| Notes to Consolidated Financial Statements | |
| 12 Months Ended
Dec. 31, 2009
USD / shares
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| Notes to Consolidated Financial Statements | |
| Note 1. Summary of Accounting Principles |
Note 1: Summary of Accounting Principles
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year's presentation.
CONSOLIDATION. The Consolidated Financial Statements include the accounts of UTC and its controlled subsidiaries. Intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents includes cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities of three months or less.
On occasion, we are required to maintain cash deposits with certain banks in respect to contractual obligations related to acquisitions or divestitures or other legal obligations. As of December 31, 2009 and 2008, the amount of restricted cash was approximately $43 million and $310 million, of which approximately $41 million and $35 million is included in current assets and $2 million and $275 million is included in long-term assets, respectively.
ACCOUNTS RECEIVABLE. Current and long-term accounts receivable include retainage of $156 million and $154 million and unbilled receivables of $902 million and $852 million as of December 31, 2009 and 2008, respectively.
Retainage represents amounts that, pursuant to the applicable contract, are not due until project completion and acceptance by the customer. Unbilled receivables represent revenues that are not currently billable to the customer under the terms of the contract. These items are expected to be collected in the normal course of business. Long-term accounts receivable are included in other assets in the Consolidated Balance Sheet.
MARKETABLE EQUITY SECURITIES. Equity securities that have a readily determinable fair value and that we do not intend to trade are classified as available for sale and carried at fair value. Unrealized holding gains and losses are recorded as a separate component of shareowners' equity, net of deferred income taxes.
INVENTORIES AND CONTRACTS IN PROGRESS. Inventories and contracts in progress are stated at the lower of cost or estimated realizable value and are primarily based on first-in, first-out (FIFO) or average cost methods; however, certain subsidiaries use the last-in, first-out (LIFO) method. If inventories that were valued using the LIFO method had been valued under the FIFO method, they would have been higher by $147 million and $176 million at December 31, 2009 and 2008, respectively. The year-over-year decline largely results from a decrease in inventories associated with the disposition of certain businesses in our Carrier segment.
Costs accumulated against specific contracts or orders are at actual cost. Inventory in excess of requirements for contracts and current or anticipated orders have been reserved as appropriate. Manufacturing costs are allocated to current production and firm contracts.
FIXED ASSETS. Fixed assets are stated at cost. Depreciation is computed over the fixed assets' useful lives using |
| Note 2. Business Acquisitions, Goodwill and Intangible Assets |
Note 2: Business Acquisitions, Goodwill and Intangible Assets
BUSINESS ACQUISITIONS. Our investments in businesses in 2009, 2008 and 2007 totaled $703 million, $1.4 billion and $2.3 billion, respectively. Included in the total investments in businesses was $0, $196 million and $300 million of debt assumed in 2009, 2008 and 2007, respectively.
In December 2009, we agreed to acquire a 49.5% equity stake in Clipper Windpower Plc (Clipper), a California-based wind turbine manufacturer that trades on the AIM London Stock Exchange. This investment is intended to expand our power generation portfolio and allow us to enter the wind power segment by leveraging our expertise in blade technology, turbines and gearbox design. The total cost was 166 million (approximately $270 million) for the purchase of 84.3 million newly issued shares and 21.8 million shares from existing shareowners. We completed the acquisition of this investment on January 12, 2010 and will account for it under the equity method of accounting. Pursuant to our agreement with Clipper, we are prohibited from acquiring additional shares of Clipper within two years of the closing date that would result in an equity stake in excess of 49.9% without prior approval of Clipper.
In November 2009, we entered into an agreement with General Electric Company (GE) to purchase the GE Security business for approximately $1.8 billion. Subject to regulatory approvals and the satisfaction of customary closing conditions, the closing is anticipated to take place early in the second quarter of 2010. GE Security, part of GE Technology Infrastructure, supplies security and fire safety technologies for commercial and residential applications through a broad product portfolio that includes fire detection and life safety systems, intrusion alarms, and video surveillance and access control systems. We intend to incorporate the GE Security business within our existing UTC Fire Security segment, which will significantly enhance UTC Fire Security's geographic diversity with GE Security's strong North American presence and increased product and technology offerings.
In August 2009, we completed the acquisition of the remaining 71% interest in GST Holdings Limited (GST), a fire alarm provider in China, for approximately $250 million bringing our total investment in GST to approximately $360 million. We recorded over $200 million of goodwill and approximately $100 million of identified intangibles in connection with GST. With the acquisition of the remaining 71% of GST, UTC Fire Security further strengthened its presence in the Chinese fire safety industry.
In July 2009, Carrier and Watsco, Inc. (Watsco) formed Carrier Enterprise, LLC, a joint venture to distribute Carrier, Bryant, Payne and Totaline residential and light commercial HVAC products in the U.S. sunbelt region and selected territories in the Caribbean and Latin America. As part of the transaction, Carrier contributed its distribution businesses located in these regions into the new venture. In consideration of its contribution, Carrier received approximately 3 million shares of common stock of Watsco and a 40 percent noncontrolling interest |
| Note 3. Earnings Per Share |
Note 3: Earnings Per Share
(in millions of dollars, except per share amounts) 2009 2008 2007
Net income attributable to common shareowners $ 3,829 $ 4,689 $ 4,224
Basic weighted average shares outstanding 917.4 937.8 963.9
Stock awards 11.4 18.6 24.9
Diluted weighted average shares outstanding 928.8 956.4 988.8
Earnings per share of Common Stock:
Basic $ 4.17 $ 5.00 $ 4.38
Diluted $ 4.12 $ 4.90 $ 4.27
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights (SARs) and stock options when the average market price of the common stock is lower than the exercise price of the related SARs and options during the period. These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would have been antidilutive. For 2009 and 2008, the number of stock awards excluded from the computation was 20.2 million and 8.9 million, respectively. There were no antidilutive stock awards outstanding for 2007. Effective January 1, 2009, we adopted the provisions under the Consolidation Topic of the FASB ASC as it relates to the accounting for noncontrolling interests in Consolidated Financial Statements. This Topic requires that the amount of net income attributable to the noncontrolling interests be included in consolidated net income on the face of the income statement. Earnings per share have not been affected as a result of the adoption of the provisions under this Topic. Additional information pertaining to the accounting for noncontrolling interests is included in Note 9.
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| Note 4. Commercial Aerospace Industry Assets and Commitments |
Note 4: Commercial Aerospace Industry Assets and Commitments
We have receivables and other financing assets with commercial aerospace industry customers totaling $3,016 million and $2,636 million at December 31, 2009 and 2008, respectively.
Customer financing assets related to commercial aerospace industry customers consist of products under lease of $675 million and notes and leases receivable of $375 million. The notes and leases receivable are scheduled to mature as follows: $62 million in 2010, $52 million in 2011, $15 million in 2012, $14 million in 2013, $14 million in 2014, and $218 million thereafter.
Financing commitments, in the form of secured debt, guarantees or lease financing, are provided to commercial aerospace customers. The extent to which the financing commitments will be utilized is not currently known, since customers may be able to obtain more favorable terms from other financing sources. We may also arrange for third-party investors to assume a portion of these commitments. If financing commitments are exercised, debt financing is generally secured by assets with fair market values equal to or exceeding the financed amounts with interest rates established at the time of funding. We also may lease aircraft and subsequently sublease the aircraft to customers under long-term noncancelable operating leases. In some instances, customers may have minimum lease terms that result in sublease periods shorter than our lease obligation. Lastly, we have made residual value and other guarantees related to various commercial aerospace customer-financing arrangements. The estimated fair market values of the guaranteed assets equal or exceed the value of the related guarantees, net of existing reserves.
Our commercial aerospace financing and rental commitments as of December 31, 2009 were $909 million and are exercisable as follows: $116 million in 2010, $100 million in 2011, $29 million in 2012, $7 million in 2013, $6 million in 2014, and $651 million thereafter. Our financing obligations with customers are contingent upon maintenance of certain levels of financial condition by the customers.
In addition, we have residual value and other guarantees of $320 million as of December 31, 2009.
We have a 33% interest in International Aero Engines AG (IAE), an international consortium of four shareholders organized to support the V2500 commercial aircraft engine program. Our interest in IAE is accounted for under the equity method of accounting. IAE may offer customer financing in the form of guarantees, secured debt or lease financing in connection with V2500 engine sales. At December 31, 2009, IAE had financing commitments of $863 million and asset value guarantees of $55 million. Our share of IAE's financing commitments and asset value guarantees was approximately $281 million at December 31, 2009. In addition, IAE had lease obligations under long-term noncancelable leases of approximately $268 million, on an undiscounted basis, through 2020 related to aircraft, which are subleased to customers under long-term leases. These aircraft have fair market values, which approximate the financed amounts, net of reserves. The shareho |
| Note 5. Inventories & Contracts in Progress |
Note 5: Inventories Contracts in Progress
(in millions of dollars) 2009 2008
Raw materials $ 1,281 $ 1,271
Work-in-process 3,097 3,295
Finished goods 2,889 3,634
Contracts in progress 6,479 6,113
13,746 14,313
Less:
Progress payments, secured by lien, on U.S. Government contracts (264) (476)
Billings on contracts in progress (5,973) (5,497)
$ 7,509 $ 8,340
Raw materials, work-in-process and finished goods are net of valuation reserves of $683 million and $497 million as of December 31, 2009 and 2008, respectively. As of December 31, 2009 and 2008, inventory also includes capitalized contract development costs of $862 million and $833 million, respectively, related to certain aerospace programs. These capitalized costs will be liquidated as production units are delivered to the customer. The capitalized contract research and development costs within inventory principally relate to capitalized costs 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.
Contracts in progress principally relate to elevator and escalator contracts and include costs of manufactured components, accumulated installation costs and estimated earnings on incomplete contracts.
Our sales contracts in many cases are long-term contracts expected to be performed over periods exceeding twelve months. At December 31, 2009 and 2008, approximately 73% and 68%, respectively, of total inventories and contracts in progress have been acquired or manufactured under such long-term contracts, a portion of which is not scheduled for delivery within the next twelve months.
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| Note 6. Fixed Assets |
Note 6: Fixed Assets
(in millions of dollars) Estimated Useful Lives 2009 2008
Land $ 345 $ 334
Buildings and improvements 20-40 years 4,898 4,681
Machinery, tools and equipment 3-20 years 9,941 9,486
Other, including under construction 493 605
15,677 15,106
Accumulated depreciation (9,313) (8,758)
$ 6,364 $ 6,348
Depreciation expense was $852 million in 2009, $865 million in 2008 and $770 million in 2007.
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| Note 7. Accrued Liabilities |
Note 7: Accrued Liabilities
(in millions of dollars) 2009 2008
Advances on sales contracts and service billings $ 5,267 $ 5,248
Accrued salaries, wages and employee benefits 1,801 1,877
Litigation and contract matters 541 436
Service and warranty accruals 447 526
Income taxes payable 348 307
Interest payable 296 296
Accrued property, sales and use taxes 196 207
Accrued restructuring costs 403 213
Accrued workers compensation 181 177
Other 2,312 2,782
$ 11,792 $ 12,069
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| Note 8. Borrowings and Lines of Credit |
Note 8: Borrowings and Lines of Credit
(in millions of dollars) 2009 2008
Short-term borrowings:
Commercial paper $ - $ 150
Revolving credit borrowings - 461
Other borrowings 254 412
Total short-term borrowings $ 254 $ 1,023
The weighted-average interest rates applicable to short-term borrowings outstanding at December 31, 2009 and 2008 were 4.8% and 5.3%, respectively. At December 31, 2009, approximately $3.1 billion was available under short-term lines of credit with local banks at our various domestic and international subsidiaries.
At December 31, 2009, 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 December 31, 2009, 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.
(in millions of dollars) 2009 2008
Long-term debt:
LIBOR+.07% floating rate notes due 2009 * $ - $ 500
6.500% notes due 2009 * - 400
7.675% ESOP debt due 2009 * - 33
4.375% notes due 2010 * 600 600
7.125% notes due 2010 * 500 500
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
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
Project financing obligations 158 193
Other (including capitalized leases) 110 105
Total long-term debt 9,490 10,453
Less current portion (1,233) (1,116)
Long-term portion $ 8,257 $ 9,337
* We may redeem the above notes, in whole or in part, at our option at any time at a redemption price in U.S. dollars equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semiannual basis at the adjusted treasury rate plus 10-50 basis points. The redemption price will also include interest accrued to the date of redemption on the principal balance of the notes being redeemed.
In February 2009, we redeemed the entire $500 million outstanding principal amount of our LIBOR+.07% floating rate notes that were due June1, 2009 at a redemption price in U.S. dollars equal to 100% of the principal amount, plus interest |
| Note 9. Equity |
Note 9: Equity
As of January 1, 2009, we adopted the provisions under the Consolidation Topic of the FASB ASC as it relates to the accounting and reporting standards for noncontrolling interests (previously referred to as minority interests) in consolidated subsidiaries as reported in consolidated financial statements. These provisions require that the carrying value of noncontrolling interests be removed from the mezzanine section of the balance sheet and reclassified as equity, and that consolidated net income be recast to include net income attributable to the noncontrolling interests. The standards require retrospective presentation and disclosure of existing noncontrolling interests. Accordingly, we have presented noncontrolling interests as a separate component of equity and have also presented net income attributable to the noncontrolling interest in the consolidated statement of operations. As a result of this adoption, we reclassified noncontrolling interests in the amounts of $918 million and $835 million from the mezzanine section to equity in the December 31, 2008 and 2007, balance sheets, respectively.
In conjunction with the adoption of the new provisions under the Consolidation Topic, we adopted the FASB update to the accounting and reporting standards for redeemable equity instruments. The update to the standards is applicable for all noncontrolling interests with redemption features, such as put options, that are not solely within the control of the Company (redeemable noncontrolling interest). The standards require redeemable noncontrolling interest to be reported in the mezzanine equity section of the consolidated balance sheet at the greater of redemption value or initial carrying value. As a result, we have classified $245 million and $203 million of "redeemable noncontrolling interests" in the mezzanine section in the December 31, 2008 and 2007, balance sheets, respectively. These amounts include an initial transition adjustment of $114 million to increase the redeemable noncontrolling interest to redemption value, where required, as of January 1, 2007. The additional accretion to redemption value attributable to certain redeemable noncontrolling interests was not significant in 2009, 2008 or 2007.
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 is provided below:
(in millions of dollars) 2009 2008 2007
Net income attributable to common shareowners $ 3,829 $ 4,689 $ 4,224
Transfers to noncontrolling interests
Decrease in common stock for purchase of subsidiary shares (67) - -
Net income attributable to common shareowners after transfers to noncontrolling interests $ 3,762 $ 4,689 $ 4,224 |
| Note 10. Income Taxes |
Note 10: Income Taxes
(in millions of dollars) 2009 2008 2007
Current:
United States:
Federal $ 239 $ 576 $ 490
State 54 51 82
Foreign: 837 1,211 1,206
1,130 1,838 1,778
Future:
United States:
Federal $ 370 $ 142 $ 220
State 41 (52) (60)
Foreign: 40 (45) (102)
451 45 58
Income tax expense $ 1,581 $ 1,883 $ 1,836
Attributable to items (charged) credited to equity and goodwill $ (782) $ 2,818 $ (493)
Future income taxes represent the tax effects of transactions, which are reported in different periods for tax and financial reporting purposes. These amounts consist of the tax effects of temporary differences between the tax and financial reporting balance sheets and tax carryforwards. Pursuant to the Income Taxes Topic of the FASB ASC, current and non-current future income tax benefits and payables within the same tax jurisdiction are generally offset for presentation in the Consolidated Balance Sheet.
The tax effects of net temporary differences and tax carryforwards which gave rise to future income tax benefits and payables at December 31, 2009 and 2008 are as follows:
(in millions of dollars) 2009 2008
Future income tax benefits:
Insurance and employee benefits $ 2,209 $ 3,200
Other asset basis differences (357) (397)
Other liability basis differences 901 1,271
Tax loss carryforwards 764 683
Tax credit carryforwards 1,177 1,125
Valuation allowance (903) (698)
$ 3,791 $ 5,184
Future income taxes payable:
Fixed assets $ 650 $ 523
Other items, net 123 290
$ 773 $ 813
Valuation allowances have been established primarily for tax credit, tax loss carryforwards, and certain foreign temporary differences to reduce the future income tax benefits to expected realizable amounts. Upon the January1, 2009 adoption of the additional guidance issued under the Income Taxes Topic of the FASB ASC related to the accounting for business combinations, changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense including those associated with acquisitions that closed prior to the date of adoption.
The sources of income before income taxes are:
(in millions of dollars) 2009 2008 2007
United States $ 2,584 $ 2,899 $ 2,786
Foreign 3,176 4,037 3,598
$ 5,760 $ 6,936 $ 6,384
With few exceptions, U.S. income taxes have not been provided on undistributed earnings of international subsidiaries. It is not practicable to estimate the amount of tax that might be payable. Our intention is to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. Accordingly, we believe that U.S. tax on any earnings that might be repatriated would be substantially offset by U.S. foreign tax credits.
Differences between effective income tax rates and the statutory U.S. federal income tax rates are as follows:
2009 2008 2007
Statutory U.S. federal income tax rate 35.0% 35.0% 3 |
| Note 11. Employee Benefit Plans |
Note 11: Employee Benefit Plans
We sponsor numerous domestic and foreign employee benefit plans, which are discussed below.
As disclosed in Note 1, we adopted the recognition provisions in 2006 and the measurement date provisions effective January 1, 2007 of the guidance reflected under the Compensation-Retirement Benefits Topic of the FASB ASC. Accordingly, we use a December31 measurement date for our pension and postretirement plans. Prior to 2007, we used a November30 measurement date for a majority of our pension and postretirement plans.
EMPLOYEE SAVINGS PLANS. We sponsor various employee savings plans. Our contributions to employer sponsored defined contribution plans were $192 million, $212 million and $200 million for 2009, 2008 and 2007, respectively. Effective January 1, 2010, newly hired non-union employees will receive all of their retirement benefits through the defined contribution savings plan.
Our non-union domestic employee savings plan uses an Employee Stock Ownership Plan (ESOP) for employer contributions. External borrowings, guaranteed by us and reported as debt in the Consolidated Balance Sheet, were used by the ESOP to fund a portion of its purchase of ESOP Convertible Preferred Stock (ESOP Preferred Stock) from us. On November6, 2003, the Trustee and we effected the conversion of all 10.6million outstanding shares of ESOP Preferred Stock into 85million shares of common stock. At the time of the conversion, each share of ESOP Preferred Stock was convertible into four shares of common stock, had a guaranteed minimum value of $65, a $4.80 annual dividend and was redeemable by us at any time for $65 per share. Because of its guaranteed value, the ESOP Preferred Stock was classified outside of Shareowners' Equity. Beginning with the December31, 2003 balance sheet, common stock held by the ESOP and committed to employees is classified as permanent equity because it no longer has a guaranteed value. Common stock allocated to ESOP participants is included in the average number of common shares outstanding for both basic and diluted earnings per share.
Shares of common stock are allocated to employees' ESOP accounts at fair value on the date earned. Cash dividends on common stock held by the ESOP are used for debt service payments. Participants receive additional shares in lieu of cash dividends. As ESOP debt service payments are made, common stock is released from an unreleased shares account. ESOP debt may be prepaid or re-amortized to either increase or decrease the number of shares released so that the value of released shares equals the value of plan benefit. We may also, at our option, contribute additional common stock or cash to the ESOP. The external borrowings have been extinguished and only re-amortized loans remain between the Company and the Trust. At December31, 2009, 37.6million common shares had been allocated to employees, leaving 22.2million unallocated common shares in the ESOP Trust, with an approximate fair value of $1.5 billion.
PENSION PLANS. We sponsor both funded and unfunded domestic and foreign defined benefit pension plans that cover the majority of our employees.
(in millions of |
| Note 12. Restructuring and Related Costs |
Note 12: Restructuring and Other Costs
During 2009, we recorded net pre-tax restructuring and other charges totaling $830 million for new and ongoing restructuring actions. We recorded charges in the segments as follows: Otis $158 million, Carrier $210 million, UTC Fire Security $112 million, Pratt Whitney $190 million, Hamilton Sundstrand $88 million, Sikorsky $7 million, Eliminations and other $62 million and General corporate expenses $3 million. The charges include $420 million in cost of sales, $364 million in selling, general and administrative expenses and $46 million in other income. As described below, these charges relate principally to actions initiated during 2009 and, to a lesser extent, to certain actions initiated in 2008 and 2007.
2009 ACTIONS. During 2009, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions, the consolidation of field operations and the consolidation of repair and overhaul operations. We recorded net pre-tax restructuring and related charges totaling $802 million, including $389 million in cost of sales, $368 million in selling, general and administrative expenses and $45 million in other income.
We expect the 2009 actions that were initiated in the year to result in net workforce reductions of approximately 14,600 hourly and salaried employees, the exiting of approximately 4.5 million net square feet of facilities and the disposal of assets associated with exited facilities. As of December 31, 2009, net workforce reductions of approximately 11,100 have been completed, and 1.1 million net square feet of facilities have been exited. The majority of the remaining workforce and facility related cost reduction actions are targeted for completion during 2010 and 2011. No specific plans for significant other actions have been finalized at this time.
On September 21, 2009, Pratt Whitney announced plans to close its Connecticut Airfoil Repair Operations facility in East Hartford, Connecticut by the second quarter of 2010 and its engine overhaul facility in Cheshire, Connecticut by early 2011. On September 22, 2009, the International Association of Machinists (IAM) filed a lawsuit in the U.S. District Court for the District of Connecticut in Hartford, Connecticut alleging that Pratt Whitney's decision to close these facilities and transfer certain work to facilities outside Connecticut breached the terms of its collective bargaining agreement. Pratt Whitney believes that it has fully complied with the collective bargaining agreement and that the IAM's contentions are without merit. On February 5, 2010, following a trial on merits, the court issued a declaratory judgment that Pratt Whitney had breached its obligations under the collective bargaining agreement and permanently enjoined Pratt Whitney from closing the facilities and transferring the work described in the challenged plans for the duration of the current collective bargaining agreement, which expires on December 5, 2010. Pratt Whitney is reviewing the decision and considering whether to appeal. Pratt Whitney has recorded $53 million of restructuring costs associated with these planned |
| Note 13. Financial Instruments |
Note 13: Financial Instruments
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures.
By 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 to 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, changes in the derivatives' fair value 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 (i.e. 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 $9 billion and $11.2 billion at December 31, 2009 and December 31, 2008, respectively.
COMMODITY FORWARD CONTRACTS. We enter into commodity forward contracts to reduce the risk of fluctuations in the price we pay for certain commodities (for example, 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 |
| Note 14. Guarantees |
Note 14: Guarantees
We extend a variety of financial guarantees to third parties. As of December 31, 2009 and 2008 the following financial guarantees were outstanding:
2009 2008
(in millions of dollars) Maximum Potential Payment Carrying Amount of Liability Maximum Potential Payment Carrying Amount of Liability
Credit facilities and debt obligations - unconsolidated subsidiaries (expire 2010 to 2034) $ 243 $ 73 $ 208 $ 2
IAE's financing arrangements (See Note 4) 1,186 13 1,420 14
Commercial aerospace financing arrangements (See Note 4) 320 12 137 10
Commercial customer financing arrangements 229 1 209 5
Performance guarantees 39 - 40 -
We also have obligations arising from sales of certain businesses and assets, including representations and warranties and related indemnities for environmental, health and safety, tax and employment matters. The maximum potential payment related to these obligations is not a specified amount as a number of the obligations do not contain financial caps. The carrying amount of liabilities related to these obligations was $137 million and $150 million at December 31, 2009 and 2008, respectively. For additional information regarding the environmental indemnifications, see Note 16.
We accrue for costs associated with guarantees 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, and where no amount within a range of estimates is more likely, the minimum is accrued. In accordance with the Guarantees Topic of FASB ASC, we record a liability for the fair value of such guarantees in the balance sheet.
We provide service and warranty policies on our products and extend performance and operating cost guarantees beyond our normal service and warranty policies on some of our products, particularly commercial aircraft engines. In addition, we incur discretionary costs to service our products in connection with specific product performance issues. Liability for performance and operating cost guarantees is based upon future product performance and durability, and is estimated largely based upon historical experience. Adjustments are made to accruals as claim data and historical experience warrant. The changes in the carrying amount of service and product warranties and product performance guarantees for the years ended December 31, 2009 and 2008, are as follows:
(in millions of dollars) 2009 2008
Balance as of January 1 $ 1,136 $ 1,252
Warranties and performance guarantees issued 400 429
Settlements made (424) (551)
Other (40) 6
Balance as of December 31 $ 1,072 $ 1,136 |
| Note 15. Collaborative Arrangements |
Note 15: 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 December 31, 2009, 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.
The following table illustrates the income statement classification and amounts attributable to transactions arising from the collaborative arrangements between participants for each period presented:
(in millions of dollars) 2009 2008 2007
Collaborator share of revenues:
Cost of products sold $ 772 $ 1,059 $ 942
Cost of services sold 29 17 15
Collaborator share of program costs (reimbursement of expenses incurred):
Cost of products sold (66) (83) (87)
Research and development (97) (61) (44)
Selling, general and administrative (4) (11) (3)
The Collaborative Arrangements Topic of the FASB ASC requires that participants in a collaborative arrangement report costs incurred and revenues generated from such transactions on a gross basis and in the appropriate line items in each company's financial statements. This is pursuant to the guidance in the Revenue Recognition Topic of the FASB ASC that addresses whether an entity should report revenue gross or net depending on whether the entity functions as a principal or agent. The Collaborative Arrangements Topic also requires disclosure of the nature and purpose of the participant's collaborative arrangements, the participant's rights and obligations under these arrangements, the accounting policy for collaborative arrangements, the income statement classification and amounts attributable to transactions arising from collaboration arrangements between participants, and the disclosure related to individually significant collaborative arrangements. These requirements were effective for financial statements issued for fiscal years beginning after December15, 2008, and interim periods within those fiscal years, and must be applied retrospectively to all |
| Note 16. Contingent Liabilities |
Note 16: Contingent Liabilities
LEASES. We occupy space and use certain equipment under lease arrangements. Rental commitments of $1,571 million at December 31, 2009 under long-term noncancelable operating leases are payable as follows: $420 million in 2010, $337 million in 2011, $231 million in 2012, $155 million in 2013, $103 million in 2014 and $325 million thereafter. Rent expense was $463 million in 2009, $504 million in 2008 and $437 million in 2007.
Additional information pertaining to commercial aerospace rental commitments is included in Note 4.
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. As described in Note 1, we have accrued for the costs of environmental remediation activities and periodically reassess these amounts. We believe that the likelihood of incurring losses materially in excess of amounts accrued is remote. At December 31, 2009, we had $539 million reserved for environmental remediation.
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 involved substantial amounts. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and continue to litigate certain cases. In addition, we accrue for liabilities associated with those 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 accrued 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 withhel |
| Note 17. Segment Financial Data |
Note 17: Segment Financial Data
Our operations are classified in six principal segments. The segments are generally determined based on the management of the businesses and on the basis of separate groups of operating companies, each with general operating autonomy over diversified products and services.
OTIS products include elevators, escalators, moving walkways and service sold to customers in the commercial and residential property industries around the world.
CARRIER products include HVAC and refrigeration systems, controls, services and energy efficient products for residential, commercial, industrial and transportation applications.
UTC FIRE SECURITY products include fire and special hazard and suppression systems and firefighting equipment, security, monitoring and rapid response systems and service and security personnel for a diversified international customer base principally in the industrial, commercial and residential property sectors.
PRATT WHITNEY products include commercial, military, business jet and general aviation aircraft engines, parts and services, industrial gas turbines, geothermal power systems and space propulsion sold to a diversified customer base, including international and domestic commercial airlines and aircraft leasing companies, aircraft manufacturers, and U.S. and foreign governments. Pratt Whitney also provides product support and a full range of overhaul, repair and fleet management services and produces land-based power generation equipment.
HAMILTON SUNDSTRAND provides aerospace and industrial products and aftermarket services for diversified industries worldwide. Aerospace products include power generation, management and distribution systems, flight systems, engine control systems, environmental control systems, fire protection and detection systems, auxiliary power units and propeller systems. Industrial products include air compressors, metering pumps and fluid handling equipment.
SIKORSKY products include military and commercial helicopters, aftermarket helicopter and aircraft parts and services.
SEGMENT REVENUES AND OPERATING PROFIT. Total revenues by segment include intersegment sales, which are generally made at prices approximating those that the selling entity is able to obtain on external sales. Segment information for the years ended December 31 is as follows:
Total Revenues Operating Profits
(in millions of dollars) 2009 2008 2007 2009 2008 2007
Otis $ 11,779 $ 12,949 $ 11,885 $ 2,447 $ 2,477 $ 2,321
Carrier 11,413 14,944 14,644 740 1,316 1,381
UTC Fire Security 5,531 6,462 5,754 493 542 443
Pratt Whitney 12,577 14,041 13,086 1,835 2,122 2,011
Hamilton Sundstrand 5,599 6,207 5,636 857 1,099 967
Sikorsky 6,318 5,368 4,789 608 478 373
Total segment 53,217 59,971 55,794 6,980 8,034 7,496
Eliminations and other (297) (214) (78) (167) (1) (60)
General corporate expenses - - - (348) (408) (386)
Consolidated $ 52,920 $ 59,757 $ 55,716 $ 6,465 $ 7,625 $ 7,050
Total Assets C |
