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UTX > SEC Filings for UTX > Form 10-Q on 26-Apr-2013All Recent SEC Filings

Show all filings for UNITED TECHNOLOGIES CORP /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for UNITED TECHNOLOGIES CORP /DE/


26-Apr-2013

Quarterly Report


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

BUSINESS OVERVIEW
We are a global provider of high technology products and services to the building systems and aerospace industries. Our operations are classified into five principal business segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems and Sikorsky. Otis and UTC Climate, Controls & Security are referred to as the "commercial businesses," while Pratt & Whitney, UTC Aerospace Systems and Sikorsky are collectively referred to as the "aerospace businesses."
On July 26, 2012, UTC acquired Goodrich Corporation (Goodrich) pursuant to a merger agreement dated September 21, 2011. As a result of the acquisition, Goodrich became a wholly-owned subsidiary of UTC. The acquired Goodrich business and the legacy Hamilton Sundstrand business have been combined to form a new segment named UTC Aerospace Systems. The results of the acquired Goodrich business have been included in UTC's financial statements only for periods subsequent to the completion of the acquisition. The acquisition resulted in the inclusion of Goodrich's assets and liabilities as of the acquisition date at their respective fair values. Accordingly, the acquisition materially affected UTC's results of operations and financial position.
Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The current status of significant factors impacting our business environment in 2013 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 2012 Annual Report, which is incorporated by reference in our 2012 Form 10-K. General
Our worldwide 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 operations include original equipment manufacturing (OEM) and extensive related aftermarket parts and services in both our commercial and aerospace businesses. Our business mix also reflects the combination of shorter cycles at UTC Climate, Controls & Security and in our commercial aerospace aftermarket businesses, and longer cycles at Otis and in our aerospace OEM businesses. Our customers include companies in the private sector and governments, and our businesses reflect an extensive geographic diversification that has evolved with the continued globalization of world economies.
Growth in emerging markets continues to be led by China, where gross domestic product growth is expected to exceed 8% in 2013. European economic conditions remain mixed with weak consumer confidence and high unemployment rates in southern Europe partially offset by growth in eastern European emerging markets. The European market, together with U.S. Government defense spending, represents over 40% of UTC sales. The economic environment in the United States showed strength during the first quarter with improving consumer sentiment and lower unemployment rates. Although U.S. Government sequestration has not yet had a substantial effect on our military aerospace businesses, it may in future periods.
Disposition Activity
On March 14, 2012, the Board of Directors of the Company approved a plan for the divestiture of a number of non-core businesses. Cash generated from these divestitures has been and is intended to be used to repay debt incurred to finance the acquisition of Goodrich. These divestitures are expected to generate approximately $3 billion in net cash, on an after-tax basis, when complete. The legacy Hamilton Sundstrand Industrial businesses, as well as Clipper Windpower (Clipper), Pratt & Whitney Rocketdyne (Rocketdyne) and UTC Power all met the "held-for-sale" criteria in 2012. The results of operations, including the net realized gain and expected losses on disposition, and the related cash flows which result from these non-core businesses have been reclassified to Discontinued Operations in our Condensed Consolidated Statements of Comprehensive Income and Cash Flows. The dispositions of Clipper and the legacy Hamilton Sundstrand Industrial businesses were completed in 2012. On February 12, 2013, we completed the disposition of UTC Power to ClearEdge Power. The UTC Power disposition resulted in payments by UTC totaling $48 million, which included capitalization of the business prior to the sale and interim funding of operations as the buyer took control of a loss generating business. We have no continuing involvement with the UTC Power business.
On July 23, 2012, we announced an agreement to sell our Rocketdyne unit to GenCorp Inc. We expect to complete the sale of the business mid-year 2013, pending the satisfaction of closing conditions, including regulatory approval. We are taking significant actions required to satisfy these conditions. Although the Board of Directors also approved the sale of the Pratt & Whitney Power Systems business, it was not reclassified to Discontinued Operations due to our expected level of continuing involvement in the business post-sale. The sale of Pratt & Whitney Power Systems is expected to be completed during the second quarter of 2013.


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In connection with regulatory approval of the Goodrich acquisition, regulatory authorities required UTC to dispose of the Goodrich electric power systems and the pumps and engine controls businesses. Pursuant to these regulatory obligations, these businesses had been held separately from UTC's and Goodrich's ongoing businesses since the acquisition of Goodrich by UTC. On March 18, 2013, we completed the sale of the Goodrich pumps and engine controls business to Triumph Group, Inc., and on March 26, 2013, we completed the sale of the Goodrich electric power systems business to Safran. Combined proceeds from the sales of the two businesses were approximately $600 million.
As discussed below in "Results of Operations," our results include the impact from non-recurring items such as the beneficial impact of gains from business divestiture activities, including those related to the ongoing portfolio transformation at UTC Climate, Controls & Security. Acquisition 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. On February 7, 2013, we completed the acquisition of Grupo Ascensores Enor, S.A. (Enor), a privately held company headquartered in Spain with operations in Spain and Portugal, which designs, manufactures, installs and services elevators. Enor's 2012 sales were approximately $50 million. Under the terms of the transaction, Zardoya Otis, S.A. (ZOSA), a non-wholly owned subsidiary of the Company, exchanged publicly traded shares of ZOSA with a fair value of approximately $240 million as of the transaction completion date for all of the shares of Enor. During the first three months of 2013, our cash investment in business acquisitions was approximately $24 million and consisted of a number of additional small acquisitions in our commercial businesses. We expect cash investment in businesses of approximately $1 billion in 2013. However, actual acquisition spending may vary depending upon the timing, availability and value of acquisition opportunities.
Other
Government legislation, policies and regulations can have a negative impact on our worldwide operations. Government regulation of refrigerants and energy efficiency standards, elevator safety codes and fire protection regulations are important to our commercial businesses. Government and market-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, and government procurement practices can impact our aerospace and defense businesses.
Commercial airline financial distress and consolidation, global economic conditions, changes in raw material and commodity prices, interest rates, foreign currency exchange rates, energy costs, and the impact from natural disasters and weather conditions create uncertainties that could impact our earnings outlook for the remainder of 2013. See Part II, Item 1A, "Risk Factors" in this Form 10-Q for further discussion.
The following activities are disclosed as required by Section 13(r)(1)(D)(iii) of the Securities Exchange Act of 1934, as amended, (Exchange Act) as transactions or dealings with the government of Iran that have not been specifically authorized by a U.S. federal department or agency:
UTC Climate, Controls & Security. In 2012 and 2013, Chubb Fire & Security Limited (Chubb), a non-U.S. subsidiary of UTC Climate, Controls & Security organized in the United Kingdom, sold fire safety products and provided related maintenance services to the London office of Bimeh Iran Insurance Company (U.K.) (BIUK), which has been designated by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) as an entity owned or controlled by the government of Iran. In January 2012, pursuant to a fire emergency services contract with BIUK that had been in place since at least 1998, Chubb sold and received payments for approximately $1,620 for fire safety equipment and maintenance services for such items, including fire blankets, fire extinguishers, extinguisher stands and spare parts. The net profit on the 2012 sales was $296. Chubb's legacy contract with BIUK was not prohibited by applicable laws when it was executed, and in January 2012, when these sales and services took place, these activities were not prohibited by U.S. law.
Pursuant to the same legacy fire emergency services contract, in January 2013, Chubb sold approximately $1,414 in fire safety equipment and maintenance services to BIUK. The net profit on the 2013 sales was $258. These sales took place after the President issued Executive Order 13628 on October 9, 2012, which implemented Section 218 of the Iran Threat Reduction and Syria Human Rights Act (ITRA) by prohibiting any entity owned or controlled by a U.S. person and established or maintained outside the U.S. from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran. Accordingly, UTC Climate, Controls & Security has filed an appropriate disclosure with OFAC. Chubb terminated its contract with BIUK on March 3, 2013 and does not intend to do any further business with BIUK.


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CRITICAL ACCOUNTING ESTIMATES
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in our 2012 Annual Report, incorporated by reference in our 2012 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 three months ended March 31, 2013.
                             RESULTS OF OPERATIONS
                                   Net Sales
                           Quarter Ended March 31,
(Dollars in millions)          2013              2012
Net Sales             $      14,399            $ 12,416


The factors contributing to the total percentage change year-over-year in total
net sales are as follows:
                                   Quarter Ended March 31, 2013
Organic volume                                 (2 )%
Foreign currency translation                    -
Acquisitions and divestitures, net             18  %
Other                                           -
Total % Change                                 16  %

During the first quarter of 2013, Otis experienced organic sales growth (2%) driven by higher new equipment sales. This was more than offset by a contraction in Sikorsky organic sales (7%), driven by reduced aircraft deliveries and aftermarket services for the U.S. Government. UTC Aerospace Systems did not have any organic growth. Organic sales in the first quarter declined at our remaining business units UTC Climate, Controls & Security (3%) and Pratt & Whitney (2%). The sales increase from acquisitions was primarily a result of the acquisitions of Goodrich and IAE, partially offset by the ongoing portfolio transformation initiatives at UTC Climate, Controls & Security.

Cost of Products and Services Sold
                                            Quarter Ended March 31,
(Dollars in millions)                         2013             2012
Cost of products sold                    $      7,848       $  6,323
Percentage of product sales                      76.5 %         75.1 %
Cost of services sold                    $      2,617       $  2,607
Percentage of service sales                      63.2 %         65.2 %
Total cost of products and services sold $     10,465       $  8,930

The factors contributing to the total percentage change year-over-year for the quarter ended March 31, 2013 in total cost of products and services sold are as follows:

                                   Quarter Ended March 31, 2013
Organic volume                                 (1 )%
Foreign currency translation                    -
Acquisitions and divestitures, net             18  %
Other                                           -
Total % Change                                 17  %


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The organic decrease in total cost of products and services sold (1%) in the first quarter of 2013 corresponded to the organic sales decline (2%) noted above. The increase in "Acquisitions and divestitures, net" (18%) is largely attributable to the acquisitions of Goodrich and IAE, partially offset by the ongoing portfolio transformation initiatives at UTC Climate, Controls & Security. The year-over-year increase in cost of products sold, as a percentage of product sales, reflects the higher proportion of commercial aerospace OEM sales as a result of lower commercial aerospace spares sales volume and a decline in aftermarket services at Sikorsky during the first quarter of 2013.

                                  Gross Margin
                            Quarter Ended March 31,
(Dollars in millions)        2013             2012
Gross margin            $     3,934       $     3,486
Percentage of net sales        27.3 %            28.1 %

The 80 basis point decline in gross margin as a percentage of sales for the first quarter of 2013 is due to the adverse gross margin impact of the acquisitions of Goodrich and IAE (30 basis points) as well as the higher proportion of commercial aerospace OEM sales as a result of lower commercial aerospace spares sales volume at Pratt & Whitney and UTC Aerospace Systems and in aftermarket services at Sikorsky (50 basis points) during the first quarter of 2013.

                           Research and Development
                           Quarter Ended March 31,
(Dollars in millions)        2013             2012
Company-funded          $       610         $   544
Percentage of net sales         4.2 %           4.4 %
Customer-funded         $       543         $   324
Percentage of net sales         3.8 %           2.6 %

Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year fluctuations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses. The year-over-year increase in company-funded research and development (12%) in the first quarter of 2013 primarily reflects an increase at UTC Aerospace Systems as a result of incremental research and development spending related to the Goodrich businesses (22%), partially offset by lower research and development spending at Pratt & Whitney related to the development of multiple geared turbofan platforms (6%). The remaining change is due to lower spending on military and commercial programs at Sikorsky. The increase in customer-funded research and development (68%) is due to incremental customer-funded spending related to the Goodrich businesses (49%) and at Pratt & Whitney on military programs (17%).
We expect company-funded research and development for the full year 2013 to increase approximately $300 million, as compared with 2012.

Selling, General and Administrative
                                                 Quarter Ended March 31,
(Dollars in millions)                             2013             2012
Selling, general and administrative expenses $     1,627       $     1,529
Percentage of net sales                             11.3 %            12.3 %

Selling, general and administrative expenses increased 6% in the first quarter of 2013 due primarily to the impact of acquisitions, net of divestitures, completed over the preceding twelve months, (10%), partially offset by lower restructuring costs (2%). Higher pension costs were more than offset by savings from previous restructuring actions. The 100 basis point year-over-year decrease as a percentage of sales reflects the lower restructuring costs and benefits from previous restructuring actions.

Other Income, Net
Quarter Ended March 31,
(Dollars in millions) 2013 2012 Other income, net $ 309 $ 300


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Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses as well as other ongoing and non-recurring items. The year-over-year increase in other income, net (3%) largely reflects the benefit of a settlement with an engine program partner (13%) and lower acquisitions and divestiture costs (9%). This was partially offset by a decline in net gains related to the ongoing UTC Climate, Controls & Security portfolio transformation (25%), which included a net gain in the first quarter of 2013 of $38 million primarily on the sale of a business in Hong Kong, compared to a net gain of $112 million during the first quarter of 2012. The remaining increase in other income, net is attributable primarily to higher equity earnings in unconsolidated entities (7%) and normal recurring operational activity as disclosed above.

                             Interest Expense, Net
                                 Quarter Ended March 31,
(Dollars in millions)              2013             2012
Interest expense              $       255         $   164
Interest income                       (19 )           (35 )
Interest expense, net         $       236         $   129
Average interest expense rate         4.0 %           5.7 %

The increase in interest expense in the first quarter of 2013 is a result of higher average debt balances associated with the financing of our acquisition of Goodrich. The decline in interest income in the first quarter of 2013 reflects the absence of approximately $15 million of favorable pre-tax interest adjustments related to the conclusion of the IRS's examination of our tax returns for the years 2006 to 2008, which were recognized in the first quarter of 2012.

Income Taxes
Quarter Ended March 31,
2013 2012
Effective tax rate 23.6 % 20.2 %

The increase in the effective tax rate for the quarter ended March 31, 2013, primarily reflects the absence of a favorable non-cash income tax adjustment of $203 million recorded in the first quarter of 2012. This adjustment was associated with the conclusion of the IRS's examination of the Company's tax returns for the years 2006 to 2008. This increase was partially offset by the favorable tax impact of $95 million associated with the legislative corporate tax extenders enacted in January 2013, as part of the American Taxpayer Relief Act of 2012. This adjustment relates to the 2012 retroactive impact of the law. We anticipate that our full year annual effective income tax rate in 2013 will be approximately 29%, absent one-time adjustments. We anticipate some variability in the tax rate quarter to quarter in 2013.
Net Income Attributable to Common Shareowners from Continuing Operations

                                                               Quarter Ended March 31,
(Dollars in millions, except per share amounts)                  2013            2012
Income from continuing operations attributable to common
shareowners                                                 $      1,270     $    1,189
Diluted earnings per share from continuing operations       $       1.39     $     1.31

Net income attributable to common shareowners from continuing operations for the first quarter of 2013 includes restructuring charges, net of tax benefit, of $35 million as well as a benefit from non-recurring items, net of tax expense, of $132 million. The net benefit on diluted earnings per share of non-recurring items in excess of restructuring charges was $0.11 per share. The results for the first quarter of 2012 included a net $0.30 per share benefit from non-recurring items, partially offset by $0.09 per share of restructuring charges. The impact of foreign currency translation and hedging generated an adverse impact of $0.01 per diluted share on our operational performance in the first quarter of 2013.
Net Loss Attributable to Common Shareowners from Discontinued Operations

                                                                 Quarter Ended March 31,
(Dollars in millions, except per share amounts)                  2013              2012
Net loss attributable to common shareowners from
discontinued operations                                     $        (4 )     $        (859 )
Diluted loss per share from discontinued operations         $         -       $       (0.95 )


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Diluted loss per share from discontinued operations for the first quarter of 2013 includes $0.01 loss per share on the sale of the UTC Power business offset by $0.01 per share benefit from the results of operations of the discontinued entities.
Diluted loss per share from discontinued operations for the first quarter of 2012 includes $0.71 per share of goodwill impairment charges related to Rocketdyne and Clipper, and $0.26 per share unfavorable income tax adjustments related to the recognition of a deferred tax liability on the existing difference between the accounting versus tax gain on the disposition of the legacy Hamilton Sundstrand Industrial businesses. Discontinued operations for the first quarter of 2012 also include a $0.02 per share benefit from the results of operations of the discontinued entities. Restructuring Costs
We recorded net pre-tax restructuring costs totaling $50 million and $138 million in the first three months of 2013 and 2012, respectively, for new and ongoing restructuring actions as follows:

                                                                  Quarter Ended March 31,
(Dollars in millions)                                             2013                2012
Otis                                                        $         10         $         28
UTC Climate, Controls & Security                                      22                   35
Pratt & Whitney                                                        7                   37
UTC Aerospace Systems                                                  8                    2
Sikorsky                                                               5                    3
Eliminations and other                                                 -                    6
Restructuring costs recorded within continuing operations             52                  111
Restructuring costs recorded within discontinued operations           (2 )                 27
Total                                                       $         50         $        138

The net costs for the first three months of 2013 and 2012 were recorded as follows:

                                                                  Quarter Ended March 31,
(Dollars in millions)                                             2013                2012
Cost of sales                                               $         27         $         62
Selling, general and administrative                                   25                   49
Other income, net                                                      -                    -
Restructuring costs recorded within continuing operations             52                  111
Restructuring costs recorded within discontinued operations           (2 )                 27
Total                                                       $         50         $        138

As described below, the charges incurred in the first three months of 2013 primarily relate to actions initiated during 2013 and 2012, while the charges incurred in the first three months of 2012 primarily relate to actions initiated during 2012 and 2011.
2013 Actions. During the three months ended March 31, 2013, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We incurred net pre-tax restructuring costs totaling $20 million as follows:

                                                                      Quarter Ended
(Dollars in millions)                                                 March 31, 2013
Otis                                                                  $          6
UTC Climate, Controls & Security                                                 8
Pratt & Whitney                                                                  6
Restructuring costs recorded within continuing operations                       20
Restructuring costs recorded within discontinued operations                      -
Total                                                                 $         20


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The following table summarizes the charges associated with the 2013
. . .
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