EXHIBIT 13
FIVE YEAR
SUMMARY
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AND EMPLOYEE AMOUNTS 1999 1998 1997 1996 1995
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For the year
Revenues $ 24,127 $ 22,809 $ 21,288 $ 19,872 $ 19,418
Research and development 1,292 1,168 1,069 1,014 865
Income from continuing operations 841 1,157 962 788 651
Net income 1,531 1,255 1,072 906 750
Earnings per share:
Basic:
Continuing operations 1.74 2.47 1.98 1.57 1.27
Net earnings 3.22 2.68 2.22 1.81 1.47
Diluted:
Continuing operations 1.65 2.33 1.89 1.51 1.24
Net earnings 3.01 2.53 2.10 1.74 1.43
Cash dividends per common share .76 .695 .62 .55 .5125
Average number of shares of Common Stock outstanding:
Basic 465.6 455.5 468.9 482.9 491.3
Diluted 506.7 494.8 507.1 517.2 519.0
Return on average common shareowners' equity, after tax 24.6% 28.6% 24.5% 21.1% 18.6%
At year end
Working capital, excluding net investment in discontinued operation $ 1,412 $ 1,359 $ 1,712 $ 2,168 $ 2,065
Total assets 24,366 17,768 15,697 15,566 14,819
Long-term debt, including current portion 3,419 1,669 1,389 1,506 1,713
Total debt 4,321 2,173 1,567 1,709 1,975
Debt to total capitalization 38% 33% 28% 28% 33%
Net debt (total debt less cash) 3,364 1,623 912 711 1,229
Net debt to total capitalization 32% 27% 18% 14% 23%
ESOP Preferred Stock, net 449 456 450 434 398
Shareowners' equity 7,117 4,378 4,073 4,306 4,021
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Number of employees - continuing operations 148,300 134,400 130,400 123,800 119,800
UNITED TECHNOLOGIES 1
MANAGEMENT'S
DISCUSSION AND ANALYSIS
Management's Discussion and Analysis of Results of
Operations and Financial Position
The Corporation's operations are classified into four operating segments.
Carrier and Otis serve customers in the commercial property and residential
housing industries. Pratt & Whitney and the Flight Systems segment serve
commercial and government customers in the aerospace industry. The Flight
Systems segment includes the former Hamilton Standard division and the former
Sundstrand Corporation ("Sundstrand"), collectively known as Hamilton
Sundstrand, and Sikorsky Aircraft. The Corporation's segment operating results
are discussed in the Segment Review and Note 15 of the Notes to Consolidated
Financial Statements.
Business Environment
As worldwide businesses, the Corporation's operations are affected by global and
regional economic factors. However, the diversity of the Corporation's
businesses and global market presence have helped limit the impact of any one
industry or the economy of any single country on the consolidated results.
Revenues from outside the U.S., including U.S. export sales, in dollars
and as a percentage of total segment revenues, are as follows:
IN MILLIONS OF DOLLARS 1999 1998 1997 1999 1998 1997
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Europe $ 4,433 $ 4,252 $ 3,857 18% 18% 18%
Asia Pacific 2,615 2,487 2,943 11% 11% 13%
Other 2,472 2,517 2,348 10% 11% 11%
U.S. Exports 3,642 4,097 3,840 15% 17% 18%
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International
Segment Revenues $13,162 $13,353 $12,988 54% 57% 60%
================================================================================
The deterioration of economic conditions in Asia appears to have subsided.
The countries involved in the 1997 Asian economic collapse are now beginning to
experience positive economic growth. Overall, however, growth is proceeding at a
slower pace than experienced before the 1997 crisis and production levels in
several countries are below their pre-crisis output. Credit availability is less
restrictive than experienced immediately following the crisis, but slower growth
is resulting in lower demand for construction. Management believes the long-term
economic growth prospects of the region remain intact and, consequently, the
Corporation's Asian investment strategy continues to focus on the long-term
infrastructure requirements of the region.
As part of its globalization strategy, the Corporation has invested in
businesses in other markets, including the People's Republic of China, the
former Soviet Union, Brazil and South Korea, which carry higher levels of
currency, political and economic risk. At December 31, 1999, the Corporation's
net investment in any one of these countries was less than 5% of consolidated
equity.
In early 1999, the Brazilian Real devalued significantly, negatively
impacting the translation of Real denominated operating results into U.S.
dollars and contributing to a slowing of regional economic activity.
OTIS is the world's largest elevator and escalator manufacturing, installation
and service company. Otis is impacted by global and regional economic factors,
particularly fluctuations in commercial construction, which affect new equipment
installations, and labor costs, which can impact service and maintenance margins
on installed elevators and escalators. In 1999, 78% of Otis' revenues were
generated outside the U.S. Accordingly, changes in foreign currency exchange
rates can significantly affect the translation of Otis' operating results into
U.S. dollars for financial reporting purposes.
During 1999, U.S. office building construction starts remained strong with
commercial vacancy rates at some of the lowest levels of the decade. In Europe,
Otis' new equipment activity increased along with a growing base of service
business. Otis maintains a significant presence in the Asia Pacific region where
construction activity remained weak, though conditions have improved since 1998.
CARRIER is the world's largest manufacturer of commercial and residential
heating, ventilating and air conditioning ("HVAC") systems and equipment.
Carrier also produces transport and commercial refrigeration equipment and
provides after-market service and components for both the HVAC and refrigeration
industries. During 1999, 48% of Carrier's revenues were generated by
international operations and U.S. exports. Carrier's results are impacted by a
number of external factors including commercial and residential construction
activity worldwide, regional economic and weather conditions and changes in
foreign currency exchange rates.
U.S. residential housing and commercial construction starts increased in
1999 compared to 1998. European construction activity increased in 1999 while
construction activity in Asia remained weak.
PRATT & WHITNEY and the FLIGHT SYSTEMS segment produce commercial and government
aerospace products, and government defense products.
The financial performance of those segments is directly tied to the
aviation industry. Pratt & Whitney is a major supplier of commercial, general
aviation and military aircraft engines, along with spare parts, product support
and a full range of overhaul, repair and fleet management services. The Flight
Systems segment provides power generation, distribution and management systems;
environmental, flight and fuel control systems; propellers for commercial and
military aircraft; and space life support systems through Hamilton Sundstrand,
and commercial and military helicopters, along with after-market products and
services, through Sikorsky Aircraft.
Commercial Aerospace
Worldwide airline profits, traffic growth and load factors have been reliable
indicators for new aircraft and after-market orders. During 1999, some airline
earnings were adversely impacted by rising fuel prices and higher labor costs,
among other factors. This erosion in earnings has resulted in a decrease in new
orders for aerospace products. The impact of a continued slowdown in the
aviation industry will likely result in lower manufacturing volumes and
after-market orders in the near term.
Over the past several years, Pratt & Whitney's mix of large commercial
engine shipments has shifted to newer, higher thrust engines for wide-bodied
aircraft in a market which is very price and product competitive. However,
during 1998, to diversify its product base, Pratt & Whitney launched the PW6000
engine, a 16,000 to 24,000 pound-thrust engine designed specifically for the
short-to-medium haul, 90 to 130 passenger, narrow-bodied aircraft market. This
new engine was
2 UNITED TECHNOLOGIES
chosen by Airbus to power its new 100 passenger A318 aircraft, which is
currently under development. The PW6000 engine is expected to enter service in
2002.
Other areas of focus for Pratt & Whitney are the follow-on spare parts
sales for engines in service and the overhaul and maintenance after-market
business. Spare parts sales trends are impacted by many factors, including
usage, pricing, regulatory changes and retirement of older aircraft. The
after-market business is being impacted by technological improvements to newer
generation engines that increase reliability and by the increased presence of
engine manufacturers in the overhaul and maintenance business. Pratt & Whitney
continued to build its after-market business in 1999 with four acquisitions,
including the acquisition of Cade Industries.
Hamilton Sundstrand continues to concentrate its commercial business on
nose-to-tail systems and support for its aircraft manufacturing customers. As
those customers have reduced supplier bases and sought lower cost packages,
Hamilton Sundstrand has focused on developing new product offerings, acquiring
businesses with complimentary products and expanding its customer and
after-market business.
The growth in the general aviation market is closely tied to the overall
health of the economy and is correlated to corporate profits. While there
continues to be backlog in the general aviation market, prospects for growth in
this market will likely be contingent on future corporate earnings strength.
Government Business
During 1999, the Corporation's sales to the U.S. Government were $3,342 million
or 14% of total sales, compared with $3,264 million or 14% of total sales in
1998 and $3,311 million or 16% of total sales in 1997.
The defense portion of the Corporation's aerospace businesses continues to
respond to a changing global political environment. The U.S. defense industry
continues to downsize and consolidate in response to continued pressure on U.S.
and global defense spending. Customers, both U.S. and global, have ongoing
efforts to review and reprioritize research and procurement initiatives.
Sikorsky is the primary supplier of transport helicopters to the U.S.
Army. Sikorsky will continue to supply Black Hawk helicopters and derivatives
thereof to the U.S. and foreign governments under contracts extending into 2002.
A Sikorsky-Boeing joint venture is also under contract with the U.S. Army to
develop prototypes, flight test and field test Comanche helicopters, the U.S.
Army's 21st century combat helicopter. The first two prototype aircraft are
currently undergoing flight testing.
The significant decrease in the U.S. defense procurement of helicopters in
recent years has resulted in overcapacity among U.S. helicopter manufacturers.
Sikorsky is responding by lowering its cost structure, improving its existing
products, concentrating on increasing its after-market and foreign government
sales and developing new products. In addition to the Comanche, Sikorsky is
leading an international team in developing the S-92, a large cabin derivative
of the Black Hawk family, for the commercial and military markets. This aircraft
made its first flight in December 1998 and two test aircraft are currently being
flown.
Pratt & Whitney engines have been selected to power two of the primary
U.S. Air Force programs of the future: the C-17 airlifter (F117 engine), which
is currently in production, and the F-22 fighter (F119 engine), which is
currently being developed. Derivatives of Pratt & Whitney's F119 engine were
chosen to provide power for the Joint Strike Fighter demonstration aircraft. The
Joint Strike Fighter program is intended to lead to the development of a single
aircraft, with two configurations, to satisfy future requirements of the U.S.
Navy, Air Force and Marine Corps and the United Kingdom Royal Navy. In addition,
Pratt & Whitney continues to deliver F100 engines and military spare parts to
both U.S. and foreign governments. Over time, the mix of Pratt & Whitney's
business is expected to shift from the F100 engine to the F119 engine.
Hamilton Sundstrand supplies systems for fixed and rotary wing aircraft
used in military applications that are incorporated into current production
aircraft. Hamilton Sundstrand's military businesses have been negatively
impacted by reductions in U.S. defense procurement and delays of foreign
military programs.
Results of Continuing Operations
IN MILLIONS OF DOLLARS 1999 1998 1997
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Sales $23,844 $22,787 $21,062
Financing revenues and
other income, net 283 22 226
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Revenues $24,127 $22,809 $21,288
================================================================================
Consolidated revenues increased 6% in 1999 and 7% in 1998. The revenue growth in
1999 was primarily due to an increase in revenues at Carrier and Otis and the
acquisition of Sundstrand in the Flight Systems segment, which more than offset
a decrease at Pratt & Whitney. Excluding the unfavorable impact of foreign
currency translation, consolidated revenues increased by 7% in 1999 and 9% in
1998.
Financing revenues and other income, net, increased $261 million in 1999
and decreased $204 million in 1998. The fluctuations were primarily related to
1998 costs associated with Pratt & Whitney's repurchases of participant
interests in commercial engine programs, partially offset by the favorable
settlement of a contract dispute with the U.S. Government.
IN MILLIONS OF DOLLARS 1999 1998 1997
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Cost of sales $18,185 $16,897 $15,846
Gross margin percent 23.7% 25.8% 24.8%
Gross margin as a percentage of sales decreased 2.1 percentage points in
1999 and increased 1 percentage point in 1998. The 1999 decrease was primarily
related to restructuring and other charges of $865 million recorded in cost of
sales (3.6 percentage point decrease), while the 1998 increase was primarily due
to improved margin percentages at Pratt & Whitney. Cost of sales and gross
margin will continue to be impacted in 2000, though to a lesser extent, by
additional costs associated with the 1999 restructuring actions that were not
accruable in 1999.
IN MILLIONS OF DOLLARS 1999 1998 1997
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Research and development $1,292 $1,168 $1,069
Percent of sales 5.4% 5.1% 5.1%
Research and development spending increased $124 million (11%) in 1999 and
$99 million (9%) in 1998. The 1999 increase related principally to the
acquisition of Sundstrand and increases at Pratt & Whitney for product
development and aircraft systems integration. The 1998 increase related
primarily to increases at Pratt & Whitney. Research and development expenses in
2000 are expected to remain at approximately 5% of sales.
UNITED TECHNOLOGIES 3
IN MILLIONS OF DOLLARS 1999 1998 1997
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Selling, general and administrative $3,133 $2,737 $2,611
Percent of sales 13.1% 12.0% 12.4%
Selling, general and administrative expenses as a percentage of sales
increased 1.1 percentage points in 1999 and decreased four-tenths of a
percentage point in 1998. The 1999 increase was primarily due to restructuring
and other charges of $151 million (six-tenths of a percentage point increase)
and the impact of acquisitions, primarily Sundstrand. The 1998 decrease was
primarily due to a decrease at Otis.
IN MILLIONS OF DOLLARS 1999 1998 1997
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Interest expense $ 260 $ 197 $ 188
Interest expense increased 32% in 1999 due to increased short-term
borrowing levels and the issuance of $400 million of 6.5% notes in May 1999, $1
billion of 6.4% to 7.5% notes in September 1999 and $325 million of 6.625% notes
in November 1999. Interest expense in 1998 increased 5% due to increased
short-term borrowing needs and the issuance of $400 million of 6.7% notes in
August 1998. Interest expense is expected to increase in the future given the
increased levels of debt.
1999 1998 1997
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Average interest rate:
Short-term borrowings 8.7% 10.4% 11.9%
Total debt 7.7% 8.3% 8.3%
The average interest rate, for the year, on short-term borrowings exceeded
that of total debt due to higher short-term borrowing rates in certain foreign
operations.
The weighted-average interest rate applicable to debt outstanding at
December 31, 1999 was 7.5% for short-term borrowings and 7.2% for total debt.
1999 1998 1997
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Effective income tax rate 25.9% 31.4% 32.7%
The Corporation has continued to reduce its effective income tax rate by
implementing tax reduction strategies. The 1999 effective tax rate includes the
impact of the Corporation's 1999 restructuring actions. Excluding restructuring,
the 1999 effective tax rate was 30.9%.
The future tax benefit arising from net deductible temporary differences
is $2,436 million and relates to expenses recognized for financial reporting
purposes which will result in tax deductions over varying future periods.
Management believes that the Corporation's earnings during the periods when the
temporary differences become deductible will be sufficient to realize those
future income tax benefits.
While some tax credit and loss carryforwards have no expiration date,
certain foreign and state tax loss carryforwards arise in a number of different
tax jurisdictions with expiration dates beginning in 2000. For those
jurisdictions where the expiration date or the projected operating results
indicate that realization is not likely, a valuation allowance has been
provided.
The Corporation believes, based upon a review of prior period income tax
returns, it is entitled to income tax refunds for prior periods. The Internal
Revenue Service reviews these potential refunds as part of the examination of
the Corporation's income tax returns and the impact on the Corporation's
liability for income taxes for these years cannot presently be determined.
Effective
Tax Rate
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995
PERCENT 25.9 31.4 32.7 32.6 33.5
Net income:
Increased 22% or $276 million from 1998 to 1999.
Increased 17% or $183 million from 1997 to 1998.
Stock Split
On April 30, 1999, the Corporation announced a two-for-one stock split paid in
the form of a stock dividend to shareowners of record at the close of business
on May 7, 1999. All common share and per share amounts reflect the stock split.
Acquisitions of Businesses
During 1999, the Corporation invested approximately $6.3 billion, including debt
assumed, in acquisitions of businesses. In June 1999, the Corporation completed
its acquisition of Sundstrand Corporation, a global producer of aerospace and
industrial products, for approximately $4.3 billion. Other significant 1999
acquisition activity included:
o Carrier's acquisition of International Comfort Products, a North
American manufacturer and marketer of heating and air conditioning
equipment
o Carrier's global strategic alliance with Toshiba Corporation, a
Japanese producer of residential and light commercial air
conditioning, ventilation and refrigeration equipment, and
compressors
o Otis' acquisition, through LG Otis Elevator, of LG Industrial
Systems' Building Facilities Group, a South Korean based company
that manufactures, sells, installs and maintains elevators,
escalators and related equipment
o Pratt & Whitney's purchase of Cade Industries, a North American
aerospace composite component and engine test cell manufacturer and
service provider.
For additional discussion of 1999 acquisitions, see Liquidity and
Financing Commitments and Note 2 of the Notes to Consolidated Financial
Statements.
Dispositions of Businesses
In May 1999, the Corporation sold its UT Automotive unit to Lear Corporation for
$2.3 billion, which resulted in an after-tax gain of $650 million. UT Automotive
results, through the date of disposition, appear as income from operations of
the discontinued UT Automotive unit in the Consolidated Statement of Operations
for all years presented.
Restructuring and Other Costs
During 1999, the Corporation's operating segments initiated a variety of actions
aimed at further strengthening their future profitability and competitive
position. Those actions focused principally on rationalizing manufacturing
processes, resulting in the closure of facilities, and improving the overall
level of organizational efficiency, including the removal of management layers.
Restructuring charges accrued in 1999 were $842 million before income taxes and
minority interests and will result in net reductions of approximately 15,000
salary and hourly
4 UNITED TECHNOLOGIES
employees and approximately 8 million square feet of facilities. The charges
were associated with severance and related costs, exit and lease termination
costs, plant shutdown related asset write-downs and site restoration and other
costs. The Corporation also incurred additional charges of $141 million
associated with the restructuring actions that were not accruable when the
actions were initiated.
In addition to restructuring, the Corporation undertook other actions
associated with product development and aircraft systems integration and
non-product purchasing. The total 1999 expenses that resulted from accrued
restructuring and related charges and charges associated with these other
actions were $1,120 million and were recorded across the Corporation's operating
segments as follows:
IN MILLIONS OF DOLLARS
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Otis $ 186
Carrier 196
Pratt & Whitney 534
Flight Systems 161
Other 43
- --------------------------------------------------------------------------------
$1,120
- --------------------------------------------------------------------------------
Net cash outflows in 1999 resulting from these actions were $366 million
pre-tax. In 2000, the Corporation expects to have additional pre-tax cash
outflows of approximately $750 million, to be paid out of normal operations,
including up to $300 million of additional costs associated with the 1999
actions that were not accruable when the actions were initiated. The 1999
restructuring and other actions are expected to result in savings that should
offset additional costs incurred, resulting in a modest benefit in 2000.
Recurring savings, associated primarily with net reduction in workforce and
facility closures, are expected to increase over a three-year period to
approximately $750 million pre-tax annually, and are expected to be reported
primarily as part of cost of sales.
For additional discussion of restructuring, see Footnote 11 of the Notes
to Consolidated Financial Statements.
=====================================================================================================
Revenues Operating Profits Operating Profit Margin
IN MILLIONS OF DOLLARS 1999 1998 1997 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Otis $5,654 $5,572 $5,548 $493 $ 533 $465 8.7% 9.6% 8.4%
Carrier 7,353 6,922 6,056 459 495 458 6.2% 7.2% 7.6%
Pratt & Whitney 7,674 7,876 7,402 634 1,024 816 8.3% 13.0% 11.0%
Flight Systems 3,810 2,891 2,804 247 287 301 6.5% 9.9% 10.7%
- -----------------------------------------------------------------------------------------------------
Segment Review
Operating segment and geographic data include the results of all majority-owned
subsidiaries, consistent with the management of these businesses. For certain of
these subsidiaries, minority shareholders have rights which overcome the
presumption of consolidation. In the Corporation's consolidated results, these
subsidiaries are accounted for using the equity method of accounting.
Net Income
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995
$ MILLIONS 1,531 1,255 1,072 906 750
1999 Compared to 1998
OTIS revenues increased $82 million (1%) in 1999. Excluding the unfavorable
impact of foreign currency translation, 1999 revenues increased 3%, reflecting
increases in North American and European operations, partially offset by a
decrease in Asia Pacific operations.
Otis operating profits decreased $40 million (8%) in 1999. Excluding the
unfavorable impact of foreign currency translation, 1999 operating profits
decreased 6%, due primarily to 1999 restructuring and other charges of $186
million that were in excess of 1998 restructuring charges. Restructuring charges
in 1999 were associated with worldwide facility consolidations and workforce
reductions. Restructuring charges in 1998 were associated with workforce
reductions and the consolidation of manufacturing and engineering facilities.
The 1999 charges were partially offset by improved operating performance,
particularly in North American operations, which benefited from increased orders
and an increase in construction activity, and in Asia Pacific and European
operations. Operating profits suffered in Latin American operations, which
continued to face pressure from the devaluation of the Real in Brazil. Excluding
restructuring in 1999 and 1998, operating profits increased.
CARRIER revenues increased $431 million (6%) in 1999. Excluding the unfavorable
impact of foreign currency translation, 1999 revenues increased 8%. The 1999
increase reflects the positive impact of acquisitions, as well as increases in
the North American, European and Refrigeration operations, partially offset by
declines in Asia Pacific and Latin American operations.
Carrier operating profits decreased $36 million (7%) in 1999. Excluding
the unfavorable impact of foreign currency translation, 1999 operating profits
decreased 1% due to 1999 restructuring and other charges of $196 million, which
surpassed those in 1998. The 1999 charges were partially offset by the impact of
acquisitions and increased operating performance in most segments, with
particularly strong performance in the North American, European and
Refrigeration operations. The 1999 and 1998 restructuring charges related to
worldwide facility closures and workforce reductions. Excluding restructuring in
1999 and 1998, operating profits increased.
PRATT & WHITNEY revenues decreased $202 million (3%) in 1999. The decrease
reflects fewer military and commercial engine shipments and lower commercial
spare parts volumes, partially offset by increases in the commercial overhaul
and repair business, military after-market and Pratt & Whitney Canada. The 1998
revenues included a favorable settlement of a contract dispute with the U.S.
Government and costs to repurchase interests from participants in commercial
engine programs.
Pratt & Whitney operating profits decreased $390 million (38%), primarily
reflecting 1999 restructuring and other charges of $534 million that exceeded
those in 1998. Lower military and commercial engine and commercial spare parts
UNITED TECHNOLOGIES 5
volumes and the absence of a nonrecurring 1998 gain were partially offset by
higher overhaul and repair and military after-market volume, improved operating
profits at Pratt & Whitney Canada and the absence of 1998 costs to repurchase
interests from participants in commercial engine programs. The 1999
restructuring and other charges were associated with workforce reductions;
consolidation of military engine operations, manufacturing operations and the
component repair business; and costs associated with product development and
aircraft systems integration. The 1998 restructuring charges related to
workforce reductions in the U.S. and Canada.
FLIGHT SYSTEMS revenues increased $919 million (32%) in 1999, reflecting the
inclusion of Sundstrand's operations for the second half of 1999, partially
offset by the effects of fewer helicopter deliveries at Sikorsky.
Flight Systems operating profits decreased $40 million (14%) in 1999, due
primarily to 1999 restructuring and other charges at Sikorsky and Hamilton
Sundstrand of $161 million, which were in excess of charges recorded in 1998,
and fewer helicopter deliveries at Sikorsky. These items were partially offset
by the inclusion of Sundstrand results for the second half of 1999. The 1999
restructuring charges related to closing facilities, consolidating functions,
reducing workforce and rationalizing customer support.
1998 Compared to 1997
OTIS revenues increased $24 million in 1998. Excluding the unfavorable impact of
foreign currency translation, 1998 revenues increased 3%, with increases in
European, North American and Latin American operations, partially offset by
declines in Asia Pacific operations.
Otis operating profits increased $68 million (15%) in 1998. Excluding the
unfavorable impact of foreign currency translation, 1998 operating profits
increased 17%. European, North American and Latin American operations improved
in 1998, partially offset by declines in Asia Pacific operations and higher
charges related to workforce reductions and the consolidation of manufacturing
and engineering facilities.
CARRIER revenues increased $866 million (14%) in 1998. Excluding the unfavorable
impact of foreign currency translation, 1998 revenues increased 17%, due to the
impact of acquisitions, as well as increases in the Refrigeration, North
American, European and Latin American operations, partially offset by declines
in Asia Pacific operations.
Carrier operating profits increased $37 million (8%) in 1998. Excluding
the unfavorable impact of foreign currency translation, 1998 operating profits
increased 11%. The 1998 increase reflects improvements in the Refrigeration,
North American, Latin American and European operations and the impact of
acquisitions which more than offset declines in Asia Pacific operations. The
1998 results include charges related to workforce reductions and plant closures.
PRATT & WHITNEY revenues increased $474 million (6%) in 1998, reflecting higher
after-market revenues, resulting primarily from acquisitions, as well as
increased commercial engine shipments and U.S. military development revenues.
The 1998 results also reflect the favorable settlement of a contract dispute
with the U.S. Government and costs to repurchase interests from participants in
commercial engine programs.
Pratt & Whitney operating profits increased $208 million (25%), reflecting
higher engine margins, increased U.S. military development volumes, higher
after-market volumes and productivity improvements. These items were partially
offset by costs to repurchase interests from participants in commercial engine
programs, charges related to workforce reduction efforts in the U.S. and Canada,
higher research and development spending and selling, general and administrative
expenses. The 1998 results also reflect the favorable settlement of a contract
dispute with the U.S. Government and favorable resolution of customer contract
issues.
FLIGHT SYSTEMS revenues increased $87 million (3%) in 1998 primarily due to
increased revenues at Hamilton Standard, which were favorably impacted by the
first quarter 1998 acquisition of a French aerospace components manufacturer,
partly offset by lower volumes at Sikorsky.
Flight Systems operating profits decreased $14 million (5%) in 1998 due to
lower volumes at Sikorsky and cost reduction charges taken at both units. The
1998 decline was partly offset by improvements at Hamilton Standard, mostly due
to the first quarter acquisition of a French aerospace components manufacturer.
Liquidity and Financing Commitments
Management assesses the Corporation's liquidity in terms of its overall ability
to generate cash to fund its operating and investing activities. Significant
factors affecting the management of liquidity are cash flows generated from
operating activities, capital expenditures, customer financing requirements,
acquisitions, Common Stock repurchases, adequate bank lines of credit and the
ability to attract long-term capital with satisfactory terms.
IN MILLIONS OF DOLLARS 1999 1998 1997
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Net cash flows provided by
operating activities $ 2,310 $ 2,314 $ 1,903
Capital expenditures (762) (673) (658)
(Increase) decrease in customer
financing assets, net (188) (213) 39
Acquisitions of businesses (3,547) (1,228) (547)
Repurchase of Common Stock (822) (650) (849)
Increase (decrease) in total debt 2,148 606 (142)
Increase in net debt 1,741 711 201
Net cash flows provided by (used in)
discontinued operation 2,159 (9) 2
Net cash flows provided by operating activities in 1999 were impacted by a
$366 million cash outflow related to 1999 restructuring and other actions. Cash
flows used in investing activities were $4,411 million during 1999 compared to
$2,071 million during 1998, reflecting increased acquisition activity, primarily
for the acquisition of Sundstrand. Capital expenditures in 1999 were $762
million, an $89 million increase over 1998. The Corporation expects 2000 capital
spending to increase moderately.
Customer financing activity was a net use of cash of $188 million in 1999,
compared to a net use of cash of $213 million in 1998. While the Corporation
expects that customer financing activity will be a net use of cash in 2000,
actual funding is subject to usage under existing customer financing
commitments. At December 31, 1999, the Corporation had financing and rental
commitments of $1,228 million related to commercial aircraft, of which as much
as $359 million may be required to be disbursed in 2000. The Corporation may
also arrange for third-party investors to assume a portion of its commitments.
Refer to Note 4 of the Notes to Consolidated Financial Statements for additional
discussion of the Corporation's commercial airline industry assets and
commitments.
Operating
Cash Flows
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995
$ BILLIONS 2.3 2.3 1.9 1.9 1.9
6 UNITED TECHNOLOGIES
The Corporation invested $6.3 billion in the acquisition of businesses in
1999, consisting of approximately $3.5 billion of cash, $900 million of assumed
debt and $1.9 billion of Common Stock issued from treasury. Of that amount, $4.3
billion related to the acquisition of Sundstrand Corporation. The remainder
related to other acquisitions, the most significant of which included Carrier's
acquisition of International Comfort Products, Carrier's global strategic
alliance with Toshiba, Otis' acquisition of the Building Facilities Group of LG
Industrial Systems and Pratt & Whitney's purchase of Cade Industries.
Acquisitions
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995
$ MILLIONS 3,547 1,228 547 277 179
The Corporation repurchased $822 million and $650 million of Common Stock
during 1999 and 1998, representing 13.2 million and 14.8 million shares, under
previously announced share repurchase programs. Share repurchase continues to be
a significant use of the Corporation's strong cash flows and has more than
offset the dilutive effect resulting from the issuance of stock under
stock-based employee benefit programs. In April 1999, the Corporation's Board of
Directors doubled the outstanding authorization for the repurchase of the
Corporation's Common Stock consistent with their approval in April 1999 of a
two-for-one stock split paid in the form of a stock dividend. At December 31,
1999, 24.9 million shares remained available for repurchase under this
authorization.
Share
Repurchase
[The following table was depicted as a bar chart in the printed material.]
1999 1998 1997 1996 1995
$ MILLIONS 822 650 849 459 221
As described in Note 2 of the Notes to Consolidated Financial Statements,
on May 4, 1999, the Corporation sold its UT Automotive unit to Lear Corporation.
The discontinued UT Automotive operation and its subsequent sale provided $2,159
million of cash in 1999.
IN MILLIONS OF DOLLARS 1999 1998
- -------------------------------------------------------------------------------
Cash and cash equivalents $ 957 $ 550
Total debt 4,321 2,173
Net debt (total debt less cash) 3,364 1,623
Shareowners' equity 7,117 4,378
Debt to total capitalization 38% 33%
Net debt to total capitalization 32% 27%
At December 31, 1999, the Corporation had credit commitments from banks
totaling $1.5 billion under a Revolving Credit Agreement, which serves as
back-up for a commercial paper facility. At December 31, 1999, there were no
borrowings under the Revolving Credit Agreement. In addition, at December 31,
1999, approximately $1.4 billion was available under short-term lines of credit
with local banks at the Corporation's various international subsidiaries.
As described in Note 8 of the Notes to Consolidated Financial Statements,
the Corporation issued a total of $1,725 million of unsubordinated, unsecured,
nonconvertible notes in 1999. The proceeds were used to finance a portion of the
Sundstrand acquisition and for general corporate purposes, including other
acquisitions and repurchases of the Corporation's Common Stock. At December 31,
1999, up to $1 billion of additional medium-term and long-term debt could be
issued under a shelf registration statement on file with the Securities and
Exchange Commission.
The Corporation's shareowners' equity is impacted by a variety of factors,
including those items that are not reported in earnings but are reported
directly in equity, such as foreign currency translation and minimum pension
liability adjustments and unrealized holding gains and losses on
available-for-sale securities. See the Statement of Changes in Shareowners'
Equity for information on such non-shareowners' changes.
The Corporation believes that existing sources of liquidity are adequate
to meet anticipated borrowing needs at comparable risk-based interest rates for
the foreseeable future. Management anticipates that, excluding those items that
are not reported in earnings but are reported directly in equity, the level of
debt to capital will increase moderately in order to satisfy its various cash
flow requirements, including acquisition spending and continued share
repurchases.
Foreign Currency and Interest Rate Risk Management
The Corporation is exposed to changes in foreign currency exchange and interest
rates primarily in its cash, debt and foreign currency transactions.
The Corporation uses derivative instruments, including swaps, forward
contracts and options, to manage certain foreign currency exposures. Derivative
instruments utilized by the Corporation in its hedging activities are viewed as
risk management tools, involve little complexity and are not used for trading
or speculative purposes. The Corporation diversifies the counterparties used and
monitors the concentration of risk to limit its counterparty exposure.
The Corporation has a large volume of foreign currency commitment and
transaction exposures, and significant foreign currency net asset exposures,
that result from its international sales, purchases, investments, borrowings and
other transactions. International segment revenues from continuing operations,
including U.S. export sales, averaged approximately $13 billion over the last
three years. Foreign currency commitment and transaction exposures are managed
at the operating unit level as an integral part of the business. Exposures that
cannot be naturally offset within the business to an insignificant amount are
hedged with foreign currency derivatives. Those hedges are initiated by the
operating units, with execution coordinated on a corporate-wide basis, and are
scheduled to mature coincident with the timing of the underlying foreign
currency commitments and transactions. Currently, the Corporation does not hold
any derivative contracts that hedge its foreign currency net asset exposures.
The Corporation's cash position includes amounts denominated in foreign
currencies. The Corporation manages its worldwide cash requirements considering
available funds among its many subsidiaries and the cost effectiveness with
which these funds can be accessed. The repatriation of cash balances from
certain of the Corporation's subsidiaries could have adverse tax consequences.
However, those balances are generally available without legal restrictions to
fund ordinary business operations. The Corporation has and will continue to
transfer cash from those subsidiaries to the parent and to other international
subsidiaries when it is cost effective to do so.
The Corporation's long-term debt portfolio consists mostly of fixed-rate
instruments in order to minimize earnings volatility related to interest
expense. The Corporation currently does not hold interest rate derivative
contracts.
The Corporation has evaluated its exposure to changes in foreign currency
exchange and interest rates in its market risk sensitive instruments, which are
primarily cash, debt and derivative instruments, using a value at risk analysis.
Based on a 95% confidence level and a one-day holding period, at December 31,
1999 and 1998, the potential loss in fair value of the Corporation's market risk
sensitive instruments was not material in relation to the Corporation's
financial position, results of operations or cash flows. The Corporation's
calculated value at risk exposure represents an estimate of reasonably possible
net losses based on historical market rates, volatilities and correlations and
is not necessarily indicative of actual results.
UNITED TECHNOLOGIES 7
Refer to Notes 1, 12 and 13 of the Notes to Consolidated Financial
Statements for additional discussion of foreign exchange and financial
instruments.
Environmental Matters
The Corporation's operations are subject to environmental regulation by federal,
state and local authorities in the United States and regulatory authorities with
jurisdiction over its foreign operations. As a result, the Corporation has
established, and continually updates, policies relating to environmental
standards of performance for its operations worldwide. The Corporation believes
that expenditures necessary to comply with the present regulations governing
environmental protection will not have a material effect upon its competitive
position, financial position, results of operations or cash flows.
The Corporation has identified approximately 430 locations, mostly in the
United States, at which it may have some liability for remediating
contamination. The Corporation does not believe that any individual location's
exposure will have a material effect on the results of operations of the
Corporation. Sites in the investigation or remediation stage represent
approximately 98% of the Corporation's recorded liability. The remaining 2% of
the recorded liability consists of sites where the Corporation may have some
liability but investigation is in the initial stages or has not begun.
The Corporation has been identified as a potentially responsible party
under the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA" or Superfund) at approximately 97 sites. The number of Superfund
sites, in and of itself, does not represent a relevant measure of liability
because the nature and extent of environmental concerns vary from site to site
and the Corporation's share of responsibility varies from sole responsibility to
very little responsibility. In estimating its liability for remediation, the
Corporation considers its likely proportionate share of the anticipated
remediation expense and the ability of other potentially responsible parties to
fulfill their obligations.
At December 31, 1999, the Corporation had $436 million reserved for
environmental remediation. Cash outflows for environmental remediation were $36
million in 1999, $36 million in 1998 and $34 million in 1997. The Corporation
estimates that ongoing environmental remediation expenditures in each of the
next two years will not exceed $50 million.
Additional discussion of the Corporation's environmental matters is
included in Notes 1 and 14 of the Notes to Consolidated Financial Statements.
U.S. Government
The Corporation's contracts with the U.S. Government are subject to audits. Like
many defense contractors, the Corporation has 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.
The Corporation has made voluntary refunds in those cases it believes
appropriate.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which, as amended, is currently effective January 1,
2001 for the Corporation. Management believes adoption of this standard will not
have a material impact on the Corporation's consolidated financial position,
results of operations or cash flows.
Year 2000
The Corporation's program to address the Year 2000 issue consisted of the
following phases: awareness, assessment, remediation, testing and contingency
planning. As of December 31, 1999, all phases were completed. The Corporation
did not experience any significant disruption as a result of the Year 2000
issue.
The Corporation's program was initiated and executed to prevent major
interruptions in the business due to Year 2000 problems using both internal and
external resources to identify and correct problems and to test for readiness.
The external costs of the project, including equipment costs and consultant and
software licensing fees, were approximately $100 million. Internal costs, which
were primarily payroll related, were approximately $40 million. These costs were
funded through operating cash flows with amounts that would normally have been
budgeted for the Corporation's information systems and production and facilities
equipment. Although the Corporation worked on its Year 2000 readiness efforts
for several years, costs incurred prior to 1997 were not separately tracked and
are generally not included in the estimate of total costs.
The Corporation completed its assessment of its Year 2000 risks related to
significant relationships with its critical third-party suppliers and customers.
Despite these efforts, the Corporation can provide no assurance that all
supplier and customer Year 2000 compliance plans were successfully completed in
a timely manner, although it is not currently aware of any problems which would
significantly impact its operations.
Euro Conversion
On January 1, 1999, the European Economic and Monetary Union (EMU) entered a
three-year transition phase during which a common currency, the "euro," was
introduced in participating countries. The euro is currently used for wholesale
financial transactions and will replace the legacy currencies that will be
withdrawn between January 1, 2002 and July 1, 2002. The Corporation has been
preparing for the euro since December 1996 and has identified issues and
developed implementation plans associated with the conversion, including
technical adaptation of information technology and other systems, continuity of
long-term contracts, foreign currency considerations, long-term competitive
implications of the conversions and the effect on the market risk inherent in
financial instruments. These implementation plans are expected to be completed
within a timetable that is consistent with the transition phases of the euro.
Based on its evaluation to date, management believes that the introduction
of the euro, including the total costs for the conversion, will not have a
material adverse impact on the Corporation's financial position, results of
operations or cash flows. However, uncertainty exists as to the effects the euro
will have on the marketplace and there is no guarantee that all issues will be
foreseen and corrected or that third parties will address the conversion
successfully.
8 UNITED TECHNOLOGIES
Cautionary Note Concerning Factors That May Affect Future Results
This Annual Report contains statements which, to the extent they are not
statements of historical or present fact, constitute "forward-looking
statements" under the securities laws. From time to time, oral or written
forward-looking statements may also be included in other materials released to
the public. These forward-looking statements are intended to provide
management's current expectations or plans for the future operating and
financial performance of the Corporation, based on assumptions currently
believed to be valid. Forward-looking statements can be identified by the use of
words such as "believe," "expect," "plans," "strategy," "prospects," "estimate,"
"project," "anticipate" and other words of similar meaning in connection with a
discussion of future operating or financial performance. These include, among
others, statements relating to:
o Future earnings and other measurements of financial performance
o Future cash flow and uses of cash
o The effect of economic downturns or growth in particular regions
o The effect of changes in the level of activity in particular
industries or markets
o The scope, nature or impact of acquisition activity
o Product developments and new business opportunities
o Restructuring costs and savings
o The outcome of contingencies
o The impact of Year 2000 issues
o The transition to the use of the euro as a currency.
All forward-looking statements involve risks and uncertainties that may
cause actual results to differ materially from those expressed or implied in the
forward-looking statements. For additional information identifying factors that
may cause actual results to vary materially from those stated in the
forward-looking statements, see the Corporation's reports on Forms 10-K, 10-Q
and 8-K filed with the Securities and Exchange Commission from time to time. The
Corporation's Annual Report on Form 10-K for 1999 includes important information
as to risk factors in the "Business" section under the headings "Description of
Business by Operating Segment" and "Other Matters Relating to the Corporation's
Business as a Whole."
UNITED TECHNOLOGIES 9
Management's
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of United Technologies Corporation and its subsidiaries
are the responsibility of the Corporation's management and have been prepared in
accordance with generally accepted accounting principles.
Management is responsible for the integrity and objectivity of the
financial statements, including estimates and judgments reflected in them and
fulfills this responsibility primarily by establishing and maintaining
accounting systems and practices adequately supported by internal accounting
controls. These controls are designed to provide reasonable assurance that the
Corporation's assets are safeguarded, that transactions are executed in
accordance with management's authorizations and that the financial records are
reliable for the purpose of preparing financial statements. Self-monitoring
mechanisms are also a part of the control environment whereby, as deficiencies
are identified, corrective actions are taken. Even an effective internal control
system, no matter how well designed, has inherent limitations -- including the
possibility of the circumvention or overriding of controls -- and, therefore,
can provide only reasonable assurance with respect to financial statement
preparation and such safeguarding of assets. Further, because of changes in
conditions, internal control system effectiveness may vary over time.
The Corporation assessed its internal control system as of December 31,
1999. Based on this assessment, management believes the internal accounting
controls in use provide reasonable assurance that the Corporation's assets are
safeguarded, that transactions are executed in accordance with management's
authorizations, and that the financial records are reliable for the purpose of
preparing financial statements.
Independent accountants are appointed annually by the Corporation's
shareowners to audit the financial statements in accordance with generally
accepted auditing standards. Their report appears below. Their audits, as well
as those of the Corporation's internal audit department, include a review of
internal accounting controls and selective tests of transactions.
The Audit Review Committee of the Board of Directors, consisting of
directors who are not officers or employees of the Corporation, meets regularly
with management, the independent accountants and the internal auditors, to
review matters relating to financial reporting, internal accounting controls and
auditing.
/s/ George David
George David
Chairman and Chief Executive Officer
/s/ Karl Krapek
Karl Krapek
President and Chief Operating Officer
/s/ David J. FitzPatrick
David J. FitzPatrick
Senior Vice President and Chief Financial Officer
Report
OF INDEPENDENT ACCOUNTANTS
To the Shareowners of United Technologies Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareowners' equity and of
cash flows present fairly, in all material respects, the financial position of
United Technologies Corporation and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Corporation's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
January 19, 2000
10 UNITED TECHNOLOGIES
CONSOLIDATED STATEMENT OF
OPERATIONS
YEARS ENDED DECEMBER 31,
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997
- --------------------------------------------------------------------------------------------
Revenues
Product sales $18,021 $17,348 $15,946
Service sales 5,823 5,439 5,116
Financing revenues and other income, net 283 22 226
- --------------------------------------------------------------------------------------------
24,127 22,809 21,288
Costs and Expenses
Cost of products sold 14,500 13,436 12,638
Cost of services sold 3,685 3,461 3,208
Research and development 1,292 1,168 1,069
Selling, general and administrative 3,133 2,737 2,611
Interest 260 197 188
- --------------------------------------------------------------------------------------------
22,870 20,999 19,714
Income from continuing operations
before income taxes and minority interests 1,257 1,810 1,574
Income taxes 325 568 514
Minority interests in subsidiaries' earnings 91 85 98
- --------------------------------------------------------------------------------------------
Income from continuing operations 841 1,157 962
Discontinued operation:
Income from operations of discontinued UT Automotive
unit (net of applicable income tax provisions
of $28, $55 and $51 in 1999, 1998 and 1997) 40 98 110
Gain on sale of UT Automotive unit (net of applicable income
tax provision of $112) 650 -- --
- --------------------------------------------------------------------------------------------
Net Income $ 1,531 $ 1,255 $ 1,072
============================================================================================
Earnings per Share of Common Stock
Basic:
Continuing operations $ 1.74 $ 2.47 $ 1.98
Discontinued operation .08 .21 .24
Gain on sale of discontinued operation 1.40 -- --
============================================================================================
Net earnings $ 3.22 $ 2.68 $ 2.22
============================================================================================
Diluted:
Continuing operations $ 1.65 $ 2.33 $ 1.89
Discontinued operation .08 .20 .21
Gain on sale of discontinued operation 1.28 -- --
============================================================================================
Net earnings $ 3.01 $ 2.53 $ 2.10
============================================================================================
See accompanying Notes to Consolidated Financial Statements
UNITED TECHNOLOGIES 11
CONSOLIDATED
BALANCE SHEET
DECEMBER 31,
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE (SHARES IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 957 $ 550
Accounts receivable (net of allowance for doubtful accounts of $406 and $316) 4,337 3,417
Inventories and contracts in progress 3,504 3,191
Future income tax benefits 1,563 1,222
Other current assets 266 161
Net investment in discontinued operation -- 1,287
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 10,627 9,828
Customer financing assets 553 498
Future income tax benefits 873 1,093
Fixed assets 4,460 3,555
Goodwill (net of accumulated amortization of $507 and $388) 5,641 1,417
Other assets 2,212 1,377
- -------------------------------------------------------------------------------------------------------------------
Total Assets $24,366 $17,768
===================================================================================================================
Liabilities and Shareowners' Equity
Short-term borrowings $ 902 $ 504
Accounts payable 1,957 1,860
Accrued liabilities 6,023 4,719
Long-term debt currently due 333 99
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 9,215 7,182
Long-term debt 3,086 1,570
Future pension and postretirement benefit obligations 1,601 1,682
Future income taxes payable 126 143
Other long-term liabilities 2,245 1,936
Commitments and contingent liabilities (Notes 4 and 14)
Minority interests in subsidiary companies 527 421
Series A ESOP Convertible Preferred Stock, $1 par value
Authorized-20,000 shares
Outstanding-12,237 and 12,629 shares 808 836
ESOP deferred compensation (359) (380)
- -------------------------------------------------------------------------------------------------------------------
449 456
Shareowners' Equity:
Capital Stock:
Preferred Stock, $1 par value; Authorized-230,000 shares; None issued or outstanding -- --
Common Stock, $1 par value; Authorized-1,000,000 shares; Issued-588,737 and 582,160 shares 4,227 2,708
Treasury Stock-114,191 and 132,056 common shares at cost (3,182) (3,117)
Retained earnings 6,463 5,411
Accumulated other non-shareowners' changes in equity:
Foreign currency translation (563) (487)
Minimum pension liability (41) (137)
Unrealized holding gain on marketable equity securities 213 --
- -------------------------------------------------------------------------------------------------------------------
(391) (624)
- -------------------------------------------------------------------------------------------------------------------
Total Shareowners' Equity 7,117 4,378
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareowners' Equity $24,366 $17,768
===================================================================================================================
See accompanying Notes to Consolidated Financial Statements
12 UNITED TECHNOLOGIES
CONSOLIDATED STATEMENT OF
CASH FLOWS
YEARS ENDED DECEMBER 31,
IN MILLIONS OF DOLLARS 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Operating Activities
Income from continuing operations $ 841 $ 1,157 $ 962
Adjustments to reconcile income from continuing operations
to net cash flows provided by operating activities:
Depreciation and amortization 844 730 707
Deferred income tax provision (benefit) 4 (264) (525)
Minority interests in subsidiaries' earnings 91 85 98
Change in:
Accounts receivable (256) 44 (182)
Inventories and contracts in progress 331 (113) 113
Other current assets (66) 213 (19)
Accounts payable and accrued liabilities 595 135 331
Other, net (74) 327 418
- --------------------------------------------------------------------------------------------------------------
Net Cash Flows Provided by Operating Activities 2,310 2,314 1,903
Investing Activities
Capital expenditures (762) (673) (658)
Increase in customer financing assets (383) (356) (132)
Decrease in customer financing assets 195 143 171
Acquisitions of businesses (3,547) (1,228) (547)
Dispositions of businesses 43 -- 36
Other, net 43 43 125
- --------------------------------------------------------------------------------------------------------------
Net Cash Flows Used in Investing Activities (4,411) (2,071) (1,005)
Financing Activities
Issuance of long-term debt 1,727 402 12
Repayment of long-term debt (557) (146) (129)
Increase in short-term borrowings 185 293 12
Common Stock issued under employee stock plans 354 220 143
Dividends paid on Common Stock (353) (316) (291)
Repurchase of Common Stock (822) (650) (849)
Dividends to minority interests and other (159) (138) (95)
- --------------------------------------------------------------------------------------------------------------
Net Cash Flows Provided by (Used in) Financing Activities 375 (335) (1,197)
Net Cash Flows Provided by (Used in) Discontinued Operation 2,159 (9) 2
Effect of foreign exchange rate changes on Cash and cash equivalents (26) (4) (46)
Net increase (decrease) in Cash and cash equivalents 407 (105) (343)
Cash and cash equivalents, beginning of year 550 655 998
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 957 $ 550 $ 655
==============================================================================================================
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of amounts capitalized $ 217 $ 170 $ 162
Income taxes paid, net of refunds 368 888 859
Non-cash investing activities:
The Corporation issued $1.9 billion of Treasury Stock in connection with the
acquisition of Sundstrand Corporation
See accompanying Notes to Consolidated Financial Statements
UNITED TECHNOLOGIES 13
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREOWNERS' EQUITY
Accumulated Non-
Other Non- Shareowners'
Shareowners' Changes In
Common Treasury Retained Changes Equity For
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS Stock Stock Earnings In Equity The Period
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 $2,345 $(1,626) $3,849 $(262)
Common Stock issued under employee plans (4.4 million shares) 143 3 (26)
Common Stock repurchased (22.4 million shares) (849)
Dividends on Common Stock ($.62 per share) (291)
Dividends on ESOP Stock ($4.80 per share) (32)
Non-Shareowners' Changes in Equity:
Net income 1,072 $1,072
Foreign currency translation:
Foreign currency translation adjustments (225) (225)
Income taxes (6) (6)
Minimum pension liability:
Pension adjustment (12) (12)
Income tax benefits 4 4
Other (14) (14)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 2,488 (2,472) 4,558 (501) $819
======
Common Stock issued under employee plans (6.6 million shares) 220 5 (53)
Common Stock repurchased (14.8 million shares) (650)
Dividends on Common Stock ($.695 per share) (316)
Dividends on ESOP Stock ($4.80 per share) (33)
Non-Shareowners' Changes in Equity:
Net income 1,255 $1,255
Foreign currency translation:
Foreign currency translation adjustments 4 4
Income taxes (7) (7)
Minimum pension liability:
Pension adjustment (187) (187)
Income tax benefits 67 67
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 2,708 (3,117) 5,411 (624) $1,132
======
Common Stock issued under employee plans (7.2 million shares) 354 16 (93)
Common Stock issued in conjunction with a business combination
(30.4 million shares) 1,165 741
Common Stock repurchased (13.2 million shares) (822)
Dividends on Common Stock ($.76 per share) (353)
Dividends on ESOP Stock ($4.80 per share) (33)
Non-Shareowners' Changes in Equity:
Net income 1,531 $1,531
Foreign currency translation:
Foreign currency translation adjustments (92) (92)
Income tax benefits 16 16
Minimum pension liability:
Pension adjustment 150 150
Income taxes (54) (54)
Unrealized holding gain on marketable equity securities:
Unrealized holding gain 328 328
Income taxes (115) (115)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 $4,227 $(3,182) $6,463 $(391) $1,764
==================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
14 UNITED TECHNOLOGIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 reclassifications have been made to prior year amounts to conform
to the current year presentation.
CONSOLIDATION. The consolidated financial statements include the accounts of the
Corporation 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 which are highly liquid in
nature and have original maturities of three months or less.
ACCOUNTS RECEIVABLE. Current and long-term accounts receivable include retainage
and unbilled costs of approximately $72 million and $103 million at December 31,
1999 and 1998. Retainage represents amounts which, pursuant to the contract, are
not due until project completion and acceptance by the customer. Unbilled costs
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
on the Consolidated Balance Sheet.
MARKETABLE EQUITY SECURITIES. Equity securities that have a readily determinable
fair value are classified as available for sale and are carried at fair value.
Unrealized holding gains and losses are recorded as a separate component of
shareowners' equity, net of the deferred income tax effect.
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. Costs accumulated
against specific contracts or orders are at actual cost. Materials in excess of
requirements for contracts and orders currently in effect or anticipated have
been reserved and written-off when appropriate.
Manufacturing tooling costs are charged to inventories or to fixed assets
depending upon their nature, general applicability and useful lives. Tooling
costs included in inventory are charged to cost of sales based on usage,
generally within two years after they enter productive use.
Manufacturing costs are allocated to current production and firm
contracts. General and administrative expenses are charged to expense as
incurred.
FIXED ASSETS. Fixed assets are stated at cost. Depreciation is computed over the
assets' useful lives generally using the straight-line method, except for
aerospace assets acquired prior to January 1, 1999, which are depreciated using
accelerated methods.
In 1999, the Company adopted AICPA Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
which requires capitalization of certain costs incurred in the development of
internal-use software. Adoption of that statement and the change to
straight-line depreciation for aerospace assets did not have a material impact
on the Corporation's financial position, results of operations or cash flows.
GOODWILL AND OTHER LONG-LIVED ASSETS. Goodwill represents costs in excess of
fair values assigned to the underlying net assets of acquired companies and is
generally amortized using the straight-line method over periods ranging from 10
to 40 years.
The Corporation evaluates potential impairment of goodwill on an ongoing
basis and of other long-lived assets when appropriate. If the carrying amount of
an asset exceeds the sum of its undiscounted expected future cash flows, the
asset's carrying value is written down to fair value.
REVENUE RECOGNITION. Sales under government and commercial fixed-price contracts
and government fixed-price-incentive contracts are recorded at the time
deliveries are made or, in some cases, on a percentage-of-completion basis.
Sales under cost-reimbursement contracts are recorded as work is performed and
billed. Sales of commercial aircraft engines sometimes require participation by
the Corporation in aircraft financing arrangements; when appropriate, such sales
are accounted for as operating leases. Sales under elevator and escalator
installation and modernization contracts are accounted for under the
percentage-of-completion method.
Losses, if any, on contracts are provided for when anticipated. Loss
provisions are based upon excess inventoriable manufacturing, engineering,
estimated warranty and product guarantee costs over the net revenue from the
products contemplated by the specific order. Contract accounting requires
estimates of future costs over the performance period of the contract. These
estimates are subject to change and result in adjustments to margins on
contracts in progress.
Service sales, representing after-market repair and maintenance
activities, are recognized over the contractual period or as services are
performed.
RESEARCH AND DEVELOPMENT. Research and development costs, not specifically
covered by contracts and those related to the Corporation-sponsored share of
research and development activity in connection with cost-sharing arrangements,
are charged to expense as incurred.
HEDGING ACTIVITY. The Corporation uses derivative instruments, including swaps,
forward contracts and options, to manage certain foreign currency exposures.
Derivative instruments are viewed by the Corporation as risk management tools
and are not used for trading or speculative purposes. Derivatives used for
hedging purposes must be designated as, and effective as, a hedge of the
identified risk exposure at the inception of the contract. Accordingly, changes
in the market value of the derivative contract must be highly correlated with
changes in the market value of the underlying hedged item at inception of the
hedge and over the life of the hedge contract.
Gains and losses from instruments that are effective hedges of firm
commitments are deferred and recognized as part of the economic basis of the
transactions underlying the commitments when the associated
UNITED TECHNOLOGIES 15
hedged transaction occurs. Gains and losses from instruments that are effective
hedges of foreign-currency-denominated transactions are reported in earnings and
offset the effects of foreign exchange transaction gains and losses from the
associated hedged transactions. Gains and losses on the excess of foreign
currency derivative amounts over the related hedged commitment or transaction
would be recognized in earnings. Cash flows from derivative instruments
designated as hedges are classified consistent with the items being hedged.
Gains and losses on derivative instruments designated but no longer
effective as a hedge would be recognized in earnings.
Gains and losses on terminations of foreign exchange contracts are
deferred and amortized over the remaining period of the original contract to the
extent the underlying hedged commitment or transaction is still likely to occur.
Gains and losses on terminations of foreign exchange contracts are recognized in
earnings when terminated in conjunction with the cancelation of the related
commitment or transaction.
Carrying amounts of foreign exchange contracts are included in accounts
receivable, other assets and accrued liabilities.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," in June 1998 which, as amended, is currently effective January 1,
2001 for the Corporation. Management believes adoption of this standard will not
have a material impact on the Corporation's consolidated financial position,
results of operations or cash flows.
ENVIRONMENTAL. Environmental investigatory, remediation, operating and
maintenance costs are accrued 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, the minimum is accrued. For sites with multiple
responsible parties, the Corporation considers its 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.
Liabilities with fixed or reliably determinable future cash payments are
discounted. Environmental liabilities are not reduced by potential insurance
reimbursements.
STOCK SPLIT. In April 1999, the Corporation announced a two-for-one stock split
which was paid in May 1999 in the form of a stock dividend to shareowners of
record at the close of business on May 7, 1999. All common share and per share
information in the Consolidated Financial Statements reflect the stock split.
2 Acquisitions and Dispositions of Businesses
ACQUISITIONS. In June 1999, the Corporation completed the acquisition of
Sundstrand Corporation, a global producer of aerospace and industrial products
for diversified markets, for approximately $4.3 billion, including debt assumed.
Under the terms of the merger agreement, each outstanding share of Sundstrand
Common Stock was exchanged for $35 in cash and .5580 shares of the Corporation's
Common Stock. The acquisition has been accounted for as a purchase.
In connection with the acquisition of Sundstrand, the Corporation is
undertaking actions to combine the operations of Sundstrand and Hamilton
Standard, including consolidating headquarters, closing facilities, relocating
salary and hourly employees and reducing salary and hourly workforce. Costs
accrued to date amounted to $25 million, relating to those actions that directly
impact Sundstrand facilities and employees, and are being accounted for as an
adjustment to the purchase price.
The Corporation's unaudited consolidated results of operations on a pro
forma basis for the Sundstrand transaction, assuming it had occurred at the
beginning of 1999 and 1998, are as follows:
YEAR ENDED DECEMBER 31,
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 1999 1998
- --------------------------------------------------------------------------------
Revenues $24,996 $24,799
Net Income 1,558 1,363
Net Income per basic common share 3.18 2.74
Net Income per diluted common share 2.99 2.58
The unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the operating
results that would have occurred had the Sundstrand acquisition been consummated
as of the above dates, nor is it necessarily indicative of future operating
results.
In addition to acquiring Sundstrand, the Corporation completed
acquisitions in 1999, 1998 and 1997 for $1,989 million, $1,237 million and $602
million, including debt assumed. Those amounts included cash consideration of
$1,662 million, $1,228 million and $547 million.
The assets and liabilities of the acquired businesses accounted for under
the purchase method are recorded at their fair values at the dates of
acquisition. The excess of the purchase price over the estimated fair values of
the net assets acquired, of $4,396 million in 1999, $855 million in 1998 and
$353 million in 1997, has been recorded as goodwill and is being amortized over
estimated useful lives that range from 10 to 40 years.
The results of operations of acquired businesses have been included in the
Consolidated Statement of Operations beginning on the effective date of
acquisition.
The cost of 1999 acquisitions and allocations of cost may require
adjustment based upon information that may come to the attention of the
Corporation which is not currently available. Adjustments are not expected to be
material and were not material for 1998 and 1997 acquisitions.
The pro forma results for acquisitions other than Sundstrand, for 1999,
1998 and 1997, assuming these acquisitions had been made at the beginning of the
year, would not be materially different from reported results.
DISPOSITIONS. In May 1999, the Corporation sold its UT Automotive unit to Lear
Corporation for $2.3 billion, which resulted in a source of cash of $2.2 billion
and an after-tax gain of $650 million. UT Automotive net assets appear in the
Consolidated Balance Sheet at December 31, 1998 as a net investment in a
discontinued operation. Related results, through the date of disposition, appear
as income from operations of the discontinued UT Automotive unit in the
Consolidated Statement of Operations for 1999, 1998 and 1997. UT Automotive
revenues prior to the disposition were $1,115 million, $2,962 million and $2,987
million in 1999, 1998 and 1997.
16 UNITED TECHNOLOGIES
3 Earnings per Share
Average
Income Shares Per Share
(MILLIONS) (THOUSANDS) Amount
- --------------------------------------------------------------------------------
December 31, 1999
Income from
continuing operations $ 841
Less: ESOP Stock dividends (33)
- -------------------------------------------------------
Basic earnings from
continuing operations 808 465.6 $1.74
Stock awards 13.8
ESOP Stock adjustment 28 27.3
- -------------------------------------------------------------------
Diluted earnings from
continuing operations $ 836 506.7 $1.65
===================================================================
Net Income $1,531
Less: ESOP Stock dividends (33)
- -------------------------------------------------------
Basic earnings 1,498 465.6 $3.22
Stock awards 13.8
ESOP Stock adjustment 28 27.3
- -------------------------------------------------------------------
Diluted earnings $1,526 506.7 $3.01
===================================================================
December 31, 1998
Income from
continuing operations $1,157
Less: ESOP Stock dividends (33)
- -------------------------------------------------------
Basic earnings from
continuing operations 1,124 455.5 $2.47
Stock awards 12.0
ESOP Stock adjustment 28 27.3
- -------------------------------------------------------------------
Diluted earnings from
continuing operations $1,152 494.8 $2.33
===================================================================
Net Income $1,255
Less: ESOP Stock dividends (33)
- -------------------------------------------------------
Basic earnings 1,222 455.5 $2.68
Stock awards 12.0
ESOP Stock adjustment 28 27.3
- -------------------------------------------------------------------
Diluted earnings $1,250 494.8 $2.53
===================================================================
December 31, 1997
Income from
continuing operations $ 962
Less: ESOP Stock dividends (32)
- -------------------------------------------------------
Basic earnings from
continuing operations 930 468.9 $1.98
Stock awards 11.7
ESOP Stock adjustment 27 26.5
- -------------------------------------------------------------------
Diluted earnings from
continuing operations $ 957 507.1 $1.89
===================================================================
Net Income $1,072
Less: ESOP Stock dividends (32)
- -------------------------------------------------------
Basic earnings 1,040 468.9 $2.22
Stock awards 11.7
ESOP Stock adjustment 27 26.5
- -------------------------------------------------------------------
Diluted earnings $1,067 507.1 $2.10
===================================================================
4 Commercial Airline Industry Assets and Commitments
The Corporation has receivables and other financing assets with commercial
airline industry customers totaling $1,562 million and $1,361 million at
December 31, 1999 and 1998, net of allowances of $279 million and $237 million.
Customer financing assets consist of products under lease of $265 million
and notes and leases receivable of $425 million. The notes and leases receivable
are scheduled to mature as follows: $137 million in 2000, $91 million in 2001,
$17 million in 2002, $29 million in 2003, $25 million in 2004 and $126 million
thereafter.
Financing commitments, in the form of secured debt, guarantees or lease
financing, are provided to commercial aircraft engine customers. The extent to
which the financing commitments will be utilized cannot currently be predicted,
since customers may be able to obtain more favorable terms from other financing
sources. The Corporation may also arrange for third-party investors to assume a
portion of its 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. The Corporation 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 which result in sublease
periods shorter than the Corporation's lease obligation. Lastly, the Corporation
has residual value and other guarantees related to various commercial aircraft
engine 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.
The Corporation's financing and rental commitments as of December 31, 1999
were $808 million and are excercisable as follows: $298 million in 2000, $50
million in 2001, $56 million in 2002, $19 million in 2003, $107 million in 2004
and $278 million thereafter.
In addition, the Corporation had net residual value and other guarantees
of $117 million as of December 31, 1999.
The Corporation has a 33% interest in International Aero Engines ("IAE"),
an international consortium of four shareholders organized to support the V2500
commercial aircraft engine program. IAE may offer customer financing in the form
of guarantees, secured debt or lease financing in connection with V2500 engine
sales. At December 31, 1999, IAE had financing commitments of $1,278 million.
The Corporation's share of IAE's financing commitments was approximately $420
million at December 31, 1999. In addition, IAE had lease obligations under
long-term noncancelable leases of approximately $360 million through 2021
related to aircraft which are subleased to customers under long-term leases.
These aircraft have fair market values which approximate the financed amounts.
The shareholders of IAE have guaranteed IAE's financing arrangements to the
extent of their respective ownership interests. In the event any shareholder was
to default on certain of these financing arrangements, the other shareholders
would be proportionately responsible.
UNITED TECHNOLOGIES 17
5 Inventories and Contracts in Progress
IN MILLIONS OF DOLLARS 1999 1998
- -------------------------------------------------------------------------------
Inventories consist of the following:
Raw material $ 702 $ 537
Work-in-process 1,158 1,122
Finished goods 1,871 1,795
Contracts in progress 1,561 1,410
- -------------------------------------------------------------------------------
5,292 4,864
Less:
Progress payments, secured by lien,
on U.S. Government contracts (87) (124)
Billings on contracts in progress (1,701) (1,549)
- -------------------------------------------------------------------------------
$ 3,504 $ 3,191
===============================================================================
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.
The Corporation's sales contracts in many cases are long-term contracts
expected to be performed over periods exceeding twelve months. Approximately 51%
and 58% of total inventories and contracts in progress have been acquired or
manufactured under such long-term contracts at December 31, 1999 and 1998. It is
impracticable for the Corporation to determine the amounts of inventory
scheduled for delivery under long-term contracts within the next twelve months.
If inventories which were valued using the LIFO method had been valued
under the FIFO method, they would have been higher by $111 million and $110
million at December 31, 1999 and 1998.
6 Fixed Assets
Estimated
IN MILLIONS OF DOLLARS Useful Lives 1999 1998
- -------------------------------------------------------------------------------
Land -- $ 207 $ 149
Buildings and improvements 20-40 years 3,072 2,977
Machinery, tools and equipment 3-12 years 6,869 6,153
Other, including under construction -- 307 270
- -------------------------------------------------------------------------------
10,455 9,549
Accumulated depreciation (5,995) (5,994)
- -------------------------------------------------------------------------------
$ 4,460 $ 3,555
===============================================================================
Depreciation expense was $658 million in 1999, $613 million in 1998 and $625
million in 1997.
7 Accrued Liabilities
IN MILLIONS OF DOLLARS 1999 1998
- --------------------------------------------------------------------------------
Accrued salaries, wages and
employee benefits $ 861 $ 841
Accrued restructuring costs 525 131
Service and warranty accruals 480 462
Advances on sales contracts 964 637
Income taxes payable 602 415
Other 2,591 2,233
- --------------------------------------------------------------------------------
$6,023 $4,719
================================================================================
8 Borrowings and Lines of Credit
Short-term borrowings consist of the following:
IN MILLIONS OF DOLLARS 1999 1998
- --------------------------------------------------------------------------------
Foreign bank borrowings $629 $183
Commercial paper 273 321
- --------------------------------------------------------------------------------
$902 $504
================================================================================
The weighted-average interest rates applicable to short-term borrowings
outstanding at December 31, 1999 and 1998 were 7.5% and 6.8%. At December 31,
1999, approximately $1.4 billion was available under short-term lines of credit
with local banks at the Corporation's various international subsidiaries.
At December 31, 1999, the Corporation had credit commitments from banks
totaling $1.5 billion under a Revolving Credit Agreement, which serves as
back-up for a commercial paper facility. There were no borrowings under the
Revolving Credit Agreement at December 31, 1999.
Long-term debt consists of the following:
Weighted-
Average
IN MILLIONS OF DOLLARS Interest Rate Maturity 1999 1998
- --------------------------------------------------------------------------------
Notes and other debt
denominated in:
U.S. dollars 7.2% 2000-2029 $2,844 $1,013
Foreign currency 4.6% 2000-2011 15 37
Capital lease obligations 5.9% 2000-2017 223 246
ESOP debt 7.7% 2000-2009 337 373
- --------------------------------------------------------------------------------
3,419 1,669
Less: Long-term debt
currently due 333 99
- --------------------------------------------------------------------------------
$3,086 $1,570
================================================================================
Principal payments required on long-term debt for the next five years are:
$333 million in 2000, $309 million in 2001, $41 million in 2002, $44 million in
2003 and $363 million in 2004.
In 1999, the Corporation issued a total of $1,725 million of
unsubordinated, unsecured, nonconvertible notes under shelf registration
statements previously filed with the Securities and Exchange Commission. The
weighted-average interest rate on those notes is 6.9%. Proceeds from the debt
issuances were used for general corporate purposes, including financing a
portion of the Sundstrand acquisition, funding other acquisitions and
repurchasing the Corporation's Common Stock.
In 1998, the Corporation issued $400 million of 6.7% unsubordinated,
unsecured, nonconvertible notes.
At December 31, 1999, up to $1 billion of additional medium-term and
long-term debt could be issued under a shelf registration statement on file with
the Securities and Exchange Commission.
The percentage of total debt at floating interest rates was 24% and 26% at
December 31, 1999 and 1998.
18 UNITED TECHNOLOGIES
9 Taxes on Income
Significant components of income taxes (benefits) for each year are as follows:
IN MILLIONS OF DOLLARS 1999 1998 1997
- -------------------------------------------------------------------------------
Current:
United States:
Federal $ 32 $ 347 $ 607
State 26 23 38
Foreign 323 337 359
- -------------------------------------------------------------------------------
381 707 1,004
Future:
United States:
Federal 67 (214) (414)
State (61) (25) (82)
Foreign (2) (25) (29)
- -------------------------------------------------------------------------------
4 (264) (525)
385 443 479
Attributable to items
(charged) credited to equity (60) 125 35
- -------------------------------------------------------------------------------
$ 325 $ 568 $ 514
===============================================================================
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. The tax effects of
temporary differences and tax carryforwards which gave rise to future income tax
benefits and payables at December 31, 1999 and 1998 are as follows:
IN MILLIONS OF DOLLARS 1999 1998
- -------------------------------------------------------------------------------
Future income tax benefits:
Insurance and employee benefits $ 669 $ 693
Other asset basis differences 263 651
Other liability basis differences 1,413 974
Tax loss carryforwards 169 106
Tax credit carryforwards 155 110
Valuation allowance (233) (219)
- -------------------------------------------------------------------------------
$2,436 $2,315
===============================================================================
Future income taxes payable:
Fixed assets $ 94 $ 47
Other items, net 55 116
- -------------------------------------------------------------------------------
$ 149 $ 163
===============================================================================
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. Valuation allowances have been established primarily for tax
credit and tax loss carryforwards to reduce the future income tax benefits to
amounts expected to be realized.
The sources of income from continuing operations before income taxes and
minority interests are:
IN MILLIONS OF DOLLARS 1999 1998 1997
- --------------------------------------------------------------------------------
United States $ 352 $ 924 $ 659
Foreign 905 886 915
- --------------------------------------------------------------------------------
$1,257 $1,810 $1,574
================================================================================
United States income taxes have not been provided on undistributed
earnings of international subsidiaries. The Corporation's intention is to
reinvest these earnings permanently or to repatriate the earnings only when it
is tax effective to do so. Accordingly, the Corporation believes that any U.S.
tax on repatriated earnings 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:
1999 1998 1997
- ------------------------------------------------------------------------------
Statutory U.S. federal
income tax rate 35.0% 35.0% 35.0%
Varying tax rates of consolidated
subsidiaries (including Foreign
Sales Corporation) (7.8) (4.8) (4.5)
Goodwill 2.5 0.4 0.2
Other (3.8) 0.8 2.0
- ------------------------------------------------------------------------------
Effective income tax rate 25.9% 31.4% 32.7%
==============================================================================
The 1999 effective tax rate includes the impact of the Corporation's 1999
restructuring actions. Excluding restructuring, the 1999 effective tax rate was
30.9%.
Tax credit carryforwards at December 31, 1999 were $155 million of which
$1 million expires annually in each of the next two years, and $4 million
expires in 2003.
Tax loss carryforwards, principally state and foreign, at December 31,
1999 were $661 million of which $471 million expire as follows: $237 million
from 2000-2004, $130 million from 2005-2009, $104 million from 2010-2019.
10 Employee Benefit Plans
The Corporation and its subsidiaries sponsor numerous domestic and foreign
employee benefit plans. Those plans are discussed below.
EMPLOYEE SAVINGS PLANS. The Corporation and certain subsidiaries sponsor various
employee savings plans. Total contribution expenses were $87 million, $81
million and $76 million for 1999, 1998 and 1997.
The Corporation's nonunion domestic employee savings plan uses an Employee
Stock Ownership Plan ("ESOP") for employer contributions. External borrowings,
guaranteed by the Corporation and reported as debt on the Consolidated Balance
Sheet, were used by the ESOP to fund a portion of its purchase of ESOP Stock
from the Corporation. Each share of ESOP Stock is convertible into four shares
of Common Stock, has a guaranteed value of $65, a $4.80 annual dividend and is
redeemable at any time for $65 per share. Upon notice of redemption by the
Corporation, the Trustee has the right to convert the ESOP Stock into Common
Stock. Because of its guaranteed value, the ESOP Stock is classified outside of
permanent equity.
Shares of ESOP Stock are committed to employees at fair value on the date
earned. The ESOP Stock's cash dividends are used for debt service payments.
Participants receive shares in lieu of the cash dividends. As debt service
payments are made, ESOP Stock is released from an unreleased shares account. If
share releases do not meet share commitments, the Corporation will contribute
additional ESOP Stock, Common Stock or cash. At December 31, 1999, 6.8 million
shares had been committed to employees, leaving 5.5 million shares in the ESOP
Trust, with an approximate fair value of $1,417 million based on equivalent
common shares.
Upon withdrawal, shares of the ESOP Stock must be converted into the
Corporation's Common Stock or, if the value of the Common Stock
UNITED TECHNOLOGIES 19
is less than the guaranteed value of the ESOP Stock, the Corporation must
repurchase the shares at their guaranteed value.
PENSION AND OTHER POSTRETIREMENT PLANS. The Corporation and its subsidiaries
sponsor many domestic and foreign defined benefit pension and other
postretirement plans whose balances are as follows:
Other
Pension Benefits Postretirement Benefits
IN MILLIONS OF DOLLARS 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Change in Benefit
Obligation:
Beginning balance $ 11,075 $ 9,666 $ 771 $ 700
Service cost 264 222 13 10
Interest cost 727 695 56 51
Actuarial (gain) loss (495) 978 (75) 21
Total benefits paid (687) (601) (73) (57)
Net settlement and
curtailment loss 73 23 106 35
Acquisitions 800 3 312 5
Other 73 89 8 6
- --------------------------------------------------------------------------------
Ending balance $ 11,830 $ 11,075 $ 1,118 $ 771
================================================================================
Change in Plan Assets:
Beginning balance $ 9,945 $ 10,570 $ 81 $ 82
Actual return on plan assets 1,989 (143) 5 5
Employer contributions 46 139 1 --
Benefits paid from plan
assets (657) (572) (11) (10)
Acquisitions 965 3 -- --
Other (92) (52) 2 4
- --------------------------------------------------------------------------------
Ending balance $ 12,196 $ 9,945 $ 78 $ 81
================================================================================
Funded status $ 366 $ (1,130) $ (1,040) $ (690)
Unrecognized net actuarial
(gain) loss (529) 999 (19) (26)
Unrecognized prior
service cost 292 235 (127) (181)
Unrecognized net asset at
transition (12) (35) -- --
- --------------------------------------------------------------------------------
Net amount recognized $ 117 $ 69 $ (1,186) $ (897)
================================================================================
Amounts Recognized in
the Consolidated
Balance Sheet
Consist of:
Prepaid benefit cost $ 422 $ 360 $ -- $ --
Accrued benefit liability (398) (712) (1,186) (897)
Intangible asset 29 207 -- --
Accumulated other non-
shareowners' changes
in equity 64 214 -- --
- --------------------------------------------------------------------------------
Net amount recognized $ 117 $ 69 $ (1,186) $ (897)
================================================================================
The pension funds are valued at September 30 of the respective years in
the preceding table. Major assumptions used in the accounting for the employee
benefit plans are shown in the following table as weighted-averages:
1999 1998 1997
- -------------------------------------------------------------------------------
Pension Benefits:
Discount rate 7.3% 6.6% 7.4%
Expected return on plan assets 9.6% 9.6% 9.7%
Salary scale 4.8% 4.8% 4.9%
Other Postretirement Benefits:
Discount rate 7.5% 6.7% 7.5%
Expected return on plan assets 9.6% 9.6% 7.0%
For measurement purposes, an 8.5% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000. The rate is
assumed to decrease to 7.5% for 2001 and remain at that level thereafter.
IN MILLIONS OF DOLLARS 1999 1998 1997
- -------------------------------------------------------------------------------
Components of Net
Periodic Benefit Cost:
Pension benefits:
Service cost $ 264 $ 222 $ 228
Interest cost 727 695 664
Expected return on plan assets (926) (856) (783)
Amortization of prior service cost 33 26 26
Amortization of unrecognized net
transition asset (23) (23) (23)
Recognized actuarial net loss 16 8 7
Net settlement and curtailment loss 82 73 6
Discontinued operation benefit (cost) 16 (4) (8)
- -------------------------------------------------------------------------------
Net periodic pension benefit cost-
continuing operations $ 189 $ 141 $ 117
===============================================================================
Net periodic pension benefit cost
of multiemployer plans $ 33 $ 25 $ 26
===============================================================================
Other postretirement benefits:
Service cost $ 13 $ 10 $ 10
Interest cost 56 51 52
Expected return on plan assets (7) (6) (6)
Amortization of prior service cost (18) (18) (18)
Net settlement and curtailment
(gain) loss (13) 10 --
Discontinued operation benefit (cost) 5 (2) (3)
- -------------------------------------------------------------------------------
Net periodic other postretirement
benefit cost-continuing operations $ 36 $ 45 $ 35
===============================================================================
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $699 million, $556 million and $173 million, as of
December 31, 1999 and $2,826 million, $2,688 million and $2,194 million, as of
December 31, 1998.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would change the accumulated postretirement
benefit obligation as of December 31, 1999 by approximately 2%. The effects of
this change on the service expense and the interest expense components of the
net postretirement benefit expense for 1999 would be 6%.
20 UNITED TECHNOLOGIES
LONG-TERM INCENTIVE PLANS. The Corporation has long-term incentive plans
authorizing various types of market and performance based incentive awards,
which may be granted to officers and employees. The 1989 Long-Term Incentive
Plan provides for the annual grant of awards in an amount not to exceed 2% of
the aggregate shares of Common Stock, treasury shares and potentially dilutive
common shares for the preceding year. The 1995 Special Retention and Stock
Appreciation Program Plan permits up to 4 million award units to be granted in
any calendar year. In addition, up to 2 million options on Common Stock may be
granted annually under the Corporation's Employee Stock Option Plan. The
exercise price of stock options, set at the time of the grant, is not less than
the fair market value per share at the date of grant. Options have a term of ten
years and generally vest after three years.
In February 1997, the Corporation granted a key group of senior executives
1,700,000 stock options under the 1989 Plan. The grant price of $37.938
represents the market value per share at the date of grant. The options became
exercisable when the closing stock price of the Corporation's Common Stock
averaged $62.50 or higher for thirty consecutive trading days.
A summary of the transactions under all plans for the three years ended
December 31, 1999 follows:
Stock Options
------------------------- Other
Average Incentive
SHARES AND UNITS IN THOUSANDS Shares Price Shares/Units
- -------------------------------------------------------------------------------
OUTSTANDING AT:
DECEMBER 31, 1996 36,160 $ 17.25 3,574
Granted 9,446 35.69 174
Exercised/earned (4,422) 13.35 (1,156)
Canceled (1,130) 29.52 (66)
- ----------------------------------------------------- -------------
DECEMBER 31, 1997 40,054 21.68 2,526
Granted 8,648 38.93 52
Exercised/earned (6,708) 14.94 (550)
Canceled (772) 32.34 (8)
- ----------------------------------------------------- -------------
DECEMBER 31, 1998 41,222 26.20 2,020
Granted 12,259 52.49 139
Exercised/earned (7,385) 21.59 (880)
Canceled (1,428) 47.51 (29)
- ----------------------------------------------------- -------------
DECEMBER 31, 1999 44,668 $ 33.49 1,250
Granted options in the above table include options issued in connection
with business combinations. The 1999 grant amount includes the issuance of 2.6
million options associated with the purchase of Sundstrand in exchange for
vested Sundstrand options.
The Corporation applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its long-term
incentive plans. Accordingly, no compensation cost has been recognized for its
fixed stock options. The compensation cost that has been recorded for
stock-based performance awards was $26 million, $31 million and $22 million for
1999, 1998 and 1997.
The following table summarizes information about stock options outstanding
(in thousands) at December 31, 1999:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------
Average Remaining Average
Exercise Price Shares Price Term Shares Price
- --------------------------------------------------------------------------------
$10.01-$25.00 17,297 $18.02 4.60 17,297 $18.02
$25.01-$40.00 15,636 35.15 7.34 5,003 33.64
$40.01-$55.00 9,043 51.51 8.82 1,190 46.43
$55.01-$70.00 1,950 59.09 9.68 22 58.01
$70.01-$85.00 742 72.33 9.34 -- --
Had compensation cost for the Corporation's stock-based compensation plans
been determined based on the fair value at the grant date for awards under those
plans consistent with the requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," the Corporation's
net income and earnings per share would have been reduced to the following pro
forma amounts:
IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997
- --------------------------------------------------------------------------------
Net income:
As reported $1,531 $1,255 $1,072
Pro forma 1,470 1,208 1,042
Basic earnings per share:
As reported $ 3.22 $ 2.68 $ 2.22
Pro forma 3.09 2.58 2.16
Diluted earnings per share:
As reported $ 3.01 $ 2.53 $ 2.10
Pro forma 2.89 2.44 2.05
The fair value of each stock option grant has been estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1999 1998 1997
- --------------------------------------------------------------------------------
Risk-free interest rate 4.8% 5.4% 6.3%
Expected life 6 years 6 years 6 years
Expected volatility 25% 23% 18%
Expected dividend yield 1.2% 1.5% 1.8%
The weighted-average grant date fair values of options granted during
1999, 1998 and 1997 were $17.20, $11.33 and $9.28.
11 Restructuring
1999 ACTIONS. During 1999, the Corporation's operating segments initiated a
variety of actions aimed at further strengthening their future profitability and
competitive position. Those actions focused principally on rationalizing
manufacturing processes and improving the overall level of organizational
efficiency, including the removal of management layers. Restructuring charges
accrued in 1999 were $842 million before income taxes and minority interests and
will result in net reductions of approximately 15,000 salary and hourly
employees and approximately 8 million square feet of facilities. Significant
1999 actions by operating segment included:
o Otis: Worldwide facility consolidations and workforce reductions
o Carrier: Worldwide facility closures and workforce reductions
UNITED TECHNOLOGIES 21
o Pratt & Whitney: Workforce reductions; consolidation of military
engine operations, manufacturing operations and the component repair
business
o Flight Systems: Facility closures and consolidation of functions in
Connecticut; workforce reductions; rationalization of customer
support.
The 1999 accrued costs were recorded across each of the Corporation's
operating segments as follows:
IN MILLIONS OF DOLLARS
- --------------------------------------------------------------------------------
Otis $178
Carrier 182
Pratt & Whitney 345
Flight Systems 131
Other 6
- --------------------------------------------------------------------------------
$842
================================================================================
The following table summarizes the accrued costs associated with the 1999
restructuring actions by type:
Accrued
Accrued Accrued Exit Site
Severance Asset & Lease Restoration
and Related Write- Termination & Other
IN MILLIONS OF DOLLARS Costs downs Costs Costs Total
- ----------------------------------------------------------------------------------------------------
1999 Charges:
Staff reductions $433 $ -- $ -- $ -- $433
Facility closures 149 160 44 56 409
- ----------------------------------------------------------------------------------------------------
Total accrued charges 582 160 44 56 842
Utilized in 1999:
Cash 137 -- 2 12 151
Non-cash 34 160 -- -- 194
- ----------------------------------------------------------------------------------------------------
Balance at
December 31, 1999 $411 $-- $ 42 $ 44 $497
====================================================================================================
The 1999 accrued costs were recorded in cost of sales (87%) and selling,
general and administrative expenses (13%) and relate to:
o Workforce reductions of approximately 15,000 employees, primarily at
Pratt & Whitney (5,200 employees), Otis (4,000 employees) and
Carrier (3,200 employees)
o Plant closings that will result in the reduction of approximately 8
million square feet of facilities, primarily at Pratt & Whitney (3
million square feet) and Carrier (2.9 million square feet) and
charges associated with the write-down of property, plant and
equipment to fair value, where fair value is based on appraised
value, primarily at Pratt & Whitney ($70 million) and Carrier ($41
million).
As of December 31, 1999, approximately 5,800 employees were terminated and
approximately 230,000 square feet were eliminated. The remaining terminations
and plant closings are planned to be substantially completed within the next
twelve months.
In 1999, the Corporation incurred additional charges of $141 million
associated with the restructuring actions that were not accruable when the
actions were initiated.
1998 AND 1997 ACTIONS. During 1998, the Corporation accrued pre-tax charges
totaling $320 million related to ongoing efforts to reduce the costs of its
continuing operations in response to an increasingly competitive business
environment. Charges were recorded in each of the Corporation's operating
segments with the majority relating to the Pratt & Whitney, Otis and Carrier
operations. The amounts were primarily recorded in cost of sales and related to
workforce reductions of approximately 7,500 employees, plant closings and
charges associated with asset impairments. Substantially all 7,500 employees
were terminated as of December 31, 1999.
The following table summarizes the costs associated with these actions:
Accrued
Severance Accrued Asset
and Related Other Exit Write-
IN MILLIONS OF DOLLARS Costs Costs downs Total
- -------------------------------------------------------------------------------
1998 Charges $ 266 $ 5 $ 49 $ 320
Adjustments (13) -- (6) (19)
- -------------------------------------------------------------------------------
1998 adjusted 253 5 43 301
Utilized:
Cash 226 4 -- 230
Non-cash -- -- 43 43
- -------------------------------------------------------------------------------
Balance at
December 31, 1999 $ 27 $ 1 $ -- $ 28
===============================================================================
The adjustments to the 1998 restructuring liability result from
finalization of actions for amounts lower than originally estimated. These
adjustments were partially offset by additional restructuring charges associated
with the 1998 actions that were not originally accruable.
In 1997, the Corporation recorded charges which were similar in nature to
those noted above. However, the amounts were not material and the related
actions have been completed.
12 Foreign Exchange
The Corporation conducts business in many different currencies and, accordingly,
is subject to the inherent risks associated with foreign exchange rate
movements. The financial position and results of operations of substantially all
of the Corporation's foreign subsidiaries are measured using the local currency
as the functional currency. The aggregate effects of translating the balance
sheets of these subsidiaries are deferred as a separate component of
shareowners' equity. The Corporation had foreign currency net assets in more
than forty currencies, aggregating $2.1 billion and $1.4 billion at December 31,
1999 and 1998. The Corporation's net assets in the Asia Pacific region were $1.0
billion and $489 million at December 31, 1999 and 1998.
Foreign currency commitment and transaction exposures are managed at the
operating unit level as an integral part of the business. Residual exposures
that cannot be offset to an insignificant amount are hedged. These hedges are
initiated by the operating units, with execution coordinated on a corporate-wide
basis, and are scheduled to mature coincident with the timing of the underlying
foreign currency commitments and transactions. Hedged items include
foreign-currency-denominated receivables and payables on the balance sheet, and
commitments for purchases and sales.
At December 31, the Corporation had the following amounts related to
foreign exchange contracts hedging foreign currency transactions and firm
commitments:
22 UNITED TECHNOLOGIES
IN MILLIONS OF DOLLARS 1999 1998
- ------------------------------------------------------------------------------
Notional amount $2,569 $2,731
Gains and losses explicitly deferred
as a result of hedging firm commitments:
Gains deferred $ 15 $ 6
Losses deferred (26) (83)
- ------------------------------------------------------------------------------
$ (11) $ (77)
==============================================================================
The deferred gains and losses are expected to be recognized in earnings
over the next three years along with the offsetting gains and losses on the
underlying commitments.
13 Financial Instruments
The Corporation operates internationally and, in the normal course of business,
is exposed to fluctuations in interest rates and currency values. These
fluctuations can increase the costs of financing, investing and operating the
business. The Corporation manages its transaction risks to acceptable limits
through the use of derivatives to create offsetting positions in foreign
currency markets. The Corporation views derivative financial instruments as risk
management tools and is not party to any leveraged derivatives.
The notional amounts of derivative contracts do not represent the amounts
exchanged by the parties, and thus are not a measure of the exposure of the
Corporation through its use of derivatives. The amounts exchanged by the parties
are normally based on the notional amounts and other terms of the derivatives,
which relate to exchange rates. The value of derivatives is derived from those
underlying parameters and changes in the relevant rates.
By nature, all financial instruments involve market and credit risk. The
Corporation enters into derivative financial instruments with major investment
grade financial institutions. The Corporation has policies to monitor its credit
risks of counterparties to derivative financial instruments. Pursuant to these
policies, the Corporation periodically determines the fair value of its
derivative instruments in order to identify its credit exposure. The Corporation
diversifies the counterparties used as a means to limit counterparty exposure
and concentration of risk. Credit risk is assessed prior to entering into
transactions and periodically thereafter. The Corporation does not anticipate
nonperformance by any of these counterparties.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Significant differences can arise
between the fair value and carrying amount of financial instruments at historic
cost.
The carrying amounts and fair values of financial instruments are as
follows:
DECEMBER 31, 1999 DECEMBER 31, 1998
Carrying Fair Carrying Fair
IN MILLIONS OF DOLLARS Amount Value Amount Value
- --------------------------------------------------------------------------------
Financial assets:
Marketable equity securities $ 355 $ 355 $ -- $ --
Long-term receivables 54 53 54 53
Customer financing notes 270 267 311 304
Financial liabilities:
Short-term borrowings 902 902 504 504
Long-term debt 3,196 3,163 1,423 1,674
Foreign exchange contracts:
In a receivable position 38 45 16 21
In a payable position 38 32 105 96
================================================================================
The following methods and assumptions were used to estimate the fair value
of financial instruments:
CASH, CASH EQUIVALENTS AND SHORT-TERM BORROWINGS. The carrying amount
approximates fair value because of the short maturity of those instruments.
MARKETABLE EQUITY SECURITIES. The carrying value and fair value at December 31,
1999 represent the Corporation's investment in common stock that is classified
as available for sale and is accounted for at fair value, where fair value is
based on the quoted market price. In addition to the above, the Corporation
holds shares of unregistered common stock that are considered restricted stock
and are, therefore, not classified as available for sale. Those shares are
reported as a long-term asset at their cost of $11 million and have an estimated
fair value based on the quoted market price of approximately $355 million at
December 31, 1999.
LONG-TERM RECEIVABLES AND CUSTOMER FINANCING NOTES. The fair values are based on
quoted market prices for those or similar instruments. When quoted market prices
are not available, an approximation of fair value is based upon projected cash
flows discounted at an estimated current market rate of interest.
DEBT. The fair values are estimated based on the quoted market prices for the
same or similar issues or on the current rates offered to the Corporation for
debt of the same remaining maturities.
FOREIGN EXCHANGE CONTRACTS. The fair values are estimated based on the amount
that the Corporation would receive or pay to terminate the agreements at the
reporting date.
FINANCING COMMITMENTS. The Corporation had outstanding financing and rental
commitments totaling $1,228 million at December 31, 1999. Risks associated with
changes in interest rates are negated 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
commitment itself is not readily determinable and is not considered significant.
Additional information pertaining to these commitments is included in Note 4.
14 Commitments and Contingent Liabilities
LEASES. The Corporation occupies space and uses certain equipment under lease
arrangements. Rental commitments at December 31, 1999 under long-term
noncancelable operating leases are as follows:
IN MILLIONS OF DOLLARS
- --------------------------------------------------------------------------------
2000 $171
2001 126
2002 96
2003 68
2004 58
Thereafter 143
- --------------------------------------------------------------------------------
$662
================================================================================
Rent expense was $234 million in 1999, $230 million in 1998 and $240 million
in 1997.
UNITED TECHNOLOGIES 23
ENVIRONMENTAL. The Corporation's operations are subject to environmental
regulation by federal, state and local authorities in the United States and
regulatory authorities with jurisdiction over its foreign operations. As
described in Note 1, the Corporation has accrued for the costs of environmental
remediation activities and periodically reassesses these amounts. Management
believes that losses materially in excess of amounts accrued are not reasonably
possible.
The Corporation has had insurance in force over its history with a number
of insurance companies and has commenced litigation seeking indemnity and
defense under these insurance policies in relation to its environmental
liabilities. The litigation is expected to last several years. Environmental
liabilities are not reduced by potential insurance reimbursements.
U.S. GOVERNMENT. The Corporation is now, and believes that, in light of the
current government contracting environment, it will be the subject of one or
more government investigations. If the Corporation or one of its business units
were charged with wrongdoing as a result of any of these investigations, the
Corporation or one of its business units could be suspended from bidding on or
receiving awards of new government contracts pending the completion of legal
proceedings. If convicted or found liable, the Corporation could be fined and
debarred from new government contracting for a period generally not to exceed
three years. Any contracts found to be tainted by fraud could be voided by the
Government.
The Corporation's contracts with the U.S. Government are also subject to
audits. Like many defense contractors, the Corporation has 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. The Corporation has made voluntary refunds in those cases
it believes appropriate.
OTHER. The Corporation extends performance and operating cost guarantees beyond
its normal warranty and service policies for extended periods on some of its
products, particularly commercial aircraft engines. Liability under such
guarantees is contingent upon future product performance and durability. The
Corporation has accrued its estimated liability that may result under these
guarantees.
The Corporation also has other commitments and contingent liabilities
related to legal proceedings and matters arising out of the normal course of
business.
The Corporation has accrued for environmental investigatory, remediation,
operating and maintenance costs, performance guarantees and other litigation and
claims based on management's estimate of the probable outcome of these matters.
While it is possible that the outcome of these matters may differ from the
recorded liability, management believes that resolution of these matters will
not have a material impact on the Corporation's financial position, results of
operations or cash flows.
15 Segment Financial Data
The Corporation and its subsidiaries design, develop, manufacture, sell and
provide service on products, classified in four principal operating segments.
The Corporation's operating segments were generally determined on the management
of the businesses and on the basis of separate operating companies, each with
general operating autonomy over diversified products and services.
Otis products include elevators and escalators, service, maintenance and
spare parts sold to a diversified international customer base in commercial real
estate development.
Carrier products include heating, ventilating and air conditioning systems
and equipment, transport and commercial refrigeration equipment and service for
a diversified international customer base principally in commercial and
residential real estate development.
Pratt & Whitney products include aircraft engines and spare parts sold to
a diversified customer base, including international and domestic commercial
airlines and aircraft leasing companies, aircraft manufacturers, regional and
commuter airlines, and U.S. and non-U.S. 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 which is
used for electrical power generation and other applications.
The Flight Systems segment includes Hamilton Sundstrand and Sikorsky
Aircraft. Hamilton Sundstrand products include environmental, flight and fuel
control systems and propellers sold primarily to U.S. and non-U.S. governments,
aerospace and defense contractors, and airframe and jet engine manufacturers and
power generation, distribution and management systems. Sikorsky Aircraft
products include helicopters and spare parts sold primarily to U.S. and non-U.S.
governments.
Operating segment and geographic data include the results of all
majority-owned subsidiaries, consistent with the management reporting of these
businesses. For certain of these subsidiaries, minority shareholders have rights
which, under the provisions of EITF 96-16, overcome the presumption of control.
In the Corporation's consolidated results, these subsidiaries are accounted for
using the equity method of accounting. Adjustments to reconcile segment
reporting to consolidated results are included in "Eliminations and other,"
which also includes certain small subsidiaries.
Operating segment information for the years ended December 31 follows:
24 UNITED TECHNOLOGIES
Operating Segments
Total Revenues Operating Profits
IN MILLIONS OF DOLLARS 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------
Otis $ 5,654 $ 5,572 $ 5,548 $ 493 $ 533 $ 465
Carrier 7,353 6,922 6,056 459 495 458
Pratt & Whitney 7,674 7,876 7,402 634 1,024 816
Flight Systems 3,810 2,891 2,804 247 287 301
- ------------------------------------------------------------------------------------
Total segment $24,491 $23,261 $21,810 $1,833 $2,339 $2,040
Eliminations and other (364) (452) (522) (85) (89) (56)
General corporate
expenses -- -- -- (231) (243) (222)
- ------------------------------------------------------------------------------------
Consolidated $24,127 $22,809 $21,288 $1,517 $2,007 $1,762
Interest expense -- -- -- (260) (197) (188)
- ------------------------------------------------------------------------------------
Income from continuing
operations before
income taxes and
minority interests $1,257 $1,810 $1,574
====================================================================================
Total Assets Capital Expenditures Depreciation and Amortization
IN MILLIONS OF DOLLARS 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Otis $ 4,036 $ 3,049 $ 2,666 $ 84 $ 93 $143 $145 $139 $134
Carrier 5,592 4,556 4,012 237 190 143 195 184 148
Pratt & Whitney 5,660 5,863 5,617 243 254 285 250 278 286
Flight Systems 7,677 2,154 1,714 166 105 91 241 118 118
- ---------------------------------------------------------------------------------------------------------------------
Total segment $22,965 $15,622 $14,009 $730 $642 $662 $831 $719 $686
Eliminations and other 1,401 2,146 1,688 32 31 (4) 13 11 21
- ---------------------------------------------------------------------------------------------------------------------
Consolidated $24,366 $17,768 $15,697 $762 $673 $658 $844 $730 $707
=====================================================================================================================
SEGMENT REVENUES AND OPERATING PROFIT. Total revenues by operating segment
include intersegment sales, which are generally made at prices approximating
those that the selling entity is able to obtain on external sales. Operating
profits by segment includes income before interest expense, income taxes and
minority interest.
Geographic Areas
External Revenues Operating Profits Long-Lived Assets
IN MILLIONS OF DOLLARS 1999 1998 1997 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
United States
operations $14,814 $13,852 $12,494 $ 757 $1,340 $1,123 $ 7,465 $3,026 $2,443
International operations:
Europe 4,433 4,252 3,857 473 516 364 1,028 842 772
Asia Pacific 2,615 2,487 2,943 206 130 210 1,464 812 557
Other 2,472 2,517 2,348 396 353 343 514 501 541
Eliminations and
other (207) (299) (354) (315) (332) (278) 28 -- (23)
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated $24,127 $22,809 $21,288 $1,517 $2,007 $1,762 $10,499 $5,181 $4,290
================================================================================================================================
25 UNITED TECHNOLOGIES
GEOGRAPHIC EXTERNAL REVENUES AND OPERATING PROFIT. Geographic external revenues
and operating profits are attributed to the geographic regions based on their
location of origin. United States external revenues include export sales to
commercial customers outside the U.S. and sales to the U.S. Government,
commercial and affiliated customers, which are known to be for resale to
customers outside the U.S.
Revenues from United States operations include export sales as follows:
IN MILLIONS OF DOLLARS 1999 1998 1997
- --------------------------------------------------------------------------------
Europe $1,303 $ 967 $ 870
Asia Pacific 1,389 1,910 1,854
Other 950 1,220 1,116
- --------------------------------------------------------------------------------
$3,642 $4,097 $3,840
================================================================================
GEOGRAPHIC LONG-LIVED ASSETS. Long-lived assets include net fixed assets and
intangibles which can be attributed to the specific geographic regions.
MAJOR CUSTOMERS. Revenues include sales under prime contracts and subcontracts
to the U.S. Government, primarily related to Pratt & Whitney and Flight Systems
products, as follows:
IN MILLIONS OF DOLLARS 1999 1998 1997
- --------------------------------------------------------------------------------
Pratt & Whitney $2,116 $1,941 $1,935
Flight Systems 1,174 1,273 1,317
================================================================================
Selected Quarterly Financial Data (Unaudited)
Quarter Ended
IN MILLIONS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------
1999
Sales $5,382 $5,984 $6,068 $6,410
Gross margin 1,405 1,637 1,211 1,406
Income from continuing operations 278 417 90 56
Net income 308 1,077 90 56
Earnings per share of Common Stock:
Basic:
Continuing operations $ .60 $ .89 $ .17 $ .10
Net earnings $ .67 $ 2.33 $ .17 $ .10
Diluted:
Continuing operations $ .57 $ .83 $ .16 $ .10
Net earnings $ .63 $ 2.15 $ .16 $ .10
1998
Sales $5,220 $5,848 $5,710 $6,009
Gross margin 1,259 1,539 1,508 1,584
Income from continuing operations 229 333 326 269
Net income 260 360 348 287
Earnings per share of Common Stock:
Basic:
Continuing operations $ .48 $ .71 $ .70 $ .58
Net earnings $ .55 $ .77 $ .75 $ .62
Diluted:
Continuing operations $ .46 $ .67 $ .66 $ .55
Net earnings $ .52 $ .72 $ .70 $ .58
================================================================================================
Comparative Stock Data
1999 1998
- ------------------------------------------------------------------------------------------------------
Common Stock High Low Dividend High Low Dividend
First quarter 67 13/16 54 $.18 46 31/32 33 1/2 $.155
Second quarter 74 11/16 61 3/4 $.18 50 1/16 42 1/32 $.18
Third quarter 71 3/16 56 $.20 49 9/16 35 7/8 $.18
Fourth quarter 65 52 5/16 $.20 56 1/4 36 $.18
- ------------------------------------------------------------------------------------------------------
The Corporation's Common Stock is listed on the New York Stock Exchange. The
high and low prices are based on the Composite Tape of the New York Stock
Exchange. There were approximately 25,000 common shareowners of record at
December 31, 1999.
26 UNITED TECHNOLOGIES