes on cash and cash equivalents

     (52     (24
                

Net increase (decrease) in cash and cash equivalents

     548       (311

Cash and cash equivalents, beginning of year

     4,449       4,327  
                

Cash and cash equivalents, end of period

   $ 4,997     $ 4,016  
                

 

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

See accompanying Notes to Condensed Consolidated Financial Statements

 

6


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Business Acquisitions. During the first six months of 2010, our investment in business acquisitions was approximately $2.4 billion, including debt assumed of $32 million, principally reflecting the acquisitions of the General Electric (GE) Security business, and an equity stake in Clipper Windpower Plc (Clipper). On March 1, 2010, we completed the acquisition of the GE Security business for approximately $1.8 billion, including debt assumed of $32 million. The GE Security business supplies security and fire safety technologies for commercial and residential applications through a broad product portfolio that includes fire detection and life safety systems, intrusion alarms, and video surveillance and access control systems. This business is being integrated into our UTC Fire & Security segment during the course of 2010, and will enhance UTC Fire & Security’s geographic diversity with the strong North American presence and increased product and technology offerings of GE Security. In connection with the acquisition of GE Security, we recorded $1.1 billion of goodwill and approximately $600 million of identifiable intangible assets.

In January 2010, we completed the acquisition of a 49.5% equity stake in Clipper, a California-based wind turbine manufacturer that trades on the AIM London Stock Exchange. This investment is intended to expand our power generation portfolio and allow us to enter the wind power market by leveraging our expertise in blade technology, turbines and gearbox design. The total cost was £166 million (approximately $270 million) for the purchase of 84.3 million newly issued shares and 21.8 million shares from existing shareowners. We have accounted for this investment under the equity method of accounting. Subsequent to the initial purchase, we increased our investment to 49.9%. 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 the prior approval of Clipper.

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

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

 

(in millions)

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

Otis

   $ 1,382    $ 86    $ (69   $ 1,399

Carrier

     3,252      11      (111     3,152

UTC Fire & Security

     5,641      1,111      (323     6,429

Pratt & Whitney

     1,237      —        (22     1,215

Hamilton Sundstrand

     4,496      1      (62     4,435

Sikorsky

     250      —        (6     244
                            

Total Segments

     16,258      1,209      (593     16,874

Eliminations and other

     40      —        —          40
                            

Total

   $ 16,298    $ 1,209    $ (593   $ 16,914
                            

 

7


Table of Contents

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

 

     June 30, 2010     December 31, 2009  

(in millions)

   Gross Amount    Accumulated
Amortization
    Gross Amount    Accumulated
Amortization
 

Amortized:

          

Service portfolios

   $ 1,801    $ (833   $ 1,814    $ (833

Patents and trademarks

     419      (127     369      (120

Other, principally customer relationships

     3,003      (1,058     2,624      (1,047
                              
     5,223      (2,018     4,807      (2,000
                              

Unamortized:

          

Trademarks and other

     694      —          731      —     
                              

Total

   $ 5,917    $ (2,018   $ 5,538    $ (2,000
                              

Amortization of intangible assets for the quarter and six months ended June 30, 2010 was $90 million and $179 million, respectively, compared with $85 million and $171 million for the same periods of 2009. Amortization of these intangible assets for 2010 through 2014 is expected to approximate $300 million per year.

Note 2: Earnings Per Share

 

     Quarter Ended June 30,    Six Months Ended June 30,

(in millions, except per share amounts)

   2010    2009    2010    2009

Net income attributable to common shareowners

   $ 1,110    $ 976    $ 1,976    $ 1,698
                           

Basic weighted average number of shares outstanding

     910      919      912      919

Stock awards

     15      10      15      8
                           

Diluted weighted average number of shares outstanding

     925      929      927      927
                           

Earnings Per Share of Common Stock:

           

Basic

   $ 1.22    $ 1.06    $ 2.17    $ 1.85

Diluted

   $ 1.20    $ 1.05    $ 2.13    $ 1.83

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period. These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would be antidilutive. The number of stock awards excluded from the computation was 12.7 million for the quarter and six months ended June 30, 2010. For the quarter and six months ended June 30, 2009, the number of stock awards excluded from the computation was 37.5 million and 38.8 million, respectively.

Note 3: Inventories and Contracts in Progress

 

(in millions)

   June 30, 2010     December 31, 2009  

Raw materials

   $ 1,281     $ 1,281  

Work-in-process

     3,465       3,097  

Finished goods

     3,077       2,889  

Contracts in progress

     6,309       6,479  
                
     14,132       13,746  

Less:

    

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

     (282     (264

Billings on contracts in progress

     (5,767     (5,973
                
   $ 8,083     $ 7,509  
                

 

8


Table of Contents

As of June 30, 2010 and December 31, 2009, the above inventory balances include capitalized contract development costs of $833 million and $862 million, respectively, related to certain aerospace programs. These capitalized costs are liquidated as production units are delivered to the customer. The capitalized contract development costs within inventory principally relate to costs capitalized on Sikorsky’s CH-148 contract with the Canadian government. The CH-148 is a derivative of the H-92, a military variant of the S-92.

Note 4: Borrowings and Lines of Credit

 

(in millions)

   June 30, 2010    December 31, 2009

Commercial paper

   $ 1,225    $ —  

Other borrowings

     197      254
             

Total short-term borrowings

   $ 1,422    $ 254
             

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

Long-term debt consists of the following:

 

(in millions)

   June 30, 2010     December 31, 2009  

4.375% notes due 2010*

   $ —        $ 600  

7.125% notes due 2010*

     —          500  

6.350% notes due 2011*

     500       500  

6.100% notes due 2012*

     500       500  

4.875% notes due 2015*

     1,200       1,200  

5.375% notes due 2017*

     1,000       1,000  

6.125% notes due 2019*

     1,250       1,250  

8.875% notes due 2019

     272       272  

4.500% notes due 2020*

     1,250       —     

8.750% notes due 2021

     250       250  

6.700% notes due 2028

     400       400  

7.500% notes due 2029*

     550       550  

5.400% notes due 2035*

     600       600  

6.050% notes due 2036*

     600       600  

6.125% notes due 2038*

     1,000       1,000  

5.700% notes due 2040*

     1,000       —     

Project financing obligations

     127       158  

Other (including capitalized leases)

     144       110  
                

Total long-term debt

     10,643       9,490  

Less current portion

     (604     (1,233
                

Long-term debt, net of current portion

   $ 10,039     $ 8,257  
                

 

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

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

 

9


Table of Contents

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

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

Note 5: Income Taxes

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

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

It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change within a range of a net increase of $40 million to a net decrease of $130 million resulting from additional worldwide uncertain tax positions, from the re-evaluation of current uncertain tax positions arising from developments in examinations, in appeals, or in the courts, or from the closure of tax statutes. Not included in the range is €198 million (approximately $243 million) of tax benefits that we have claimed related to a 1998 German reorganization. These tax benefits are currently being reviewed by the German Tax Office in the course of an audit of tax years 1999 to 2000. In 2008 the German Federal Tax Court denied benefits to another taxpayer in a case involving a German tax law relevant to our reorganization. The determination of the German Federal Tax Court on this other matter was appealed to the European Court of Justice (ECJ) to determine if the underlying German tax law is violative of European Union (EU) principles. On September 17, 2009 the ECJ issued an opinion in this case that is generally favorable to the other taxpayer and referred the case back to the German Federal Tax Court for further consideration of certain related issues. In May 2010, the German Federal Tax Court released its decision, in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development. After consideration of the ECJ decision and the latest German Federal Tax Court decision, we continue to believe that it is more likely than not that the relevant German tax law is violative of EU principles and we have not accrued tax expense for this matter. As we continue to monitor developments related to this matter, it may become necessary for us to accrue tax expense and related interest.

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

The effective tax rate for the quarter ended June 30, 2010 has increased as compared to the same period of 2009 as a result of an overall increase in the forecasted effective tax rate, the net tax effects of asset impairment charges in 2010 and the absence of a non-taxable gain recorded in the same period of 2009. The effective tax rate for the six months ended June 30, 2010 increased as compared to the same period of 2009 as a result of an overall increase to the forecasted effective tax rate, the impact from health care legislation related to the Medicare Part D program in the first quarter of 2010, and the absence of a $25 million tax benefit and non-taxable gain recorded in 2009.

 

10


Table of Contents

Note 6: Employee Benefit Plans

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

 

     Quarter Ended June 30,    Six Months Ended June 30,

(in millions)

   2010    2009    2010    2009

Defined Benefit Plans

   $ 469    $ 428    $ 511    $ 451
                           

Defined Contribution Plans

   $ 46    $ 48    $ 96    $ 101
                           

In the first six months of 2010, we made contributions of $451 million to our domestic defined benefit pension plans, almost entirely in the second quarter, including a $250 million contribution of UTC common stock. In the first six months of 2009, we made contributions of $401 million to our domestic defined benefit pension plans, all of which was contributed in the second quarter of 2009. There were no contributions of UTC common stock to our domestic defined benefit pension plans in the first six months of 2009.

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

 

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

(in millions)

   2010     2009     2010     2009  

Service cost

   $ 99     $ 108     $ —        $ 1  

Interest cost

     320       319       12       13  

Expected return on plan assets

     (428     (403     —          —     

Amortization

     (4     14       —          (1

Recognized actuarial net loss

     71       56       (1     (1

Net settlement and curtailment loss

     11       4       —          —     
                                

Total net periodic benefit cost

   $ 69     $ 98     $ 11     $ 12  
                                
     Pension Benefits
Six Months Ended
June 30,
    Other Postretirement  Benefits
Six Months Ended
June 30,
 

(in millions)

   2010     2009     2010     2009  

Service cost

   $ 198     $ 214     $ 1     $ 2  

Interest cost

     642       635       23       25  

Expected return on plan assets

     (859     (802     —          —     

Amortization

     (8     28       (1     (2

Recognized actuarial net loss

     142       112       (1     (2

Net settlement and curtailment loss

     17       17       —          —     
                                

Total net periodic benefit cost

   $ 132     $ 204     $ 22     $ 23  
                                

Note 7: Restructuring and Other Costs

During the first six months of 2010, we recorded net pre-tax restructuring and other costs in our business segments totaling $152 million for new and ongoing restructuring actions as follows:

 

(in millions)

    

Otis

   $ 28

Carrier

     33

UTC Fire & Security

     29

Pratt & Whitney

     35

Hamilton Sundstrand

     9

Sikorsky

     7

Eliminations and other

     11
      

Total

   $ 152
      

 

11


Table of Contents

The net costs included $91 million recorded in cost of sales, $60 million in selling, general and administrative expenses and $1 million in other income, net. As described below, these costs primarily relate to actions initiated during 2010 and 2009.

2010 Actions. During the first six months of 2010, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and consolidation of field operations. We recorded net pre-tax restructuring and other costs totaling $121 million, including $68 million in cost of sales and $53 million in selling, general and administrative expenses.

We expect the actions initiated in the first six months of 2010 to result in net workforce reductions of approximately 2,400 hourly and salaried employees, the exiting of approximately 2.8 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of June 30, 2010, we have completed net workforce reductions of approximately 900 employees. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2010 and 2011. No specific plans for significant other actions have been finalized at this time.

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

 

(in millions)

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

Restructuring accruals at March 31, 2010

   $ 37     $ —        $ 6     $ 43  

Net pre-tax restructuring costs

     58       12       2       72  

Utilization

     (24     (12     (4     (40
                                

Balance at June 30, 2010

   $ 71     $ —        $ 4     $ 75  
                                

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

 

(in millions)

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

Expected costs

   $ 116     $ 12     $ 48     $ 176  

Costs incurred - quarter ended March 31, 2010

     (42     —          (7     (49

Costs incurred - quarter ended June 30, 2010

     (58     (12     (2     (72
                                

Balance at June 30, 2010

   $ 16     $ —        $ 39     $ 55  
                                

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

 

(in millions)

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

Otis

   $ 30    $ (11   $ (15   $ 4

Carrier

     49      (8     (17     24

UTC Fire & Security

     37      (9     (13     15

Pratt & Whitney

     30      (19     (4     7

Hamilton Sundstrand

     9      (2     (5     2

Sikorsky

     10      —          (7     3

Eliminations and other

     11      —          (11     —  
                             

Total

   $ 176    $ (49   $ (72   $ 55
                             

2009 Actions. During the first six months of 2010, we recorded net pre-tax restructuring and other costs and reversals totaling $35 million for restructuring actions initiated in 2009, including $23 million in cost of sales, $11 million in selling, general and administrative expenses and $1 million in other income, net. The 2009 actions relate to ongoing cost reduction efforts, including workforce reductions, the consolidation of field operations and the consolidation of repair and overhaul operations.

 

12


Table of Contents

As of June 30, 2010, we have completed net workforce reductions of approximately 12,800 employees of an expected 14,500 employees, and have exited 1.1 million net square feet of facilities of an expected 4.6 million net square feet. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2010 and 2011.

As previously disclosed, in September 2009, Pratt & Whitney announced plans to close a Connecticut repair facility by the second quarter of 2010 and a Connecticut engine overhaul facility by early 2011. The International Association of Machinists (IAM) subsequently filed a lawsuit in U.S. District Court alleging that Pratt & Whitney’s decision to close these facilities and transfer certain work to other facilities breached the terms of its collective bargaining agreement with the IAM and seeking to enjoin Pratt & Whitney from moving the work for the duration of the collective bargaining agreement. In February 2010, the District Court issued a judgment enjoining Pratt & Whitney from closing the facilities and transferring the work for the duration of the current collective bargaining agreement, which expires on December 5, 2010. Pratt & Whitney subsequently appealed the decision. On July 8, 2010, the Second Circuit Court of Appeals upheld the District Court’s decision. Pratt & Whitney is reviewing this decision and considering its impact on Pratt & Whitney’s operations. Pratt & Whitney recorded $53 million of restructuring costs in 2009 and $5 million of restructuring costs in 2010 associated with these planned closures. We do not believe that resolution of this matter will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.

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

 

(in millions)

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

Restructuring accruals at March 31, 2010

   $ 228     $ —        $ 16     $ 244  

Net pre-tax restructuring costs

     —          2       14       16  

Utilization

     (46     (2     (9     (57
                                

Balance at June 30, 2010

   $ 182     $ —        $ 21     $ 203  
                                

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

 

(in millions)

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

Expected costs

   $ 713     $ 74     $ 113     $ 900  

Costs incurred through December 31, 2009

     (680     (69     (53     (802

Costs incurred - quarter ended March 31, 2010

     (9     (3     (7     (19

Costs incurred - quarter ended June 30, 2010

     —          (2     (14     (16
                                

Remaining costs at June 30, 2010

   $ 24     $ —        $ 39     $ 63  
                                

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

 

(in millions)

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

Otis

   $ 162    $ (157   $ —        $ (2   $ 3

Carrier

     235      (205     (10     (1     19

UTC Fire & Security

     116      (103     (1     (6     6

Pratt & Whitney

     211      (174     (8     (5     24

Hamilton Sundstrand

     103      (90     —          (2     11

Sikorsky

     7      (7     —          —          —  

Eliminations and other

     63      (63     —          —          —  

General corporate expenses

     3      (3     —          —          —  
                                     

Total

   $ 900    $ (802   $ (19   $ (16   $ 63
                                     

 

13


Table of Contents

2008 Actions. As of June 30, 2010, we have approximately $28 million of accrual balances remaining related to 2008 actions.

Note 8: Financial Instruments

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

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

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

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

The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $8.8 billion and $9.0 billion at June 30, 2010 and December 31, 2009, respectively.

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

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

 

(in millions)

  

Balance Sheet Asset Location    

   June 30, 2010    December 31, 2009

Derivatives designated as hedging instruments:

        

Foreign Exchange Contracts

   Other assets, current    $ 84    $ 107

Foreign Exchange Contracts

   Other assets      11      33
                
        95      140
                

Derivatives not designated as hedging instruments:

        

Foreign Exchange Contracts

   Other assets, current      49      113

Foreign Exchange Contracts

   Other assets      4      5
                
        53      118
                

Total Asset Derivative Contracts

      $ 148    $ 258
                
     

Balance Sheet Liability Location    

         

Derivatives designated as hedging instruments:

        

Foreign Exchange Contracts

   Accrued liabilities    $ 32    $ 31

Foreign Exchange Contracts

   Other long-term liabilities      21      4
                
        53      35
                

Derivatives not designated as hedging instruments:

        

Foreign Exchange Contracts

   Accrued liabilities      51      106

Foreign Exchange Contracts

   Other long-term liabilities      3      3
                
        54      109
                

Total Liability Derivative Contracts

      $ 107    $ 144
                

 

14


Table of Contents

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

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(in millions)

   2010     2009     2010     2009  

(Loss) gain recorded in Accumulated other comprehensive loss

   $ (74   $ 135     $ (19   $ 2  

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

     18       (39     41       (99

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

     —          —          —          (5

Assuming current market conditions continue, a $69 million pre-tax gain is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At June 30, 2010, all derivative contracts accounted for as cash flow hedges mature by May 2012.

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

 

     Quarter Ended June 30,    Six Months Ended June 30,  

(in millions)

   2010     2009    2010     2009  

(Loss) gain recognized in Other income, net

   $ (20   $ 33    $ (24   $ (48

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

As of June 30, 2010, we had certain non-recurring measurements resulting in asset impairment charges of approximately $86 million related primarily to the expected disposition of certain businesses within both Carrier and Hamilton Sundstrand. For additional discussion refer to Note 1 to the Condensed Consolidated Financial Statements.

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

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

 

15


Table of Contents

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

 

(in millions)

   Total Carrying
Value at
June 30, 2010
   Quoted price in
active markets
(Level 1)
   Significant other
observable inputs
(Level 2)
   Unobservable
inputs

(Level 3)

Available-for-sale securities

   $ 654    $ 654    $ —      $ —  

Derivative assets

     148      —        148      —  

Derivative liabilities

     107      —        107      —  

(in millions)

   Total Carrying
Value at
December 31, 2009
   Quoted price in
active markets
(Level 1)
   Significant other
observable inputs
(Level 2)
   Unobservable
inputs

(Level 3)

Available-for-sale securities

   $ 664    $ 664    $ —      $ —  

Derivative assets

     258      —        258      —  

Derivative liabilities

     144      —        144      —  

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

As of June 30, 2010, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.

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

 

     June 30, 2010     December 31, 2009  

(in millions)

   Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Long-term receivables

   $ 307     $ 279     $ 430     $ 408  

Customer financing notes receivable

     315       249       350       264  

Long-term debt (excluding capitalized leases)

     (10,589     (12,076     (9,442     (10,361

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

We have outstanding financing and rental commitments totaling $875 million at June 30, 2010. Risks associated with changes in interest rates on these commitments are mitigated by the fact that interest rates are variable during the commitment term and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded. The fair value of the commitments themselves are not readily determinable and are not considered significant.

 

16


Table of Contents

Note 9: Shareowners’ Equity and Noncontrolling Interest

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

 

     Quarter Ended June 30,  
     2010     2009  

(in millions)

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

Equity, beginning of period

   $ 19,964     $ 960     $ 20,924     $ 15,667     $ 894     $ 16,561  

Comprehensive income for the period:

            

Net income

     1,110       102       1,212       976       90       1,066  

Other comprehensive (loss) income:

            

Foreign currency translation, net

     (447     (25     (472     749       9       758  

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

     (27     —          (27     49       —          49  

Cash flow hedging (losses) gains

     (68     —          (68     124       —          124  

Change in pension and post-retirement benefit plans, net

     50       —          50       26       —          26  
                                                

Total other comprehensive (loss) income

     (492     (25     (517     948       9       957  
                                                

Total comprehensive income for the period

     618       77       695       1,924       99       2,023  

Common Stock issued under employee plans

     139       —          139       149       —          149  

Common Stock repurchased

     (660     —          (660     (150     —          (150

Common Stock contributed to pension plans

     250       —          250       —          —          —     

Dividends on Common Stock

     (371     —          (371     (340     —          (340

Dividends on ESOP Common Stock

     (15     —          (15     (15     —          (15

Dividends attributable to noncontrolling interest

     —          (58     (58     —          (107     (107

Purchase of subsidiary shares from noncontrolling interest

     —          (3     (3     —          —          —     

Acquired noncontrolling interest

     —          4       4       —          3       3  

Redeemable noncontrolling interest in subsidiaries’ earnings

     —          (10     (10     —          (4     (4

Redeemable noncontrolling interest in total other comprehensive (loss) income

     —          12       12       —          (34     (34

Change in redemption value of put options

     8       —          8       1       —          1  
                                                

Equity, end of period

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

 

17


Table of Contents
     Six Months Ended June 30,  
     2010     2009  

(in millions)

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

Equity, beginning of period

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

Comprehensive income for the period:

            

Net income

     1,976       183       2,159       1,698       167       1,865  

Other comprehensive (loss) income:

            

Foreign currency translation, net

     (797     (48     (845     464       (26     438  

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

     8       —          8       30       —          30  

Cash flow hedging (losses) gains

     (43     —          (43     72       —          72  

Change in pension and post-retirement benefit plans, net

     81       —          81       76       —          76  
                                                

Total other comprehensive (loss) income

     (751     (48     (799     642       (26     616  
                                                

Total comprehensive income for the period

     1,225       135       1,360       2,340       141       2,481  

Common Stock issued under employee plans

     326       —          326       220       —          220  

Common Stock repurchased

     (1,160     —          (1,160     (350     —          (350

Common Stock contributed to pension plans

     250       —          250       —          —          —     

Dividends on Common Stock

     (744     —          (744     (679     —          (679

Dividends on ESOP Common Stock

     (31     —          (31     (30     —          (30

Dividends attributable to noncontrolling interest

     —          (147     (147     —          (191     (191

Purchase of subsidiary shares from noncontrolling interest

     (2     (4     (6     (27     (10     (37

Sale of subsidiary shares in noncontrolling interest

     —          27       27       —          —          —     

Acquired noncontrolling interest

     —          29       29       —          17       17  

Redeemable noncontrolling interest in subsidiaries’ earnings

     —          (16     (16     —          (8     (8

Redeemable noncontrolling interest in total other comprehensive (loss) income

     —          25       25       —          (16     (16

Change in redemption value of put options

     3       —          3       (1     —          (1
                                                

Equity, end of period

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

During 2009, we adopted the FASB ASU for redeemable equity instruments, applicable for all noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests). The standards require redeemable noncontrolling interests to be reported in the mezzanine section of the balance sheet, between liabilities and equity, at the greater of redemption value or initial carrying value. As a result of this adoption, we have retroactively reclassified “Redeemable noncontrolling interests” in the mezzanine section of the balance sheet and have increased them to redemption value, where required, resulting in a $319 million reclassification from total equity at June 30, 2009.

 

18


Table of Contents

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

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(in millions)

   2010     2009     2010     2009  

Redeemable noncontrolling interest, beginning of period

   $ 377     $ 225     $ 389     $ 245  

Net income

     10       4       16       8  

Foreign currency translation, net

     (12     34       (25     16  

Dividends attributable to noncontrolling interest

     (3     (1     (13     (9

Acquired noncontrolling interest

     12       58       12       58  

Purchase of subsidiary shares from noncontrolling interest

     (65     —          (65     —     

Change in redemption value of put options

     (8     (1     (3     1  
                                

Redeemable noncontrolling interest, end of period

   $ 311     $ 319     $ 311     $ 319  
                                

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

 

     Quarter Ended June 30,    Six Months Ended June 30,  

(in millions)

   2010    2009    2010     2009  

Net income attributable to common shareowners

   $ 1,110    $ 976    $ 1,976     $ 1,698  
                              

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

     —        —        (2     (27
                              

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

   $ 1,110    $ 976    $ 1,974     $ 1,671  
                              

Note 10: Guarantees

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

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

 

(in millions)

   2010     2009  

Balance as of January 1

   $ 1,072     $ 1,136  

Warranties and performance guarantees issued

     189       170  

Settlements made

     (174     (202

Other

     2       (26
                

Balance as of June 30

   $ 1,089     $ 1,078  
                

Note 11: Collaborative Arrangements

In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into certain collaboration arrangements in which costs, revenues and risks are shared. Revenues generated from engine programs, spare parts sales, and aftermarket business under collaboration arrangements are recorded as earned in our financial statements. Amounts attributable to our collaborative partners for their share of revenues are recorded as an expense in our financial statements based upon the terms and nature of the arrangement. Costs associated with engine programs under collaborative arrangements are expensed as incurred. Under these arrangements, collaborators contribute their program share of engine parts, incur their own production costs and make certain payments to Pratt & Whitney for shared or joint program costs. The reimbursement of the collaborator’s share of program costs is recorded as a reduction of the related expense item at that time. As of June 30, 2010, the collaborators’ interests in all commercial engine programs ranged from 12 percent to 48 percent. Pratt & Whitney directs those programs and is the principal participant in all existing collaborative arrangements. There are no individually significant collaborative arrangements and none of the partners exceed 31 percent share in an individual program.

 

19


Table of Contents

Note 12: Contingent Liabilities

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

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

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

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

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

As previously disclosed, in December 2008, the Department of Defense (DOD) issued a contract claim against Sikorsky to recover overpayments the DOD alleges it has incurred since 2003 in connection with cost accounting changes approved by the DOD and implemented by Sikorsky in 1999 and 2006. These changes relate to the calculation of material overhead rates in government contracts. The DOD claimed that Sikorsky’s liability is approximately $86 million (including interest through June 2010). 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. We extend performance and operating cost guarantees beyond our normal warranty and service policies for extended periods on some of our products. We have accrued our estimate of the liability that may result under these guarantees and for service costs that are probable and can be reasonably estimated.

 

20


Table of Contents

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

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

Note 13: Segment Financial Data

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

Results for the quarters and six months ended June 30, 2010 and 2009 are as follows:

 

Quarter Ended June 30,    Revenues     Operating Profits     Operating Profit Margins  

(in millions)

   2010     2009     2010     2009     2010     2009  

Otis

   $ 2,837     $ 2,952     $ 641     $ 631     22.6   21.4

Carrier

     3,124       3,100       333       260     10.7   8.4

UTC Fire & Security

     1,619       1,330       168       55     10.4   4.1

Pratt & Whitney

     3,298       3,111       522       467     15.8   15.0

Hamilton Sundstrand

     1,387       1,402       204       187     14.7   13.3

Sikorsky

     1,691       1,389       169       133     10.0   9.6
                                            

Total segments

     13,956       13,284       2,037       1,733     14.6   13.0

Eliminations and other

     (66     (88     (19     (7    

General corporate expenses

     —          —          (93     (89    
                                            

Consolidated

   $ 13,890     $ 13,196     $ 1,925     $ 1,637     13.9   12.4
                                            
Six Months Ended June 30,    Revenues     Operating Profits     Operating Profit Margins  

(in millions)

   2010     2009     2010     2009     2010     2009  

Otis

   $ 5,569     $ 5,617     $ 1,237     $ 1,137     22.2   20.2

Carrier

     5,564       5,587       472       282     8.5   5.0

UTC Fire & Security

     3,038       2,616       291       148     9.6   5.7

Pratt & Whitney

     6,190       6,291       958       903     15.5   14.4

Hamilton Sundstrand

     2,728       2,783       425       379     15.6   13.6

Sikorsky

     3,057       2,723       314       249     10.3   9.1
                                            

Total segments

     26,146       25,617       3,697       3,098     14.1   12.1

Eliminations and other

     (165     (172     (64     (44    

General corporate expenses

     —          —          (170     (167    
                                            

Consolidated

   $ 25,981     $ 25,445     $ 3,463     $ 2,887     13.3   11.3
                                            

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

Note 14: Accounting Pronouncements

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements.” This ASU establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This ASU provides amendments to the criteria for separating deliverables, measuring and allocating arrangement consideration to one or more units of

 

21


Table of Contents

accounting. The amendments in this ASU also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures are also required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require disclosure of the significant judgments made and changes to those judgments and how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. Early application is permitted. We have evaluated this new ASU and have determined that it will not have a significant impact on the determination or reporting of our financial results.

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements.” This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance 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 have evaluated this new ASU and have determined that it will not have a significant impact on the determination or reporting of our financial results.

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

 

22


Table of Contents

With respect to the unaudited condensed consolidated financial information of UTC for the quarters ended June 30, 2010 and 2009, PricewaterhouseCoopers LLP (PricewaterhouseCoopers) reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated July 26, 2010, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the Act) for its report on the unaudited condensed consolidated financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.

Report of Independent Registered Public Accounting Firm

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

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

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

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

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

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

July 26, 2010

 

23


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

BUSINESS OVERVIEW

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

General

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

The global economic downturn we experienced throughout 2009 has shown signs of improvement in the first half of 2010. While some economic indicators continue to trend positive, the overall rate of global recovery experienced to date has been modest and uncertainty over the sustainability of this recovery remains. Certain markets have experienced volatility, as evidenced by the protracted slide in 10-year U.S. Treasury yields and the significant fluctuations in the Euro during the second quarter of 2010. The availability of credit remains tight. Despite uncertainty as to the sustainability of the current recovery, we have seen broader improvement in the year-over-year order rates in the second quarter of 2010, with continued growth in the short-cycle Carrier and Hamilton Sundstrand industrial businesses. Commercial aerospace aftermarket orders have also improved sequentially over the first quarter of 2010, which is consistent with our expectation of growth in the second half of 2010. These order rate improvements positively impacted organic revenues, which grew on a consolidated basis for the first time since the fourth quarter of 2008. Order rates at our longer cycle businesses, such as Otis new equipment, Carrier commercial HVAC and certain businesses within UTC Fire & Security, also grew year-over-year in the quarter. Based on an improved business unit operational outlook, as compared to the first quarter of 2010, our full year expectation for organic revenue growth is approximately 2%; however, we expect some adverse impacts on earnings in the second half of 2010, particularly from foreign currency translation and higher research and development costs. Even with the improved end market environment experienced in the second quarter of 2010, we continue to focus on cost reduction to drive year-over-year margin expansion, including the continuation of restructuring initiatives initiated in late 2008.

Total revenues increased 5% in the second quarter of 2010, as compared to the same period of 2009. This reflects organic revenue growth (4%) and the beneficial impact of net acquisitions (1%). Along with the revenue increase, consolidated operating profit increased 18% in the second quarter of 2010, as compared with the same period of 2009. This year-over-year improvement reflects an increase in operational profit (8%) driven by the beneficial impact on operational results of our continued focus on cost reduction and previously initiated restructuring actions, contributions from net acquisitions (3%), and the impact of currency hedges net of foreign currency translation (net combined 2%) at Pratt & Whitney Canada (P&WC). This year-over-year improvement also reflects the beneficial impact of lower restructuring costs partially offset by the adverse impact of year-over-year non-recurring items, including the absence of a gain recorded at Otis in the second quarter of 2009 and the impact from asset impairment charges recorded at both Carrier and Hamilton Sundstrand, as further described below. To better position us for the future, we continue to focus on restructuring and cost reduction actions, ongoing portfolio transformation at Carrier, and efforts to implement low cost sourcing initiatives.

Although the U.S. dollar strengthened throughout the second quarter of 2010 against certain currencies such as the Euro, the impact of foreign currency generated a positive foreign currency impact of $.03 per diluted share on our operational performance in the second quarter of 2010. This year-over-year impact primarily represents the beneficial impact of hedging which more than offset adverse foreign currency translation at P&WC. The relative weakness in the U.S. dollar adversely impacts P&WC operating results, 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. However, as a result of hedging programs in place, this adverse impact was more than offset by the beneficial impact on revenues of maturing hedges that were executed when the U.S. dollar was stronger.

Commercial Businesses

Our commercial businesses generally serve customers in the worldwide commercial and residential property industries, although Carrier also serves customers in the commercial and transport refrigeration industries. Revenues in the commercial

 

24


Table of Contents

businesses are influenced by a number of external factors including fluctuations in residential and commercial construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, tightening credit markets and other global and political factors. Carrier’s financial performance can also be influenced by production and utilization of transport equipment, and for its residential business, weather conditions. To ensure adequate supply of Carrier products in the distribution channel, Carrier customarily offers its customers incentives to purchase products.

Although organic revenue contracted at both Otis and UTC Fire & Security, Carrier’s revenues grew organically in the second quarter of 2010 and we continue to see improvement in the growth in order rates in Carrier’s short-cycle businesses. We are also encouraged by the improvement in order growth in our longer cycle commercial businesses, such as Otis new equipment, Carrier commercial HVAC, and certain businesses within UTC Fire & Security. Emerging markets continue to perform well, with particular strength in India and Brazil where combined orders for the commercial business units grew by over 25% in the second quarter year-over-year. Similarly, in China, orders grew over the prior year, but as expected, growth rates in China have begun to slow as year-over-year comparisons become more difficult in light of the strong growth experienced in the prior year. Although the growth in order rates across the businesses is based on low prior year comparisons, it nonetheless indicates improvements to key markets. While the U.S. housing market remained weak in the first half of 2010, it has shown improvement over the depressed levels experienced in 2009.

Within the Otis segment, revenues decreased 1% in the first half of 2010 as lower volume was mostly offset by the favorable impact of foreign currency translation. Volume was negatively impacted by a weaker opening new equipment backlog. Aggressive cost reduction actions and continued strength in the contractual maintenance business helped to mitigate the new equipment volume decline. New equipment orders increased 11% in the first half of 2010, as compared to the same period of 2009, primarily due to the strong order growth in China and the favorable impact of foreign currency translation. Following a two year decline, orders in North America grew in the second quarter of 2010. Pricing remained under pressure in all of Otis’ major markets, which is expected to continue through the remainder of 2010.

Carrier experienced organic revenue growth of 7% in the second quarter of 2010, as compared to the same period of 2009, as certain businesses are benefiting from strengthening market conditions, particularly in the transport refrigeration and U.S. residential systems markets, while overall market conditions across Europe remain weak. We continue to see improvement in order rate growth in Carrier’s short-cycle businesses, particularly within transport refrigeration, which has experienced a significant increase in organic orders. Carrier also continued its transformation to a higher returns business, as evidenced by very strong operating profit margin expansion in the second quarter of 2010.

UTC Fire & Security experienced a 22% revenue increase in the second quarter of 2010, as compared to the same period of 2009, driven by the impact of net acquisitions (25%), principally GE Security, partially offset by an organic revenue contraction. Although organic revenues declined in the second quarter of 2010, organic orders grew year-over-year for the first time since the second quarter of 2008, including order growth in Asia, as well as in the product businesses.

Aerospace Businesses

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

Aerospace markets showed modest signs of recovery in the first half of 2010. Airline operating results have been encouraging as they continue to focus on improving their finances through cost reduction actions and cash conservation measures. Airline traffic trended favorably in the second quarter of 2010 and, as a result, we expect RPM’s to grow approximately 5% worldwide in 2010. Orders of shorter cycle commercial aerospace spares grew year-over-year in the second quarter of 2010, with 8% growth in Pratt & Whitney’s large commercial spares orders and a 7% growth in Hamilton Sundstrand’s commercial spares orders. The recent improvement in air traffic trends and order rates are in line with our expectation of higher commercial aerospace aftermarket revenues in the second half of 2010. The lingering effects of the economic downturn continue to contribute to a low demand for business and general aviation aircraft, and as a result P&WC engine shipments declined 13% in the second quarter of 2010, as compared to the same period of the prior year, although engine shipments increased 8% from the first quarter of 2010. With the general economic recovery, the level of engine shipments at P&WC is expected to increase as the year progresses, while spares orders are expected to be flat for the full year of 2010 as compared with 2009.

Although the commercial aircraft market remains a challenge, higher military aircraft deliveries, as a result of continued government spending, drove a 22% increase in Sikorsky’s second quarter revenues as compared to the same period of 2009. With the robust government demand, Sikorsky’s military backlog remains very strong.

As previously disclosed, Sikorsky engaged in discussions with the Canadian government concerning an anticipated delay in completing certain elements of the specification for interim aircraft to be delivered under a contract for the development, production,

 

25


Table of Contents

and logistical support of 28 CH-148 helicopters. Pursuant to those discussions, the parties signed contract amendments in June 2010 that provide the requirements for the six interim aircraft scheduled to be delivered beginning in November 2010 and which will allow for commencement of initial operational test and evaluation activities prior to the scheduled delivery of final configuration helicopters starting in June 2012. The amendments also include modifications to the liquidated damages schedule, readjustment of payment schedules, resolution of open disputes and other program enhancements.

Acquisition and Disposition Activity

Our growth strategy contemplates acquisitions. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated, and anticipated synergies or cost savings are achieved. During the first six months of 2010, our investment in business acquisitions was approximately $2.4 billion, including debt assumed of $32 million, and principally reflected the acquisition of the GE Security business, and the acquisition of an equity stake in Clipper Windpower Plc (Clipper). The remainder of our investment in businesses for the first six months of 2010 consisted of a number of small acquisitions in both our commercial and aerospace businesses. We recorded the excess of the purchase price over the estimated fair value of the assets acquired as an increase in goodwill. As a result of acquisition activity, goodwill increased approximately $1.2 billion in the first six months of 2010.

On March 1, 2010, we completed the acquisition of the GE Security business for approximately $1.8 billion, including debt assumed of $32 million. The GE Security business supplies security and fire safety technologies for commercial and residential applications through a broad product portfolio that includes fire detection and life safety systems, intrusion alarms, and video surveillance and access control systems. This business is being integrated into our UTC Fire & Security segment during the course of 2010 and will enhance UTC Fire & Security’s geographic diversity with the strong North American presence and increased product and technology offerings of GE Security. We recorded $1.1 billion of goodwill and approximately $600 million of identified intangible assets in connection with this acquisition.

In January 2010, we completed the acquisition of a 49.5% equity stake in Clipper, a California-based wind turbine manufacturer that trades on the AIM London Stock Exchange. This investment is intended to expand our power generation portfolio and allow us to enter the wind power market by leveraging our expertise in blade technology, turbines and gearbox design. The total cost was £166 million (approximately $270 million) for the purchase of 84.3 million newly issued shares and 21.8 million shares from existing shareowners. We have accounted for this investment under the equity method of accounting. Subsequent to the initial purchase, we increased our investment to 49.9%. 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 the prior approval of Clipper.

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

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

Other

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

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

CRITICAL ACCOUNTING ESTIMATES

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to

 

26


Table of Contents

the Consolidated Financial Statements in our 2009 Annual Report, incorporated by reference in our 2009 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting estimates during the first six months of 2010.

RESULTS OF CONTINUING OPERATIONS

Revenues

 

     Quarter Ended June 30,          Six Months Ended June 30,       

(in millions)

   2010    2009    % change     2010    2009    % change  

Sales

   $ 13,802    $ 13,060    5.7    $ 25,842    $ 25,259    2.3 

Other income, net

     88      136    (35.3 )%      139      186    (25.3 )% 
                                        

Total revenues

   $ 13,890    $ 13,196    5.3    $ 25,981    $ 25,445    2.1 
                                        

The 5% revenue increase in the second quarter of 2010, as compared to the same period of 2009, reflects organic revenue growth (4%) and the beneficial impact from net acquisitions (1%). The net acquisitions impact reflects the benefit of recent acquisitions, principally GE Security, net of the impact of dispositions, primarily at Carrier associated with its ongoing portfolio transformation strategy. Organic revenue growth largely reflects an increase at Sikorsky, driven by higher military revenues, and growth at Carrier driven primarily by strength in the transport refrigeration and U.S. residential systems business. The organic revenue growth also reflects the year-over-year beneficial impact of currency hedges at P&WC. These organic revenue increases were partially offset by organic revenue contraction across other segments, primarily at Otis and UTC Fire & Security. The organic revenue decline at Otis is due to a decline in new equipment revenue, as continued growth in China was offset by declines in most other major geographic markets, partially offset by continued growth in the contractual maintenance business. Although total revenue grew at UTC Fire & Security, it was driven from the impact of the GE Security acquisition; the contraction in organic revenue primarily reflects a decline in the service and install business as a result of weaker market conditions.

The 2% revenue increase in the first six months of 2010, as compared to the same period of 2009, was attributable to the beneficial impact from foreign currency translation. Organic revenues were flat year-over-year reflecting an increase at both Sikorsky and Carrier, offset by declines across the rest of the businesses. The organic revenue growth at Sikorsky was driven by higher military revenues and growth at Carrier was driven primarily by strength in the transport refrigeration and U.S. residential systems businesses. Similar to the second quarter of 2010, the decline in organic revenues at Otis over the first six months of 2010 was due primarily to a decline in new equipment revenue, as continued growth in China was offset by declines in most other major geographic markets, with partial offset from continued growth in the contractual maintenance business. The organic contraction at UTC Fire & Security was a result of weaker market conditions impacting both the product and the service and install businesses. The revenue contraction at Pratt & Whitney largely reflects the continued depressed conditions in the business jet market and lower commercial aerospace aftermarket. The beneficial impact from recent acquisitions, principally GE Security, was mostly offset by the impact of dispositions associated with Carrier’s ongoing portfolio transformation to a higher returns business.

The decline in Other income, net for the second quarter and first six months of 2010, as compared with the same period of 2009, primarily reflects the absence of a $52 million non-taxable gain recognized at Otis in the second quarter of 2009. This prior year gain related to the re-measurement to fair value of a previously held equity interest in a joint venture as a result of the purchase of a controlling interest. The remaining year-over-year variance for both the second quarter and first six months of 2010 is primarily attributable to activity in the second quarter of 2010 related to a $24 million favorable pre-tax interest adjustment associated with the resolution of an uncertain temporary tax item, partially offset by the impact from the early redemption of long-term debt that was due November 15, 2010.

Gross Margin

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(in millions)

   2010     2009     2010     2009  

Gross margin

   $ 3,787     $ 3,459     $ 7,095     $ 6,551  

Percentage of sales

     27.4     26.5     27.5     25.9

 

27


Table of Contents

The 90 basis point increase in gross margin as a percentage of sales in the second quarter of 2010, as compared to 2009, was primarily driven by increased volumes, continued focus on cost reduction, savings from previously initiated restructuring actions, net operational efficiencies and the beneficial impact from net acquisitions. The adverse impact of asset impairment charges (60 basis points) at both Carrier and Hamilton Sundstrand in the second quarter of 2010, primarily related to expected disposition activity, was mostly offset by the beneficial impact of lower year-over-year restructuring costs (50 basis points).

For the first six months of 2010, as compared with the same period of 2009, gross margin as a percentage of sales improved 160 basis points. This improvement was primarily driven by increased volumes, continued focus on cost reduction, savings from previously initiated restructuring actions, net operational efficiencies and the beneficial impact from net acquisitions. The beneficial impact of lower year-over-year restructuring charges (40 basis points) was mostly offset by the adverse impact of asset impairment charges (30 basis points) related to expected disposition activity in 2010 at both Carrier and Hamilton Sundstrand.

Research and Development

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

(in millions)

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

Company-funded

   $ 459    3.3   $ 384    2.9   $ 856    3.3   $ 793    3.1

Customer-funded

     485    3.5     519    4.0     977    3.8     1,033    4.1
                                                    

Total

   $ 944    6.8   $ 903    6.9   $ 1,833    7.1   $ 1,826    7.2
                                                    

Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year variations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses and relates largely to the next generation product family at Pratt & Whitney, the Boeing 787 program at Hamilton Sundstrand, and various engine programs at P&WC. Company-funded research and development spending for the full year 2010 is expected to increase by more than $150 million from 2009 levels primarily due to incremental investments in the next generation product family at Pratt & Whitney, including the PurePower PW1000G engine, and the impact of research and development activities at the recently acquired GE Security business within UTC Fire & Security.

The decrease in customer-funded research and development in the second quarter and first six months of 2010, compared to the same periods in 2009 was primarily driven by a decrease at Pratt & Whitney related to a reduction in development spending on the Joint Strike Fighter program partially offset by higher development spending on the CH-53K program at Sikorsky.

Selling, General and Administrative

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(in millions)

   2010     2009     2010     2009  

Selling, general and administrative expenses

   $ 1,491     $ 1,574     $ 2,915     $ 3,057  

Percentage of sales

     10.8     12.1     11.3     12.1

The decrease in selling, general and administrative expenses in the second quarter of 2010, as compared to the same period of 2009, is due primarily to a continued focus on cost reduction and the impact from restructuring and cost saving initiatives undertaken in 2009 in anticipation of adverse economic conditions. As a percentage of sales, the 130 basis point year-over-year decrease reflects the beneficial impact of lower year-over-year restructuring costs (110 basis points).

The decrease in selling, general and administrative expenses in the first six months of 2010, as compared to the same period of 2009, is due primarily to a continued focus on cost reduction and the impact from restructuring and cost saving initiatives undertaken in 2009 in anticipation of adverse economic conditions. As a percentage of sales, the 80 basis point year-over-year decrease primarily reflects the impact of lower restructuring costs.

 

28


Table of Contents

Interest Expense

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(in millions)

   2010     2009     2010     2009  

Interest expense

   $ 192     $ 177     $ 378     $ 352  

Average interest rate

     5.8     5.8     5.9     5.9

The increase in interest expense in the second quarter of 2010 as compared to the same period of the prior year largely reflects the impact of higher average borrowings, partially offset by lower interest charges related to our deferred compensation plan. Interest expense on our long-term debt increased as a result of the issuance of two series of fixed rate long-term notes totaling $2.25 billion in February 2010 (see further discussion in the “Liquidity and Financial Condition” section). This impact was partially offset by the absence of interest associated with the repayment in May 2010 of our $600 million of 4.375% notes due 2010, the early redemption in June 2010 of our $500 million of 7.125% notes due 2010, and the repayment in June 2009 of our $400 million of 6.500% notes due 2009. Interest expense also reflects the lower cost associated with our commercial paper borrowings. Similar to the second quarter of 2010, the interest expense for the first six months of 2010, as compared to the same period of the prior year, reflects the impact of higher average borrowings.

Income Taxes

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

Effective tax rate

   30.0   27.0   30.0   26.4

The increase in the effective tax rate for the second quarter of 2010, as compared to the same period of 2009, reflects an overall increase in the forecasted effective tax rate, the net tax effects of asset impairment charges in 2010 and the absence of a non-taxable gain recorded in the same period of 2009. The effective tax rate for the six months ended June 30, 2010 increased as compared to the same period of 2009 as a result of an overall increase to the forecasted effective tax rate, the impact from health care legislation related to the Medicare Part D program in the first quarter of 2010, and the absence of a $25 million tax benefit and non-taxable gain recorded in 2009. The effective tax rate for the balance of the year is expected to be approximately 29% before the impacts of any discrete events.

Net Income

 

     Quarter Ended June 30,    Six Months Ended June 30,

(in millions, except per share amounts)

   2010    2009    2010    2009

Net income

   $ 1,212    $ 1,066    $ 2,159    $ 1,865

Less: Noncontrolling interest in subsidiaries’ earnings

     102      90      183      167
                           

Net income attributable to common shareowners

   $ 1,110    $ 976    $ 1,976    $ 1,698
                           

Diluted earnings per share

   $ 1.20    $ 1.05    $ 2.13    $ 1.83

Although the U.S. dollar strengthened throughout the second quarter of 2010 against certain currencies such as the Euro, the impact of foreign currency generated a positive foreign currency impact of $.03 per diluted share on our operational performance in the second quarter of 2010. This year-over-year impact primarily represents the beneficial impact of hedging which more than offset adverse foreign currency translation at P&WC. At P&WC, the weakness of the U.S. dollar in the second quarter of 2010 generated an adverse foreign currency translation impact as the majority of P&WC’s revenues are denominated in U.S. dollars, while a significant portion of its costs are incurred in local currencies. To help mitigate the volatility of foreign currency exchange rates on our operating results, we maintain foreign currency hedging programs, the majority of which are entered into by P&WC. As a result of hedging programs currently in place, P&WC’s 2010 full year operating results will include a beneficial impact of foreign currency translation, net of hedging, of approximately $125 million. For additional discussion of hedging, refer to Note 8 to the Condensed Consolidated Financial Statements. Diluted earnings per share for the second quarter of 2010 include a net charge of $.12 per share from restructuring and non-recurring items. These non-recurring items primarily include the previously noted asset impairment charges at both Carrier and Hamilton Sundstrand, net of a favorable pretax interest adjustment associated with the resolution of an uncertain temporary tax item. We expect to initiate additional restructuring actions during the remainder of 2010. Including trailing costs from

 

29


Table of Contents

previously announced restructuring actions, we expect a net $.20 charge to diluted earnings per share for anticipated restructuring costs and non-recurring items for the full year 2010. Except for those restructuring actions initiated during the first six months of 2010, no specific plans for significant other actions have been finalized at this time. Diluted earnings per share for the second quarter of 2010 were also favorably impacted by approximately $.03 per share as a result of the shares repurchased since July 1, 2009 under our share repurchase program.

Restructuring and Other Costs

During the first six months of 2010, we recorded pre-tax restructuring and other costs totaling $152 million for new and ongoing restructuring actions as follows:

 

(in millions)

    

Otis

   $ 28

Carrier

     33

UTC Fire & Security

     29

Pratt & Whitney

     35

Hamilton Sundstrand

     9

Sikorsky

     7

Eliminations and other

     11
      

Total

   $ 152
      

The net costs included $91 million recorded in cost of sales, $60 million in selling, general and administrative expenses and $1 million in other income, net. As described below, these costs primarily relate to actions initiated during 2010 and 2009.

2010 Actions. During the first six months of 2010, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We recorded net pre-tax restructuring and other costs totaling $121 million as follows: Otis $26 million, Carrier $25 million, UTC Fire & Security $22 million, Pratt & Whitney $23 million, Hamilton Sundstrand $7 million, Sikorsky $7 million and Eliminations and other $11 million. The charges included $68 million in cost of sales and $53 million in selling, general and administrative expenses. Those costs included $100 million for severance and related employee termination costs, $12 million for asset write-downs and $9 million for facility exit and lease termination costs.

We expect the 2010 actions that were initiated in the first six months to result in net workforce reductions of approximately 2,400 hourly and salaried employees, the exiting of approximately 2.8 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of June 30, 2010, we have completed net workforce reductions of approximately 900 employees. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2010 and 2011. Approximately 75% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During the first six months of 2010, we had cash outflows of approximately $35 million related to the 2010 actions. We expect to incur additional restructuring and other costs of $55 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 $160 million annually.

2009 Actions. During the first six months of 2010, we recorded net pre-tax restructuring and other costs and reversals totaling $35 million for restructuring actions initiated in 2009. The 2009 actions relate to ongoing cost reduction efforts, including workforce reductions, the consolidation of field operations and the consolidation of repair and overhaul operations. We recorded the charges for the first six months of 2010 as follows: Otis $2 million, Carrier $11 million, UTC Fire & Security $7 million, Pratt & Whitney $13 million and Hamilton Sundstrand $2 million. The charges included $23 million in cost of sales, $11 million in selling, general and administrative expenses and $1 million in other income, net. Those costs included $9 million for severance and related employee termination costs, $5 million for asset write-downs and $21 million for facility exit and lease termination costs.

We expect the 2009 actions to result in net workforce reductions of approximately 14,500 hourly and salaried employees, the exiting of approximately 4.6 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of June 30, 2010, we have completed net workforce reductions of approximately 12,800 employees and exited 1.1 million net square feet of facilities. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2010 and 2011. Approximately 60% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During the first six months of 2010, we had cash outflows of approximately $131 million related to the 2009 actions. We expect to incur additional restructuring and other costs of $63 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.

 

30


Table of Contents

In September 2009, Pratt & Whitney announced plans to close a repair facility and an engine overhaul facility in Connecticut. For additional information concerning litigation related to Pratt & Whitney’s decision to close these two facilities, see Part II, Item 1, “Legal Proceedings” in this Form 10-Q for further discussion.

Additional 2010 Actions. We expect to initiate additional restructuring actions during the remainder of 2010. Including trailing costs from previously announced restructuring actions, we expect a net $.20 charge to diluted earnings per share for anticipated restructuring costs and non-recurring items for the full year 2010. Except for those actions described above, no specific plans for significant other actions have been finalized at this time.

Segment Review

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

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

 

     Revenues     Operating Profits     Operating Profit Margins  

(in millions)

   2010     2009     2010     2009     2010     2009  

Otis

   $ 2,837     $ 2,952     $ 641     $ 631     22.6   21.4

Carrier

     3,124       3,100       333       260     10.7   8.4

UTC Fire & Security

     1,619       1,330       168       55     10.4   4.1

Pratt & Whitney

     3,298       3,111       522       467     15.8   15.0

Hamilton Sundstrand

     1,387       1,402       204       187     14.7   13.3

Sikorsky

     1,691       1,389       169       133     10.0   9.6
                                            

Total segments

     13,956       13,284       2,037       1,733     14.6   13.0

Eliminations and other

     (66     (88     (19     (7    

General corporate expenses

     —          —          (93     (89    
                                            

Consolidated

   $ 13,890     $ 13,196     $ 1,925     $ 1,637     13.9   12.4
                                            

Second quarter 2010 and 2009 restructuring and other costs included in consolidated operating profit totaled $85 million and $301 million, respectively, as follows:

 

     Quarter Ended June 30,

(in millions)

   2010    2009

Otis

   $ 17    $ 57

Carrier

     15      55

UTC Fire & Security

     19      86

Pratt & Whitney

     9      56

Hamilton Sundstrand

     7      37

Sikorsky

     7      7

Eliminations and other

     11      1

General corporate expenses

     —        2
             

Total

   $ 85    $ 301
             

 

31


Table of Contents

Results for the six months ended June 30, 2010 and 2009 are as follows:

 

     Revenues     Operating Profits     Operating Profit Margins  

(in millions)

   2010     2009     2010     2009     2010     2009  

Otis

   $ 5,569     $ 5,617     $ 1,237     $ 1,137     22.2   20.2

Carrier

     5,564       5,587       472       282     8.5   5.0

UTC Fire & Security

     3,038       2,616       291       148     9.6   5.7

Pratt & Whitney

     6,190       6,291       958       903     15.5   14.4

Hamilton Sundstrand

     2,728       2,783       425       379     15.6   13.6

Sikorsky

     3,057       2,723