UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C.
20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from____________________________to__________________________
Commission file number 1-812
UNITED TECHNOLOGIES CORPORATION
DELAWARE 06-0570975
One Financial Plaza, Hartford, Connecticut 06103
(860) 728-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
At March 31, 2001 there were 470,735,511 shares of Common Stock outstanding.
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
Quarter Ended March 31, 2001
Page
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statement of 1
Operations for the quarters ended March
31, 2001 and 2000
Condensed Consolidated Balance Sheet at March 2
31, 2001 and December 31, 2000
Condensed Consolidated Statement of Cash 3
Flows for the quarters ended March 31,
2001 and 2000
Notes to Condensed Consolidated Financial 4
Statements
Report of Independent Accountants 10
Item 2. Management's Discussion and Analysis of 11
Results of Operations and Financial Position
Item 3. Quantitative and Qualitative 15
Disclosures About Market Risk
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Quarter Ended
March 31,
In Millions (except per share amounts) 2001 2000
Revenues:
Product sales $ 4,988 $ 4,824
Service sales 1,609 1,483
Financing revenues and other income, net 74 83
6,671 6,390
Costs and expenses:
Cost of products sold 3,794 3,693
Cost of services sold 1,018 935
Research and development 297 314
Selling, general and administrative 785 781
Interest 107 86
6,001 5,809
Income before income taxes
and minority interests 670 581
Income taxes 204 177
Minority interests 26 27
Net income $ 440 $ 377
Earnings per share of Common Stock:
Basic $ .92 $ .78
Diluted $ .86 $ .74
Dividends per share of Common Stock $ .225 $ .20
Average number of shares outstanding:
Basic 471 473
Diluted 508 511
See accompanying Notes to Condensed Consolidated Financial Statements
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, December 31,
2001 2000
In Millions (Unaudited)
Assets
Cash and cash equivalents $ 780 $ 748
Accounts receivable, net 4,410 4,445
Inventories and contracts in progress, net 4,005 3,756
Future income tax benefits 1,420 1,439
Other current assets 347 274
Total Current Assets 10,962 10,662
Fixed assets 10,426 10,355
Less: Accumulated depreciation (5,919) (5,868)
4,507 4,487
Goodwill 6,778 6,771
Other assets 3,440 3,444
Total Assets $ 25,687 $ 25,364
Liabilities and Shareowners' Equity
Short-term borrowings $ 666 $ 1,039
Accounts payable 2,333 2,261
Accrued liabilities 5,905 5,748
Long-term debt currently due 248 296
Total Current Liabilities 9,152 9,344
Long-term debt 3,960 3,476
Future pension and postretirement benefit obligations 1,649 1,636
Other long-term liabilities 2,761 2,814
Series A ESOP Convertible Preferred Stock 756 767
ESOP deferred compensation (329) (335)
427 432
Shareowners' Equity:
Common Stock 4,799 4,665
Treasury Stock (4,149) (3,955)
Retained earnings 8,035 7,743
Accumulated other non-shareowners' changes in equity (947) (791)
7,738 7,662
Total Liabilities and Shareowners' Equity $ 25,687 $ 25,364
See accompanying Notes to Condensed Consolidated Financial Statements
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Quarter Ended
March 31,
In Millions 2001 2000
Operating Activities:
Net income $ 440 $ 377
Adjustments to reconcile net income
to net cash flows provided by
operating activities:
Depreciation and amortization 222 212
Deferred income tax provision 32 27
Change in:
Accounts receivable (20) 23
Inventories and contracts in progress (241) (99)
Accounts payable and accrued liabilities 256 21
Other current assets (29) (4)
Other, net (27) (31)
Net cash flows provided by operating
activities 633 526
Investing Activities:
Capital expenditures (207) (149)
Investments in businesses (173) (269)
Disposition of businesses 8 -
Increase in customer financing assets, net (52) (15)
Other, net (3) 40
Net cash flows used in investing activities (427) (393)
Financing Activities:
Issuance of long-term debt 500 216
Repayment of long-term debt (105) (145)
Decrease in short-term borrowings, net (332) (122)
Dividends paid on Common Stock (106) (94)
Repurchase of Common Stock (200) (300)
Other, net 82 13
Net cash flows used in financing activities (161) (432)
Effect of foreign exchange rate changes on Cash and
cash equivalents (13) (1)
Net increase (decrease) in Cash and cash
equivalents 32 (300)
Cash and cash equivalents, beginning of year 748 957
Cash and cash equivalents, end of period $ 780 $ 657
See accompanying Notes to Condensed Consolidated Financial Statements
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at March 31, 2001 and for the
quarters ended March 31, 2001 and 2000 are unaudited, but in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. The results reported in these condensed consolidated financial
statements should not necessarily be taken as indicative of results that may be
expected for the entire year. The financial information included herein should
be read in conjunction with the financial statements and notes in the
Corporation's Annual Report incorporated by reference in Form 10-K for calendar
year 2000.
Issuance of Long-Term Debt
In February 2001, the Corporation issued $500 million of 6.35%
unsubordinated, unsecured, nonconvertible notes ("the 6.35% Notes") under a
shelf registration filed with the Securities and Exchange Commission in
December 2000. The 6.35% Notes are due March 1, 2011, with interest payable
semiannually commencing September 1, 2001. The Corporation may redeem all or
any portion of the 6.35% Notes at any time for a formula-based price
determined at the time of the redemption. Proceeds from the issuance were used
primarily to repay commercial paper. The proceeds from these commercial paper
borrowings were used for working capital and for general corporate purposes,
which includes financing acquisitions and repurchases of the Corporation's
Common Stock.
Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. The standard requires that all derivative
instruments be recorded on the balance sheet at fair value. The accounting for
the changes in fair value depends on how the derivative is used and designated.
Adoption of this standard resulted in a $3 million pre-tax transition gain,
recorded in Financing revenues and other income, net and reduced shareowners'
equity by $7 million, net of tax. The income statement gain recorded at
transition was largely offset by a net loss in the quarter associated primarily
with derivatives and embedded derivatives that are not designated as hedges and
do not cover balance sheet exposures.
The Corporation is exposed to fluctuations in foreign currency exchange
rates, interest rates and commodity prices. To manage certain of these
exposures, the Corporation uses derivative instruments, including swaps, forward
contracts and options. Derivative instruments used 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.
Foreign Currency Exposures
The Corporation's global presence and large volume of international sales,
purchases, investments and borrowings expose it to fluctuations in foreign
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
currency exchange rates. Foreign currency exposures are identified and managed
at the operating unit level. Exposures that cannot be naturally offset within an
operating unit to an insignificant amount are hedged. The Corporation has
foreign currency forward contracts that are designated as hedges of the cash
flow variability arising from forecasted foreign-currency-denominated sales and
purchases. Gains and losses on those derivatives are recorded in shareowners'
equity to the extent they are effective as hedges and reclassified into sales or
cost of products sold in the period in which the hedged transaction impacts
earnings.
The Corporation has foreign currency forward contracts and swaps that cover
the exposure arising from remeasurement of foreign-currency-denominated
receivables, payables and borrowings. The gains and losses on those derivative
instruments are reported in earnings and largely offset the transaction
gains and losses on remeasurement of the related balance sheet items. The
Corporation also has a significant amount of foreign currency net asset
exposures. Currently, the Corporation does not hold any derivative contracts
that hedge its foreign currency net asset exposures but may consider such
strategies in the future.
Interest Rate Exposures
The Corporation's long-term debt portfolio consists mostly of fixed-rate
instruments to minimize earnings volatility related to interest expense. From
time to time the Corporation issues commercial paper, which creates an exposure
to changes in interest rates. The Corporation does not currently hold interest
rate derivative contracts.
Commodity Exposures
The Corporation is exposed to volatility in the prices of raw materials used
in some of its products and uses forward contracts, in limited circumstances, to
hedge a portion of the forecasted purchase of raw materials. The forward
contracts are designated as hedges of the cash flow variability that result
from the forecasted purchases. Gains and losses on those derivatives are
deferred in shareowners' equity to the extent they are effective as hedges and
reclassified into cost of products sold in the period in which the hedged trans-
action impacts earnings.
Quarterly Activity
At March 31, 2001, the fair value of derivatives held by the Corporation,
including those embedded in other contracts, was a $53 million net liability.
The non-shareowner changes in equity associated with hedging activity during the
quarter ended March 31, 2001 were as follows:
In Millions, net of tax
December 31, 2000 $ -
Cash flow hedging loss, net (37)
Net loss reclassified to sales
or cost of products sold 8
March 31, 2001 $ (29)
Of the amount recorded in shareowners' equity, a $34 million pre-tax loss is
expected to be reclassified into sales or cost of products sold to reflect
the fixed prices obtained from hedging within the next 12 months. Gains
and losses recognized in earnings related to discontinuance of cash flow
hedges and ineffectiveness of cash flow hedges during the quarter ended
March 31, 2001 were immaterial. All open derivative contracts mature by
June 2003.
Non-Shareowners' Changes in Equity
Non-shareowners' changes in equity include all changes in equity during a
period except changes resulting from investments by and distributions to
shareowners. A summary of the non-shareowners' changes in equity is provided
below.
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
Quarter Ended
March 31,
In Millions 2001 2000
Net Income $ 440 $ 377
Foreign currency translation, net (111) (29)
Unrealized holding loss on marketable equity
securities, net (16) (74)
Cash flow hedging loss, net (29) -
$ 284 $ 274
Investments in Businesses
During the first quarter of 2001, the Corporation invested $203 million,
including debt assumed, in the acquisition of businesses. Those investments
include Hamilton Sundstrand's purchase of Claverham Group LTD, a U.K. supplier
to the European aerospace industry, and other small industry consolidating
transactions. The assets and liabilities of the acquired businesses accounted
for under the purchase method were 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 has been recorded as goodwill and is being amortized
over its estimated useful life. The results of operations of all acquired
businesses have been included in the Condensed Consolidated Statement of
Operations beginning on the effective date of each acquisition. The pro forma
results, assuming these acquisitions had been made at the beginning of the year,
would not be materially different from reported results.
Inventories and Contracts in Progress
March 31, December 31,
In Millions 2001 2000
Inventories consist of the following:
Raw material $ 694 $ 738
Work-in-process 1,278 1,179
Finished goods 2,299 2,099
Contracts in progress 1,826 1,849
6,097 5,865
Less:
Progress payments, secured by lien, on U.S.
Government contracts (149) (137)
Billings on contracts in progress (1,943) (1,972)
$ 4,005 $ 3,756
Restructuring
During 1999, the Corporation's operating segments initiated a variety of
programs aimed at further strengthening their future profitability and
competitive position. These programs 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
were expected to result in net reductions of approximately 15,000 salaried and
hourly employees and approximately 8 million square feet of facilities.
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
The 1999 accrued costs were recorded at each of the Corporation's operating
segments as follows:
In Millions
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 and related activity through March 31, 2001:
Accrued Accrued Exit &
Severance Lease Accrued Site
and Related Asset Write- Termination Restoration &
In Millions Costs downs Costs Other Costs Total
1999 Charges:
Staff reductions $ 433 $ - $ - $ - $ 433
Facility closures 149 160 44 56 409
Total accrued charges 582 160 44 56 842
Adjustments (62) - (11) 1 (72)
Utilized to date:
Cash (362) - (16) (24) (402)
Non-cash (115) (160) (8) - (283)
Balance at
March 31, 2001 $ 43 $ - $ 9 $ 33 $ 85
The 1999 accrued costs related to:
. Workforce reductions of approximately 15,000 employees, primarily at Pratt &
Whitney (5,200 employees), Otis (4,000 employees) and Carrier (3,200
employees).
. Plant closings that were planned to 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).
The adjustments to the 1999 restructuring liability result from completion of
programs for amounts lower than originally estimated and revision of several of
the original programs. The $14 million adjustment in the first quarter of 2001
was more than offset by additional restructuring related charges of $44 million
that were not accruable or contemplated when the 1999 programs were initiated.
As of March 31, 2001, workforce reductions of approximately 12,800 employees
were completed and approximately 4.8 million square feet were eliminated under
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
the 1999 restructuring programs. Reductions of approximately 900 employees and
approximately 2 million square feet remain under the 1999 restructuring
programs. The programs are expected to be substantially complete in the first
half of 2001.
Contingent Liabilities
There has been no significant change in the Corporation's material
contingencies during 2001. Summarized below, however, are the matters previously
described in Notes 1 and 14 of the Notes to Consolidated Financial Statements in
the Corporation's Annual Report, incorporated by reference in Form 10-K for
calendar year 2000.
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.
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. Accrued
environmental liabilities are not reduced by potential insurance reimbursements.
The Corporation periodically reassesses these accrued amounts. Management
believes that the likelihood of incurring losses materially in excess of
amounts accrued is remote.
The Corporation has had insurance in force over its history with a number of
insurance companies and has litigation seeking indemnity and defense under
these insurance policies in relation to its environmental liabilities. The
litigation is expected to last several years.
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, they 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.
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AND SUBSIDIARIES
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.
Earnings Per Share
Quarter Ended
March 31,
In Millions (except per share amounts) 2001 2000
Net income $ 440 $ 377
Less: ESOP Stock dividends (8) (8)
Basic earnings 432 369
ESOP Stock adjustment 7 7
Diluted earnings $ 439 $ 376
Average shares:
Basic 471 473
Stock awards 11 11
ESOP Stock 26 27
Diluted 508 511
Earnings per share of Common Stock:
Basic $ .92 $ .78
Diluted $ .86 $ .74
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
With respect to the unaudited condensed consolidated financial information of
United Technologies Corporation for the quarters ended March 31, 2001 and 2000,
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") reported that they have
applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report dated April 19,
2001, appearing below, states that they did not audit and they do not express an
opinion on that unaudited condensed consolidated financial information.
PricewaterhouseCoopers has not carried out any significant or additional audit
tests beyond those which would have been necessary if their report had not been
included. Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature of the review
procedures applied. PricewaterhouseCoopers is not subject to the liability
provisions of Section 11 of the Securities Act of 1933 ("the Act") for their
report on the unaudited condensed consolidated financial information because
that report is not a "report" or a "part" of a registration statement prepared
or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11
of the Act.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners of
United Technologies Corporation
We have reviewed the accompanying condensed consolidated statement of
operations of United Technologies Corporation and its consolidated subsidiaries
for the quarters ended March 31, 2001, and 2000, the condensed consolidated
statement of cash flows for the three months ended March 31, 2001 and 2000, and
the condensed consolidated balance sheet as of March 31, 2001. This financial
information is the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial information
for it to be in conformity with accounting principles generally accepted in the
United States of America.
We previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2000, and the related consolidated statements of operations, of
changes in shareowners' equity and of cash flows for the year then ended (not
presented herein), and in our report dated January 18, 2001, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 2000, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
April 19, 2001
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AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Position
BUSINESS ENVIRONMENT
The Corporation's operations are classified into four principal operating
segments: Otis, Carrier, Pratt & Whitney and Flight Systems. Otis and Carrier
serve customers in the commercial and residential property industries. Carrier
also serves commercial and transport refrigeration customers. Pratt & Whitney
and the Flight Systems segment, which includes Sikorsky Aircraft ("Sikorsky")
and Hamilton Sundstrand, primarily serve commercial and government customers in
the aerospace industry.
For discussion of the Corporation's business environment, refer to the
discussion of "Business Environment" in the Management's Discussion and
Analysis of Results of Operations and Financial Position in the Corporation's
Annual Report incorporated by reference in Form 10-K for calendar year 2000.
Significant changes in the Corporation's business environment during the first
quarter of 2001 are discussed below.
As worldwide businesses, the Corporation's operations are affected by global
and regional economic factors. During the first quarter of 2001, weaker European
and Asian currencies had a negative impact on the Corporation's consolidated
results. However, in general, the diversity of the Corporation's businesses
and global market presence have helped, and should continue to help, limit
the impact of any one industry or the economy of any single country on the
consolidated results.
There have been no other significant changes in the Corporation's business
environment during the first quarter of 2001.
RESULTS OF CONTINUING OPERATIONS
Consolidated revenues increased $281 million (4%) to $6.67 billion in the
first quarter of 2001 compared to the same period in 2000. Excluding the
unfavorable impact of foreign currency translation, consolidated revenues
increased 7%. The increase reflects the purchase of Specialty Equipment
Companies in the fourth quarter of 2000 and growth in the ongoing businesses of
Carrier, Pratt & Whitney and Otis.
Gross margin as a percentage of sales increased 0.5 percentage points to 27.1%
in the first quarter of 2001 principally as a result of previous cost reduction
actions.
Research and development spending decreased $17 million (5%) in the first
quarter of 2001 compared to 2000, primarily due to a decrease at Pratt &
Whitney, which reflects the variable nature of engineering development program
schedules. As a percentage of sales, research and development was 4.5% in the
first quarter of 2001 as compared to 5.0% in the same period of 2000.
Research and development is expected to be approximately 5% of sales in 2001.
Selling, general and administrative expenses increased $4 million (0.5%) in
the first quarter of 2001 compared to 2000. The increase is related to the
impact of acquisitions, primarily at Carrier, partially offset by a decrease
resulting from cost reduction actions. As a percentage of sales, these expenses
were 11.9% in the first quarter of 2001, as compared to 12.4% in the same
period of 2000.
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
Interest expense increased $21 million (24%) in the first quarter of 2001
compared to 2000. The increase is primarily related to the issuance of $500
million of 6.35% Notes due 2011 in February 2001 and $500 million of 7.125%
Notes due 2010 in November 2000.
The effective income tax rate for the first quarter of 2001 was 30.4% compared
to 30.5% for the first quarter of 2000. The Corporation has continued to lower
its effective income tax rate by implementing tax reduction strategies.
Restructuring and Other Costs
As described in the Notes to Condensed Consolidated Financial Statements, the
Corporation's operating segments initiated a variety of programs in 1999 aimed
at further strengthening their future profitability and competitive position.
The 1999 programs totaled $1,120 million, before income taxes and minority
interests, and included accrued restructuring charges of $842 million, related
charges of $141 million that were not accruable when initiated, and charges
associated with product development and aircraft systems integration and non-
product purchasing.
In February 2000, a Federal District Court issued an injunction relative to
certain restructuring actions planned by Pratt & Whitney that would move work
from Connecticut to Arkansas, Texas and Oklahoma. After a subsequent ruling by
the Second Circuit Court of Appeals, the injunction remains in place until the
end of the Collective Bargaining Agreement in December 2001. In February 2001,
Pratt & Whitney agreed, for the life of the current Collective Bargaining
Agreement, to retain this work within the bargaining unit. The Corporation
does not believe that this outcome will materially impact the Corporation's
restructuring program.
During the first quarter of 2001, the Corporation incurred and recognized
approximately $44 million of costs that were not accruable or contemplated when
the 1999 programs were inititated and expects to incur at least $100 million in
total for all of 2001. In the current year, the Corporation expects to have
pre-tax cash outflows of up to $200 million associated with the 1999
programs and costs that were not accruable or contemplated when the 1999
programs were initiated. These cash flows are expected to largely occur in the
first of half of the year and will use cash generated by operations. The 1999
restructuring and other actions taken by the Corporation are expected to
result in savings that should offset the additional costs expected to be
incurred, resulting in a net benefit in 2001. Recurring savings, associated
primarily with a net reduction in workforce and facility closures, are
expected to increase through 2002 to approximately $750 million pre-tax
annually, primarily benefiting cost of products sold.
Segment Review
Revenues, operating profits and operating profit margins of the Corporation's
principal operating segments include the results of all majority-owned
subsidiaries, consistent with the management reporting of these businesses.
Adjustments to reconcile segment reporting to consolidated results are included
in "Eliminations and other," which also includes certain small subsidiaries.
Results quarters ended March 31, 2001 and 2000 are as follows:
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
In Millions of Dollars Operating
Revenues Operating Profits Profit Margin
Quarter Ended March 31, 2001 2000 2001 2000 2001 2000
Otis $ 1,548 $ 1,543 $ 220 $ 192 14.2% 12.4%
Carrier 2,085 1,846 131 123 6.3% 6.7%
Pratt & Whitney 1,878 1,824 343 282 18.3% 15.5%
Flight Systems 1,254 1,257 168 138 13.4% 11.0%
Total segment 6,765 6,470 862 735 12.7% 11.4%
Eliminations and other (94) (80) (33) (11)
General corporate expenses - - (52) (57)
Consolidated $ 6,671 $ 6,390 777 667
Interest expense (107) (86)
Income before income taxes
and minority interests $ 670 $ 581
Otis revenues increased $5 million in the first quarter of 2001 compared
to 2000. Excluding the impact of foreign currency translation, revenues
increased 6%, reflecting increases in all regions. The increases were led by
Europe and North America and related to higher new equipment and service sales.
The negative foreign currency impact was primarily due to European and
Asian currencies.
Otis operating profits increased $28 million (15%) in the first quarter of
2001 compared to 2000. Excluding the impact of foreign currency translation,
operating profit increased 21%, reflecting profit improvements in all regions
primarily due to previous cost reduction actions.
Carrier revenues increased $239 million (13%) in the first quarter of 2001
compared to 2000. Excluding the impact of foreign currency translation, revenues
increased 16%, reflecting the acquisition of Specialty Equipment Companies
during the fourth quarter of 2000, growth in international markets and
growth in a weak North American residential market. The improvements were
partially offset by continued weakness in the commercial refrigeration
business and North American transport refrigeration business. The negative
foreign currency impact was primarily due to European and Asian currencies.
Carrier operating profits increased $8 million (7%) in the first quarter of
2001 compared to 2000. Excluding the impact of foreign currency translation,
operating profit increased by 11%, in line with the increased revenues and the
acquisition of Specialty Equipment Companies. The increase was partially offset
by weakness in the North American transport refrigeration market, a slow ramp-
up in commercial refrigeration new plant efficiency, and investments in new
products.
Pratt & Whitney revenues increased $54 million (3%) in the first quarter of
2001 compared to 2000. The increase was primarily due to improved aftermarket
and small commercial engine shipments at Pratt & Whitney Canada and increased
shipments of industrial gas turbines at Pratt & Whitney Power Systems, partially
offset by an expected decline in government funded development for large
military engines related to program timing.
Pratt & Whitney operating profits increased $61 million (22%) in the first
quarter of 2001 compared to 2000, primarily reflecting increased shipments and
improved aftermarket performance at Pratt & Whitney Canada and continued cost
reductions.
Flight Systems revenues decreased $3 million in the first quarter of 2001
compared to 2000. The first quarter decrease is primarily associated with
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UNITED TECHNOLOGIES CORPORATION
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lower value shipments at Sikorsky, largely offset by an increase at Hamilton
Sundstrand associated with increased original equipment sales and improved
aftermarket in the aerospace business.
Flight Systems operating profits increased $30 million (22%) in the first
quarter of 2001 compared to 2000, reflecting improved aftermarket performance in
the aerospace business at Hamilton Sundstrand and improvements at Sikorsky.
LIQUIDITY AND FINANCIAL POSITION
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, investments in
businesses, customer financing requirements, dividends, Common Stock
repurchases, adequate bank lines of credit and financial flexibility to attract
long-term capital with satisfactory terms.
March 31, December 31, March 31,
In Millions of Dollars 2001 2000 2000
Cash and cash equivalents $ 780 $ 748 $ 657
Total debt 4,874 4,811 4,265
Net debt (total debt less cash) 4,094 4,063 3,608
Shareowners' equity 7,738 7,662 7,036
Debt to total capitalization 39% 39% 38%
Net debt to total capitalization 35% 35% 34%
Net cash flows provided by operating activities increased $107 million in the
first quarter of 2001 compared to the corresponding period in 2000. The
increase reflects improved operating performance, in part due to lower
restructuring charges in 2001.
Cash used in investing activities increased $34 million to $427 million in the
first quarter of 2001 compared to the same period of 2000 primarily due to
increased capital expenditures. Cash spending for investments in businesses
for the first quarter of 2001 was $173 million and includes the Hamilton
Sundstrand acquisition of Claverham Group LTD. Total investments in businesses
in 2001 is expected to be at least $1 billion.
Customer financing activity was a net use of cash of $52 million in the first
quarter of 2001 compared with a $15 million net use of cash for the same
period of 2000, primarily due to customer generated requirements for financing.
While the Corporation expects that 2001 customer financing activity will be a
net use of funds, actual funding is subject to usage under existing customer
financing commitments during the remainder of the year. The Corporation had
financing and rental commitments of $1.8 billion related to commercial aircraft,
compared to $1.2 billion at December 31, 2000.
Net cash flows used in financing activities decreased $271 million in the
first quarter of 2001, reflecting the Corporation's issuance of $500 million
of 6.35% notes in February 2001 under shelf registration statements previously
filed with the Securities and Exchange Commission. Following this offering,
up to $500 million of additional medium-term and long-term debt could be issued
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
under shelf registration statements on file with the Securities and Exchange
Commission. The Corporation plans to register an additional $1.5 billion of
debt and equity securities (this statement, however, does not constitute an
offer of any securities for sale).
The Corporation repurchased $200 million of Common Stock, representing 2.7
million shares, in the first quarter of 2001 under previously announced share
repurchase programs. The share repurchase programs continue to be a use of the
Corporation's cash flows and have more than offset the dilutive effect resulting
from the issuance of stock and options under stock-based employee benefit
programs. At March 31, 2001, the Corporation was authorized to repurchase an
additional 8.6 million shares.
The Corporation manages its worldwide cash requirements considering available
funds among the many subsidiaries through which it conducts its business and the
cost effectiveness with which those 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.
Management believes that its existing cash position and other available
sources of liquidity are sufficient to meet current and anticipated requirements
for the foreseeable future. Although uncertainties in acquisition spending
could cause modest variations at times, management anticipates that the level of
debt-to-capital will remain generally consistent with recent levels.
New Accounting Guidance
Effective January 1, 2001, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. See Notes to Condensed Consolidated Finan-
cial Statements for further discussion.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no significant change in the Corporation's exposure to market
risk during the first quarter of 2001. For discussion of the Corporation's
exposure to market risk, refer to Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, contained in the Corporation's Annual Report
incorporated by reference in Form 10-K for the calendar year 2000.
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CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This report on Form 10-Q 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:
. Future earnings and other measurements of financial performance
. Future cash flow and uses of cash
. The effect of economic downturns or growth in particular regions
. The effect of changes in the level of activity in particular industries or
markets
. The scope, nature or impact of acquisition activity
. Product developments and new business opportunities
. Restructuring costs and savings
. The outcome of contingencies.
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. This Report on Form 10-Q includes important informa-
tion as to risk factors in the "Notes to Condensed Consolidated Financial
Statements" under the heading "Contingent Liabilities" and in the section
titled "Management's Discussion and Analysis of Results of Operations and
Financial Position" under the headings "Business Environment" and "Restructuring
and Other Costs." The Corporation's Annual Report on Form 10-K for 2000 also
includes important information as to risk factors in the "Business" section
under the headings "Description of Business by Operating Segment," "Other
Matters Relating to the Corporation's Business as a Whole" and "Legal
Proceedings." Additional important information as to risk factors is included
in the Corporation's 2000 Annual Report to Shareowners in the section titled
"Management's Discussion and Analysis of Results of Operations and Finan-
cial Position" under the headings "Business Environment" and "Restructuring
and Other Costs." 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-Q and 8-K filed with the
Securities and Exchange Commission from time to time.
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UNITED TECHNOLOGIES CORPORATION
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Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(ii) Bylaws as amended and restated effective March 21, 2001.*
(12) Statement re: computation of ratio of earnings to fixed charges.*
(15) Letter re: unaudited interim financial information.*
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31,
2001.
*Submitted electronically herewith.
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UNITED TECHNOLOGIES CORPORATION
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED TECHNOLOGIES CORPORATION
Dated: May 4, 2001 By: /s/ David J. FitzPatrick
David J. FitzPatrick
Senior Vice President,
Chief Financial Officer and Treasurer
Dated: May 4, 2001 By: /s/ David G. Nord
David G. Nord
Vice President, Controller
Dated: May 4, 2001 By: /s/ William H. Trachsel
William H. Trachsel
Senior Vice President, General Counsel and
Secretary
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EXHIBIT INDEX
3(ii) Bylaws as amended and restated effective March 21, 2001.*
(12) Statement re: computation of ratio of earnings to fixed charges. *
(15) Letter re: unaudited interim financial information. *
*Submitted electronically herewith.
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