NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at
March 31, 2016
and for the
quarters ended March 31, 2016 and 2015
are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our Annual Report to Shareowners (
2015
Annual Report) incorporated by reference to our Annual Report on Form 10-K for calendar year
2015
(
2015
Form 10-K).
Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. On November 6, 2015, we completed the sale of the Sikorsky Aircraft business (Sikorsky) to Lockheed Martin Corp. Accordingly, the results of operations and the related cash flows of Sikorsky have been reclassified to Discontinued Operations in our Consolidated Statements of Operations and Cash Flows for the quarter ended March 31, 2015. See Note 2 for further discussion.
Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets
Business Acquisitions and Dispositions.
During the
quarter ended March 31, 2016
, our investment in business acquisitions was
$79 million
and consisted of a number of small acquisitions, primarily in our commercial businesses.
As a result of the 2012 transactions related to IAE International Aero Engines AG (IAE), Pratt & Whitney holds a
61%
net interest in the collaboration and a
49.5%
ownership interest in IAE. IAE's business purpose is to coordinate the design, development, manufacturing and product support of the V2500 jet engine program through involvement with the collaborators. IAE retains limited equity with the primary economics of the V2500 program passed to the participants in the separate collaboration arrangement. As such, we have determined that IAE is a variable interest entity with Pratt & Whitney its primary beneficiary, and IAE has, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for IAE in our Condensed Consolidated Balance Sheet as of
March 31, 2016
are as follows:
|
|
|
|
|
(Dollars in millions)
|
|
Current assets
|
$
|
2,161
|
|
Noncurrent assets
|
968
|
|
Total assets
|
$
|
3,129
|
|
|
|
Current liabilities
|
$
|
1,792
|
|
Noncurrent liabilities
|
1,182
|
|
Total liabilities
|
$
|
2,974
|
|
Goodwill.
Changes in our goodwill balances for the
quarter ended March 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Balance as of
January 1, 2016
|
|
Goodwill
Resulting from Business Combinations
|
|
Foreign Currency Translation and Other
|
|
Balance as of
March 31, 2016
|
Otis
|
$
|
1,566
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
1,587
|
|
UTC Climate, Controls & Security
|
9,458
|
|
|
89
|
|
|
5
|
|
|
9,552
|
|
Pratt & Whitney
|
1,515
|
|
|
—
|
|
|
—
|
|
|
1,515
|
|
UTC Aerospace Systems
|
14,759
|
|
|
20
|
|
|
(28
|
)
|
|
14,751
|
|
Total Segments
|
27,298
|
|
|
109
|
|
|
(2
|
)
|
|
27,405
|
|
Eliminations and other
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Total
|
$
|
27,301
|
|
|
$
|
109
|
|
|
$
|
(2
|
)
|
|
$
|
27,408
|
|
Intangible Assets.
Identifiable intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
(Dollars in millions)
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Gross Amount
|
|
Accumulated
Amortization
|
Amortized:
|
|
|
|
|
|
|
|
Service portfolios
|
$
|
2,048
|
|
|
$
|
(1,371
|
)
|
|
$
|
1,977
|
|
|
$
|
(1,307
|
)
|
Patents and trademarks
|
367
|
|
|
(196
|
)
|
|
361
|
|
|
(189
|
)
|
IAE collaboration
|
3,436
|
|
|
(116
|
)
|
|
3,336
|
|
|
(86
|
)
|
Customer relationships and other
|
12,600
|
|
|
(3,136
|
)
|
|
12,430
|
|
|
(2,988
|
)
|
|
18,451
|
|
|
(4,819
|
)
|
|
18,104
|
|
|
(4,570
|
)
|
Unamortized:
|
|
|
|
|
|
|
|
Trademarks and other
|
2,087
|
|
|
—
|
|
|
2,069
|
|
|
—
|
|
Total
|
$
|
20,538
|
|
|
$
|
(4,819
|
)
|
|
$
|
20,173
|
|
|
$
|
(4,570
|
)
|
Customer relationship intangible assets include payments made to our customers to secure certain contractual rights. We amortize these intangible assets based on the underlying pattern of economic benefit, which may result in an amortization method other than straight-line. We classify amortization of such payments as a reduction of sales. The IAE collaboration intangible asset is amortized based upon the pattern of economic benefits as represented by the underlying cash flows.
Amortization of intangible assets was
$187 million
and
$179 million
for the
quarters ended March 31, 2016 and 2015
, respectively. The following is the expected amortization of intangible assets for the years
2016
through
2021
, which reflects an increase in expected amortization expense due to the pattern of economic benefit on certain aerospace intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Remaining 2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
Amortization expense
|
|
$
|
538
|
|
|
$
|
736
|
|
|
$
|
764
|
|
|
$
|
759
|
|
|
$
|
757
|
|
|
$
|
797
|
|
Note 2: Discontinued Operations
On November 6, 2015, we completed the sale of Sikorsky to Lockheed Martin Corp.
Accordingly, the results of operations and the related cash flows related to Sikorsky have been reclassified to Discontinued Operations in our Condensed Consolidated Statements of Operations, Comprehensive Income and Cash Flows for the quarter ended March 31, 2015. In the quarter ended March 31, 2016, we recognized approximately
$18 million
of additional Gain on disposal of discontinued operations including settlement of working capital adjustments, and net cash outflows from discontinued operations of approximately
$2.2 billion
, primarily related to the payment of Federal taxes related to the 2015 gain realized on sale of Sikorsky.
The following summarized financial information related to Sikorsky has been segregated from continuing operations and reported as Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(Dollars in millions)
|
2016
|
|
2015
|
Discontinued Operations:
|
|
|
|
Net sales
|
$
|
—
|
|
|
$
|
1,266
|
|
Cost of sales
|
—
|
|
|
1,062
|
|
Research and development
|
—
|
|
|
38
|
|
Selling, general and administrative
|
—
|
|
|
87
|
|
Other income, net
|
—
|
|
|
(12
|
)
|
Income from operations
|
—
|
|
|
91
|
|
Gain on disposal
|
18
|
|
|
—
|
|
Income tax expense
|
(7
|
)
|
|
(28
|
)
|
Income from discontinued operations
|
$
|
11
|
|
|
$
|
63
|
|
Note 3: Earnings Per Share
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(Dollars in millions, except per share amounts; shares in millions)
|
2016
|
|
2015
|
Net income attributable to common shareowners:
|
|
|
|
Net income from continuing operations
|
$
|
1,180
|
|
|
$
|
1,364
|
|
Net income from discontinued operations
|
11
|
|
|
62
|
|
Net income attributable to common shareowners
|
$
|
1,191
|
|
|
$
|
1,426
|
|
Basic weighted average number of shares outstanding
|
825.0
|
|
|
890.3
|
|
Stock awards and equity units
|
6.2
|
|
|
13.9
|
|
Diluted weighted average number of shares outstanding
|
831.2
|
|
|
904.2
|
|
Earnings Per Share of Common Stock - Basic:
|
|
|
|
Net income from continuing operations
|
$
|
1.43
|
|
|
$
|
1.53
|
|
Net income from discontinued operations
|
0.01
|
|
|
0.07
|
|
Net income attributable to common shareowners
|
1.44
|
|
|
1.60
|
|
Earnings Per Share of Common Stock - Diluted:
|
|
|
|
Net income from continuing operations
|
$
|
1.42
|
|
|
$
|
1.51
|
|
Net income from discontinued operations
|
0.01
|
|
|
0.07
|
|
Net income attributable to common shareowners
|
1.43
|
|
|
1.58
|
|
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period. These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would be anti-dilutive. For the
quarters ended March 31, 2016 and 2015
, the number of stock awards excluded from the computation was approximately
16.4 million
and
0.4 million
, respectively.
Note 4: Inventories and Contracts in Progress
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
March 31, 2016
|
|
December 31, 2015
|
Raw materials
|
$
|
2,218
|
|
|
$
|
2,037
|
|
Work-in-process
|
2,639
|
|
|
2,422
|
|
Finished goods
|
3,058
|
|
|
3,183
|
|
Contracts in progress
|
8,900
|
|
|
8,668
|
|
|
16,815
|
|
|
16,310
|
|
Less:
|
|
|
|
Progress payments, secured by lien, on U.S. Government contracts
|
(148
|
)
|
|
(239
|
)
|
Billings on contracts in progress
|
(8,160
|
)
|
|
(7,936
|
)
|
|
$
|
8,507
|
|
|
$
|
8,135
|
|
Inventory also includes capitalized contract development costs related to certain aerospace programs at UTC Aerospace Systems. As of
March 31, 2016
and
December 31, 2015
, these capitalized costs were
$151 million
and
$152 million
, respectively, which will be liquidated as production units are delivered to the customer.
Note 5: Borrowings and Lines of Credit
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
March 31, 2016
|
|
December 31, 2015
|
Commercial paper
|
$
|
1,073
|
|
|
$
|
727
|
|
Other borrowings
|
160
|
|
|
199
|
|
Total short-term borrowings
|
$
|
1,233
|
|
|
$
|
926
|
|
At
March 31, 2016
, we had revolving credit agreements with various banks permitting aggregate borrowings of up to
$4.35 billion
pursuant to a
$2.20 billion
revolving credit agreement and a
$2.15 billion
multicurrency revolving credit agreement, both of which expire in
May 2019
. As of
March 31, 2016
, there were no borrowings under these revolving credit agreements. The undrawn portions of these revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of
March 31, 2016
, our maximum commercial paper borrowing limit was
$4.35 billion
. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, debt refinancing, and repurchases of our common stock. The need for commercial paper borrowings arises when the use of domestic cash for acquisitions, dividends, and share repurchases exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.
On
February 22, 2016
we issued
€950 million
aggregate principal amount of 1.125% notes due 2021,
€500 million
aggregate principal amount of 1.875% notes due 2026 and
€750 million
aggregate principal amount of floating rate notes due 2018. The net proceeds from these debt issuances were used for general corporate purposes.
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
March 31, 2016
|
|
December 31, 2015
|
5.375% notes due 2017
1
|
$
|
1,000
|
|
|
$
|
1,000
|
|
1.800% notes due 2017
1
|
1,500
|
|
|
1,500
|
|
EURIBOR plus 0.800% floating rate notes due 2018 (€750 million principal value)
2
|
837
|
|
|
—
|
|
1.778% junior subordinated notes due 2018
|
1,100
|
|
|
1,100
|
|
6.800% notes due 2018
|
99
|
|
|
99
|
|
6.125% notes due 2019
1
|
1,250
|
|
|
1,250
|
|
8.875% notes due 2019
|
271
|
|
|
271
|
|
4.500% notes due 2020
1
|
1,250
|
|
|
1,250
|
|
4.875% notes due 2020
|
171
|
|
|
171
|
|
1.125% notes due 2021 (€950 million principal value)
3
|
1,061
|
|
|
—
|
|
8.750% notes due 2021
|
250
|
|
|
250
|
|
3.100% notes due 2022
1
|
2,300
|
|
|
2,300
|
|
1.250% notes due 2023 (€750 million principal value)
3
|
837
|
|
|
817
|
|
1.875% notes due 2026 (€500 million principal value)
3
|
558
|
|
|
—
|
|
7.100% notes due 2027
|
141
|
|
|
141
|
|
6.700% notes due 2028
|
400
|
|
|
400
|
|
7.500% notes due 2029
1
|
550
|
|
|
550
|
|
5.400% notes due 2035
1
|
600
|
|
|
600
|
|
6.050% notes due 2036
1
|
600
|
|
|
600
|
|
6.800% notes due 2036
|
134
|
|
|
134
|
|
7.000% notes due 2038
|
159
|
|
|
159
|
|
6.125% notes due 2038
1
|
1,000
|
|
|
1,000
|
|
5.700% notes due 2040
1
|
1,000
|
|
|
1,000
|
|
4.500% notes due 2042
1
|
3,500
|
|
|
3,500
|
|
4.150% notes due 2045
4
|
850
|
|
|
850
|
|
Project financing obligations
|
171
|
|
|
191
|
|
Other (including capitalized leases)
|
195
|
|
|
306
|
|
Total principal long-term debt
|
21,784
|
|
|
19,439
|
|
Other (fair market value adjustments and discounts)
|
34
|
|
|
60
|
|
Total long-term debt
|
21,818
|
|
|
19,499
|
|
Less: current portion
|
130
|
|
|
179
|
|
Long-term debt, net of current portion
|
$
|
21,688
|
|
|
$
|
19,320
|
|
|
|
1
|
We may redeem the above notes, in whole or in part, at our option at any time at a redemption price in U.S. Dollars equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semiannual basis at the adjusted treasury rate plus 10-50 basis points. The redemption price will also include interest accrued to the date of redemption on the principal balance of the notes being redeemed.
|
|
|
2
|
These notes bear interest at the three-month EURIBOR rate plus 0.800%, established quarterly. The interest rate in effect at
March 31, 2016
was 0.605%. The notes may be redeemed at our option in whole, but not in part, at any time in the event of certain developments affecting U.S. taxation.
|
|
|
3
|
We may redeem these notes, in whole or in part, at our option at any time. If redeemed earlier than three months prior to the stated maturity date, the redemption price in Euro shall equal the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on an annual basis at a rate based upon a comparable German federal government bond whose maturity is closest to the maturity of the notes plus 15-30 basis points. In addition, the notes may be redeemed at our option in whole, but not in part, at any time in the event of certain developments affecting U.S. taxation.
|
|
|
4
|
We may redeem these notes, in whole or in part, at our option at any time. If redeemed prior to November 16, 2044, the redemption price in U.S. Dollars shall equal the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semiannual basis at the adjusted treasury rate plus 25 basis points.
|
We have an existing universal shelf registration statement filed with the Securities and Exchange Commission (SEC) for an indeterminate amount of equity and debt securities for future issuance, subject to our internal limitations on the amount of equity and debt to be issued under this shelf registration statement. We plan to renew the shelf registration prior to its expiration on May 29, 2016.
Note 6: Income Taxes
We conduct business globally and, as a result, UTC or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Belgium, Canada, China, France, Germany, Hong Kong, Italy, Japan, Singapore, South Korea, Spain, the United Kingdom and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2003.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. It is reasonably possible that over the next 12 months the amount of unrecognized tax benefits may change within a range of a net increase of
$60 million
to a net decrease of
$460 million
as a result of additional worldwide uncertain tax positions, the revaluation of current uncertain tax positions arising from developments in examinations, in appeals, or in the courts, or the closure of tax statutes. See Note 14, Contingent Liabilities, for discussion regarding uncertain tax positions, included in the above range, related to pending litigation with respect to certain deductions claimed in Germany.
UTC tax years 2011 and 2012 are currently under review by the Examination Division of the Internal Revenue Service (IRS), which is expected to continue beyond the next 12 months. Goodrich Corporation tax years 2011 and 2012 through the date of acquisition by UTC are currently under review by the Examination Division of the IRS, which may be completed within the next 12 months.
Note 7: Employee Benefit Plans
Pension and Postretirement Plans.
We sponsor both funded and unfunded domestic and foreign defined pension and other postretirement benefit plans, and defined contribution plans. Contributions to our plans were as follows:
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(Dollars in millions)
|
2016
|
|
2015
|
Defined benefit plans
|
$
|
75
|
|
|
$
|
45
|
|
Defined contribution plans
|
78
|
|
|
96
|
|
There were
no
contributions to our domestic defined benefit pension plans in the
quarters ended March 31, 2016 and 2015
. The following table illustrates the components of net periodic benefit cost for our defined pension and other postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
Quarter Ended March 31,
|
|
Other Postretirement Benefits
Quarter Ended March 31,
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
$
|
94
|
|
|
$
|
125
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
302
|
|
|
351
|
|
|
8
|
|
|
8
|
|
Expected return on plan assets
|
(556
|
)
|
|
(569
|
)
|
|
—
|
|
|
—
|
|
Amortization
|
(8
|
)
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
Recognized actuarial net loss (gain)
|
135
|
|
|
221
|
|
|
(1
|
)
|
|
(1
|
)
|
Net settlement and curtailment loss
|
12
|
|
|
6
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit (income) cost
|
$
|
(21
|
)
|
|
$
|
131
|
|
|
$
|
8
|
|
|
$
|
8
|
|
There were no curtailment losses related to discontinued operations for the quarters ended March 31, 2016 and 2015. Total net periodic benefit cost in the table above, for the quarter ended March 31, 2015, includes approximately
$25 million
related to, and recorded in, discontinued operations.
In 2015, we changed the approach we use to estimate the service and interest components of net periodic pension cost for our significant pension plans. Historically, we estimated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We elected to utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant projected cash flows. We made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change does not affect the measurement of our total benefit obligations. The discount rates used to measure service cost and interest cost during 2016 are
3.9%
and
3.5%
, respectively. The previous method would have used a discount rate for both service and interest costs of
4.1%
. This change decreases the service and interest cost components of our annual net periodic pension cost by approximately
$215 million
for 2016. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it prospectively, effective January 1, 2016.
Note 8: Restructuring Costs
During the
quarter ended March 31, 2016
, we recorded net pre-tax restructuring costs totaling
$62 million
for new and ongoing restructuring actions. We recorded charges in the segments as follows:
|
|
|
|
|
(Dollars in millions)
|
|
Otis
|
$
|
15
|
|
UTC Climate, Controls & Security
|
28
|
|
Pratt & Whitney
|
5
|
|
UTC Aerospace Systems
|
13
|
|
Eliminations and other
|
1
|
|
Total
|
$
|
62
|
|
Restructuring charges incurred during the
quarter ended March 31, 2016
primarily relate to actions initiated during
2016
and
2015
, and were recorded as follows:
|
|
|
|
|
(Dollars in millions)
|
|
Cost of sales
|
$
|
31
|
|
Selling, general and administrative
|
31
|
|
Total
|
$
|
62
|
|
2016 Actions
.
During the
quarter ended March 31, 2016
, we recorded net pre-tax restructuring costs totaling
$28 million
, including
$13 million
in cost of sales, and
$15 million
in selling, general and administrative expenses. The 2016 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations.
We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2016 and
2017
. No specific plans for significant other actions have been finalized at this time. All costs incurred during the quarter ended
March 31, 2016
relate to severance. The following table summarizes the accrual balance and utilization for the
2016
restructuring actions:
|
|
|
|
|
(Dollars in millions)
|
Total
|
Net pre-tax restructuring costs
|
$
|
28
|
|
Utilization and foreign exchange
|
(3
|
)
|
Balance at March 31, 2016
|
$
|
25
|
|
The following table summarizes expected, incurred and remaining costs for the
2016
restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Expected
Costs
|
|
Costs Incurred Quarter Ended
March 31, 2016
|
|
Remaining Costs at
March 31,
2016
|
Otis
|
$
|
14
|
|
|
$
|
(10
|
)
|
|
$
|
4
|
|
UTC Climate, Controls & Security
|
21
|
|
|
(13
|
)
|
|
8
|
|
UTC Aerospace Systems
|
73
|
|
|
(5
|
)
|
|
68
|
|
Total
|
$
|
108
|
|
|
$
|
(28
|
)
|
|
$
|
80
|
|
2015 Actions
.
During the
quarter ended March 31, 2016
, we recorded net pre-tax restructuring costs totaling
$29 million
for restructuring actions initiated in
2015
, including
$15 million
in cost of sales and
$14 million
in selling, general and administrative expenses. The
2015
actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. The following table summarizes the accrual balances and utilization by cost type for the
2015
restructuring actions:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Severance
|
|
Facility Exit,
Lease
Termination and
Other Costs
|
|
Total
|
Restructuring accruals at January 1, 2016
|
$
|
183
|
|
|
$
|
23
|
|
|
$
|
206
|
|
Net pre-tax restructuring costs
|
21
|
|
|
8
|
|
|
29
|
|
Utilization and foreign exchange
|
(63
|
)
|
|
(8
|
)
|
|
(71
|
)
|
Balance at March 31, 2016
|
$
|
141
|
|
|
$
|
23
|
|
|
$
|
164
|
|
The following table summarizes expected, incurred and remaining costs for the
2015
restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Expected
Costs
|
|
Costs Incurred in 2015
|
|
Costs Incurred Quarter Ended
March 31, 2016
|
|
Remaining Costs at
March 31,
2016
|
Otis
|
$
|
54
|
|
|
$
|
(35
|
)
|
|
$
|
(5
|
)
|
|
$
|
14
|
|
UTC Climate, Controls & Security
|
207
|
|
|
(83
|
)
|
|
(14
|
)
|
|
110
|
|
Pratt & Whitney
|
100
|
|
|
(82
|
)
|
|
(1
|
)
|
|
17
|
|
UTC Aerospace Systems
|
144
|
|
|
(105
|
)
|
|
(8
|
)
|
|
31
|
|
Eliminations and other
|
22
|
|
|
(21
|
)
|
|
(1
|
)
|
|
—
|
|
Total
|
$
|
527
|
|
|
$
|
(326
|
)
|
|
$
|
(29
|
)
|
|
$
|
172
|
|
2014 and Prior Actions.
As of March 31, 2016
, we have approximately
$83 million
of accrual balances remaining related to
2014
actions.
Note 9: Financial Instruments
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures.
The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was
$16.2 billion
and
$15.6 billion
at
March 31, 2016
and
December 31, 2015
, respectively.
The following table summarizes the fair value of derivative instruments as of
March 31, 2016
and
December 31, 2015
which consist solely of foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
(Dollars in millions)
|
March 31, 2016
|
|
December 31, 2015
|
|
March 31, 2016
|
|
December 31, 2015
|
Derivatives designated as hedging instruments
|
$
|
26
|
|
|
$
|
4
|
|
|
$
|
232
|
|
|
$
|
428
|
|
Derivatives not designated as hedging instruments
|
70
|
|
|
97
|
|
|
79
|
|
|
105
|
|
As discussed in Note 5,
we have issued approximately €2.95 billion of Euro-denominated debt, which qualifies as a net investment hedge against our investments in European businesses under ASC 815,
Derivatives and Hedging.
As of March 31, 2016, the net investment hedge is deemed to be effective as defined under ASC 815.
The amount of gains and losses related to the Company's derivative financial instruments was as follows:
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(Dollars in millions)
|
2016
|
|
2015
|
Gain (loss) recorded in Accumulated other comprehensive loss
|
$
|
159
|
|
|
$
|
(184
|
)
|
Loss reclassified from Accumulated other comprehensive loss into Product sales (effective portion)
|
62
|
|
|
57
|
|
Assuming current market conditions continue, a
$137 million
pre-tax loss is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At
March 31, 2016
, all derivative contracts accounted for as cash flow hedges will mature by
November 2022
.
The effect on the Condensed Consolidated Statement of Operations of foreign exchange contracts not designated as hedging instruments was as follows:
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(Dollars in millions)
|
2016
|
|
2015
|
Gain recognized in Other income, net
|
$
|
15
|
|
|
$
|
18
|
|
We received
$42 million
and
$569 million
from settlements of derivative contracts during the quarters ended March 31, 2016 and 2015, respectively.
Note 10: Fair Value Measurements
In accordance with the provisions of ASC 820, the following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and nonrecurring basis in our Condensed Consolidated Balance Sheet as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016 (Dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
1,083
|
|
|
$
|
1,083
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
96
|
|
|
—
|
|
|
96
|
|
|
—
|
|
Derivative liabilities
|
(311
|
)
|
|
—
|
|
|
(311
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015 (Dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
951
|
|
|
$
|
951
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
101
|
|
|
—
|
|
|
101
|
|
|
—
|
|
Derivative liabilities
|
(533
|
)
|
|
—
|
|
|
(533
|
)
|
|
—
|
|
Valuation Techniques.
Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally, and are measured at fair value using closing stock prices from active markets. Our derivative assets and liabilities include foreign exchange contracts and commodity derivatives that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks. As of
March 31, 2016
, there were no significant transfers in and out of Level 1 and Level 2.
As of
March 31, 2016
, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties' credit risks.
The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Condensed Consolidated Balance Sheet at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
(Dollars in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Long-term receivables
|
$
|
129
|
|
|
$
|
122
|
|
|
$
|
122
|
|
|
$
|
107
|
|
Customer financing notes receivable
|
456
|
|
|
433
|
|
|
403
|
|
|
403
|
|
Short-term borrowings
|
(1,233
|
)
|
|
(1,233
|
)
|
|
(926
|
)
|
|
(926
|
)
|
Long-term debt (excluding capitalized leases)
|
(21,795
|
)
|
|
(24,219
|
)
|
|
(19,476
|
)
|
|
(21,198
|
)
|
Long-term liabilities
|
(429
|
)
|
|
(428
|
)
|
|
(458
|
)
|
|
(419
|
)
|
The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Condensed Consolidated Balance Sheet as of
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Long-term receivables
|
$
|
122
|
|
|
$
|
—
|
|
|
$
|
122
|
|
|
$
|
—
|
|
Customer financing notes receivable
|
433
|
|
|
—
|
|
|
433
|
|
|
—
|
|
Short-term borrowings
|
(1,233
|
)
|
|
—
|
|
|
(1,073
|
)
|
|
(160
|
)
|
Long-term debt (excluding capitalized leases)
|
(24,219
|
)
|
|
—
|
|
|
(23,961
|
)
|
|
(258
|
)
|
Long-term liabilities
|
(428
|
)
|
|
—
|
|
|
(428
|
)
|
|
—
|
|
We had commercial aerospace financing and other contractual commitments totaling approximately
$14.0 billion
and
$14.6 billion
as of
March 31, 2016
and
December 31, 2015
, respectively, related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms. Risks associated with changes in interest rates on these commitments are mitigated by the fact that interest rates are variable during the commitment term, and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded.
Note 11: Long-Term Financing Receivables
Our long-term financing receivables primarily represent balances related to our aerospace businesses, such as long-term trade accounts receivable, leases receivable, and notes receivable. We also have other long-term receivables related to our commercial businesses; however, both the individual and aggregate amounts of those other receivables are not significant.
Long-term trade accounts receivable, including unbilled receivables related to long-term aftermarket contracts, are principally amounts arising from the sale of goods and delivery of services with a contractual maturity date or realization period of greater than one year, and are recognized as "Other assets" in our Condensed Consolidated Balance Sheet. Notes and leases receivable represent notes and lease receivables other than receivables related to operating leases, and are recognized as "Customer financing assets" in our Condensed Consolidated Balance Sheet. The following table summarizes the balance by class of aerospace business related long-term receivables as of
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
March 31, 2016
|
|
December 31, 2015
|
Long-term trade accounts receivable
|
$
|
934
|
|
|
$
|
903
|
|
Notes and leases receivable
|
343
|
|
|
451
|
|
Total long-term receivables
|
$
|
1,277
|
|
|
$
|
1,354
|
|
Customer credit ratings range from customers with an extremely strong capacity to meet financial obligations, to customers whose uncollateralized receivable is in default. There can be no assurance that actual results will not differ from estimates or that consideration of these factors in the future will not result in an increase or decrease to the allowance for credit losses on long-term receivables. Based upon the customer credit ratings, approximately
14%
and
13%
of our total long-term receivables were considered to bear high credit risk as of
March 31, 2016
and
December 31, 2015
, respectively.
For long-term trade accounts receivable, we evaluate credit risk and collectability individually to determine if an allowance is necessary. Our long-term receivables reflected in the table above, which includes a reserve of
$18 million
as of
March 31, 2016
and
December 31, 2015
, are individually evaluated for impairment. At
March 31, 2016
and
December 31, 2015
, we did not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or considered to be not recoverable.
Note 12: Shareowners' Equity and Noncontrolling Interest
A summary of the changes in shareowners' equity and noncontrolling interest comprising total equity for the
quarters ended March 31, 2016 and 2015
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
2016
|
|
2015
|
(Dollars in millions)
|
Share-owners'
Equity
|
|
Non-controlling Interest
|
|
Total
Equity
|
|
Share-owners'
Equity
|
|
Non-controlling Interest
|
|
Total
Equity
|
Equity, beginning of period
|
$
|
27,358
|
|
|
$
|
1,486
|
|
|
$
|
28,844
|
|
|
$
|
31,213
|
|
|
$
|
1,351
|
|
|
$
|
32,564
|
|
Comprehensive income for the period:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
1,191
|
|
|
81
|
|
|
1,272
|
|
|
1,426
|
|
|
72
|
|
|
1,498
|
|
Total other comprehensive income (loss)
|
275
|
|
|
13
|
|
|
288
|
|
|
(550
|
)
|
|
(40
|
)
|
|
(590
|
)
|
Total comprehensive income for the period
|
1,466
|
|
|
94
|
|
|
1,560
|
|
|
876
|
|
|
32
|
|
|
908
|
|
Common Stock issued under employee plans
|
51
|
|
|
|
|
51
|
|
|
125
|
|
|
|
|
125
|
|
Common Stock repurchased
|
—
|
|
|
|
|
—
|
|
|
(3,000
|
)
|
|
|
|
(3,000
|
)
|
Dividends on Common Stock
|
(509
|
)
|
|
|
|
(509
|
)
|
|
(553
|
)
|
|
|
|
(553
|
)
|
Dividends on ESOP Common Stock
|
(18
|
)
|
|
|
|
(18
|
)
|
|
(19
|
)
|
|
|
|
(19
|
)
|
Dividends attributable to noncontrolling interest
|
|
|
|
(51
|
)
|
|
(51
|
)
|
|
|
|
|
(55
|
)
|
|
(55
|
)
|
(Purchase) sale of subsidiary shares from noncontrolling interest
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
11
|
|
|
14
|
|
|
25
|
|
Acquisition of noncontrolling interest
|
|
|
34
|
|
|
34
|
|
|
|
|
172
|
|
|
172
|
|
Disposition of noncontrolling interest
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
(3
|
)
|
|
(3
|
)
|
Other
|
5
|
|
|
(12
|
)
|
|
(7
|
)
|
|
(3
|
)
|
|
6
|
|
|
3
|
|
Equity, end of period
|
$
|
28,353
|
|
|
$
|
1,550
|
|
|
$
|
29,903
|
|
|
$
|
28,650
|
|
|
$
|
1,517
|
|
|
$
|
30,167
|
|
On March 13, 2015, we entered into accelerated share repurchase (ASR) agreements to repurchase an aggregate of
$2.65 billion
of our common stock. Under the terms of the ASR agreements, we made the aggregate payments and received an initial delivery of
18.6 million
shares of common stock, representing approximately 85% of the shares expected to be repurchased. On July 31, 2015, the shares associated with the remaining portion of the aggregate purchase were settled upon final delivery of approximately
4.2 million
additional shares of common stock.
On November 11, 2015, we entered into ASR agreements to repurchase an aggregate of
$6 billion
of our common stock utilizing the net after-tax proceeds from the sale of Sikorsky. The ASR agreements provide for the repurchase of our common stock based on the average of the daily volume-weighted average prices of our common stock during the term of such ASR agreement, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR agreement. Under the terms of the ASR agreements, we made the aggregate payments and received an initial delivery of approximately
51.9 million
shares of our common stock, representing approximately 85% of the shares expected to be repurchased. The shares associated with the remaining portion of the aggregate purchase price are to be settled over six tranches. Upon settlement of each tranche, we may be entitled to receive additional shares of our common stock or, under certain limited circumstances, be required to deliver shares or make additional payments to the counterparties, at our election.
On January 19, 2016, the shares associated with the remaining portion of the first tranche of the aggregate purchase were settled upon final delivery of approximately
2.1 million
shares of common stock. The final settlement of the transactions under the remaining five tranches is expected to occur no later than the third quarter of 2016.
A summary of the changes in each component of accumulated other comprehensive income (loss), net of tax for the
quarters ended March 31, 2016 and 2015
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Foreign
Currency
Translation
|
|
Defined
Benefit
Pension and
Post-
retirement
Plans
|
|
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
|
|
Unrealized
Hedging
(Losses)
Gains
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
Quarter Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
(2,438
|
)
|
|
$
|
(5,135
|
)
|
|
$
|
293
|
|
|
$
|
(339
|
)
|
|
$
|
(7,619
|
)
|
Other comprehensive income (loss) before
reclassifications, net
|
26
|
|
|
(17
|
)
|
|
38
|
|
|
117
|
|
|
164
|
|
Amounts reclassified, pretax
|
1
|
|
|
126
|
|
|
(27
|
)
|
|
62
|
|
|
162
|
|
Tax (benefit) expense reclassified
|
—
|
|
|
(46
|
)
|
|
12
|
|
|
(17
|
)
|
|
(51
|
)
|
Balance at March 31, 2016
|
$
|
(2,411
|
)
|
|
$
|
(5,072
|
)
|
|
$
|
316
|
|
|
$
|
(177
|
)
|
|
$
|
(7,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Foreign
Currency
Translation
|
|
Defined
Benefit
Pension and
Post-
retirement
Plans
|
|
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
|
|
Unrealized
Hedging
(Losses)
Gains
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
Quarter Ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
$
|
(1,051
|
)
|
|
$
|
(5,709
|
)
|
|
$
|
308
|
|
|
$
|
(209
|
)
|
|
$
|
(6,661
|
)
|
Other comprehensive (loss) income before reclassifications, net
|
(665
|
)
|
|
35
|
|
|
54
|
|
|
(132
|
)
|
|
(708
|
)
|
Amounts reclassified, pretax
|
(2
|
)
|
|
217
|
|
|
(28
|
)
|
|
57
|
|
|
244
|
|
Tax (benefit) expense reclassified
|
—
|
|
|
(80
|
)
|
|
10
|
|
|
(16
|
)
|
|
(86
|
)
|
Balance at March 31, 2015
|
$
|
(1,718
|
)
|
|
$
|
(5,537
|
)
|
|
$
|
344
|
|
|
$
|
(300
|
)
|
|
$
|
(7,211
|
)
|
Amounts reclassified related to our defined benefit pension and postretirement plans include amortization of prior service costs and transition obligations, and actuarial net losses recognized during each period presented. These costs are recorded as components of net periodic pension cost for each period presented (see Note 7 for additional details).
All noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests) are reported in the mezzanine section of the Condensed Consolidated Balance Sheet, between liabilities and equity, at the greater of redemption value or initial carrying value.
Changes in noncontrolling interests that do not result in a change of control, and where there is a difference between fair value and carrying value, are accounted for as equity transactions. There would be no pro-forma effect on Net income attributable to common shareowners for the
quarter ended March 31, 2016
had the changes been recorded through net income. The pro-forma increase in Net income attributable to common shareowners would have been
$11 million
for the
quarter ended March 31, 2015
had the changes been recorded through net income.
Note 13: Guarantees
We extend a variety of financial, market value and product performance guarantees to third parties. There have been no material changes to guarantees outstanding since
December 31, 2015
. The changes in the carrying amount of service and product warranties and product performance guarantees for the
three months ended March 31, 2016 and 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2016
|
|
2015
|
Balance as of January 1
|
|
$
|
1,212
|
|
|
$
|
1,264
|
|
Warranties and performance guarantees issued
|
|
76
|
|
|
72
|
|
Settlements made
|
|
(62
|
)
|
|
(68
|
)
|
Other
|
|
10
|
|
|
(4
|
)
|
Balance as of March 31
|
|
$
|
1,236
|
|
|
$
|
1,264
|
|
The amounts above exclude service and product warranties and product performance guarantees related to Sikorsky of approximately
$50 million
as of March 31, 2015.
Note 14: Contingent Liabilities
Summarized below are the matters previously described in Note 17 of the Notes to the Consolidated Financial Statements in our
2015
Annual Report, incorporated by reference in our
2015
Form 10-K, updated as applicable.
Except as otherwise noted, while we are unable to predict the final outcome, based on information currently available, we do not believe that resolution of any of the following matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Environmental.
Our operations are subject to environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over our foreign operations. As described in Note 1 to the Consolidated Financial Statements in our
2015
Annual Report, we have accrued for the costs of environmental remediation activities and periodically reassess these amounts. We believe that the likelihood of incurring losses materially in excess of amounts accrued is remote. Additional information pertaining to environmental matters is included in Note 1 to the Consolidated Financial Statements in our
2015
Annual Report.
Government.
In the ordinary course of business, the Company and its subsidiaries and our properties are subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations and threatened legal actions and proceedings. For example, we are now, and believe that, in light of the current U.S. Government contracting environment, we will continue to be the subject of one or more U.S. Government investigations. Such U.S. Government investigations often take years to complete and could result in administrative, civil or criminal liabilities, including repayments, fines, treble and other damages, forfeitures, restitution or penalties, or could lead to suspension or debarment of U.S. Government contracting or of export privileges. For instance, if we or one of our business units were charged with wrongdoing as a result of any of these investigations or other government investigations (including violations of certain environmental or export laws) the U.S. Government could suspend us from bidding on or receiving awards of new U.S. Government contracts pending the completion of legal proceedings. If convicted or found liable, the U.S. Government could fine and debar us from new U.S. Government contracting for a period generally not to exceed three years. The U.S. Government also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other seriously improper conduct. The U.S. Government could void any contracts found to be tainted by fraud.
Our contracts with the U.S. Government are also subject to audits. Like many defense contractors, we have received audit reports, which recommend that certain contract prices should be reduced to comply with various government regulations, including because cost or pricing data we submitted in negotiation of the contract prices or cost accounting practices may not have conformed to government regulations, or that certain payments be delayed or withheld. Some of these audit reports involved substantial amounts. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and continue to litigate certain cases. In addition, we accrue for liabilities associated with those matters that are probable and can be reasonably estimated. The most likely settlement amount to be incurred is accrued based upon a range of estimates. Where no amount within a range of estimates is more likely, then we accrued the minimum amount.
Legal Proceedings.
F100 Engine Litigation
As previously disclosed, the United States Government sued us in 1999 in the United States District Court for the Southern District of Ohio (District Court), claiming that Pratt & Whitney violated the civil False Claims Act and common law. The claims relate to the “Fighter Engine Competition” between Pratt & Whitney's F100 engine and General Electric's F110 engine. The government alleged that it overpaid for F100 engines under contracts awarded by the U.S. Air Force in fiscal years 1985 through 1990 because Pratt & Whitney inflated its estimated costs for some purchased parts and withheld data that would have revealed the overstatements. At trial, which ended in April 2005, the government claimed Pratt & Whitney's liability to be approximately $624 million.
On August 1, 2008, the trial court held that the Air Force had not suffered any actual damages because Pratt & Whitney had made significant price concessions after the alleged overstatements were made. However, the trial court judge found that Pratt & Whitney violated the False Claims Act due to inaccurate statements contained in its 1983 initial engine pricing proposal. In the absence of actual damages, the trial court awarded the government the maximum civil penalty of $7,090,000, or $10,000 for each of the 709 invoices Pratt & Whitney submitted in 1989 and later under the contracts.
In September 2008, both the government and UTC appealed the decision to the United States Court of Appeals for the Sixth Circuit. In November 2010, the Sixth Circuit affirmed Pratt & Whitney's liability for the civil penalty under the False Claims Act, but remanded the case to the trial court for further proceedings on the issues of False Claims Act damages and common law liability and damages.
On June 18, 2012, the trial court found that Pratt & Whitney had breached obligations imposed by common law based on the same conduct with respect to which the court previously found liability under the False Claims Act. Under the common law claims, the U.S. Air Force seeks damages for events occurring before March 3, 1989, which are not recoverable under the False Claims Act.
On June 17, 2013, the trial court awarded the government approximately $473 million in damages and penalties, plus prejudgment interest in an amount to be determined. On July 1, 2013, the trial court, after determining the amount of prejudgment interest, entered judgment in favor of the government in the amount of approximately $664 million. The trial court also awarded post-judgment interest on the full amount of the judgment to accrue from July 2, 2013, at the federal variable interest rate determined pursuant to 28 U.S.C. § 1961. The judgment included four different components: (1) common law damages of approximately $109 million; (2) prejudgment interest on common law damages of approximately $191 million; (3) False Claims Act treble damages of approximately $357 million; and (4) the civil penalty of approximately $7 million. The penalty component of the judgment previously was affirmed by the United States Court of Appeals in 2010.
We filed an appeal from the judgment to the United States Court of Appeals for the Sixth Circuit on August 26, 2013. On April 6, 2015, the Sixth Circuit reversed the trial court’s decision and vacated the prior damages award, noting that the government did not prove any damages. The court rejected as a matter of law the evidence submitted by the government on damages and remanded the case to the District Court to decide in the first instance whether the government should have another opportunity to prove that it suffered any actual damages.
On July 17, 2015, the case returned to the District Court, at which time we filed a motion for entry of judgment, seeking a judgment of zero actual damages. The government responded by filing a motion on August 28, 2015, in which it abandoned its claim for actual damages, but now seeks a
judgment of approximately $85 million, representing (1) disgorgement of UTC’s alleged profits in fiscal year 1985, the first year of the multi-year engine competition, (2) prejudgment interest and (3) the approximately $7 million civil penalty.
We believe that there is no basis for the government’s new profit disgorgement claim. Accordingly, we continue not to accrue a reserve beyond the civil penalty referenced above.
Cost Accounting Standards Claim
By letter dated December 24, 2013, a Divisional Administrative Contracting Officer of the United States Defense Contract Management Agency asserted a claim and demand for payment of approximately $211 million against Pratt & Whitney. The claim is based on Pratt & Whitney's alleged noncompliance with cost accounting standards from January 1, 2005 to December 31, 2012, due to its method of determining the cost of collaborator parts used in the calculation of material overhead costs for government contracts.
On March 18, 2014, Pratt & Whitney filed an appeal to the Armed Services Board of Contract Appeals. Pratt & Whitney’s appeal is still pending and we continue to believe the government’s claim is without merit.
German Tax Litigation
As previously disclosed, UTC has been involved in administrative review proceedings with the German Tax Office, which concern approximately €215 million (approximately $241 million) of tax benefits that we have claimed related to a 1998 reorganization of the corporate structure of Otis operations in Germany. Upon audit, these tax benefits were disallowed by the German Tax Office. UTC estimates interest associated with the aforementioned tax benefits is an additional approximately €118 million (approximately $132 million). On August 3, 2012, we filed suit in the local German Tax Court (Berlin-Brandenburg). In March 2016, the local German Tax Court dismissed our suit, and we have appealed this decision to the German Federal Tax Court (FTC).
From 2008 to 2014, there was ongoing litigation between the German Government and another taxpayer in a case involving a German tax law relevant to our reorganization. In November 2014, the FTC ruled in favor of the German Government, and against the other taxpayer. In light of the FTC decision in the case involving the other taxpayer, we fully accrued for tax and interest in 2014.
In 2015, UTC made tax and interest payments to German tax authorities of €275 million (approximately $300 million) in order to avoid additional interest accruals pending final resolution of this matter. In the meantime, we continue vigorously to litigate our matter.
Asbestos Matters
As previously reported, like many other industrial companies, we and our subsidiaries have been named as defendants in lawsuits alleging personal injury as a result of exposure to asbestos integrated into certain of our products or business premises. While we have never manufactured asbestos and no longer incorporate it in any currently-manufactured products, certain of our historical products, like those of many other manufacturers, have contained components incorporating asbestos. A substantial majority of these asbestos-related claims have been dismissed without payment or were covered in full or in part by insurance or other forms of indemnity. Additional cases were litigated and settled without any insurance reimbursement. The amounts involved in asbestos related claims were not material individually or in the aggregate in any year.
Our estimated total liability to resolve all pending and unasserted potential future asbestos claims through 2059 is
$376 million
and is recorded in Other long-term liabilities on our Condensed Consolidated Balance Sheet. This amount is on a pre-
tax basis, not discounted, and excludes the Company’s defense fees (which will continue to be expensed by the Company as they are incurred).
In addition, the Company has recorded a
$106 million
insurance recovery receivable for probable asbestos related recoveries. In calculating this amount, the Company used the estimated asbestos liability for pending and projected future claims and considered the amount of insurance available, allocation methodologies, solvency ratings, creditworthiness, and the contractual terms with each insurer.
The amounts recorded by UTC for asbestos-related claims are based on currently available information and assumptions that we believe are reasonable. Our actual liabilities or insurance recoveries could be higher or lower than those recorded if actual results vary significantly from the assumptions. Key variables in these assumptions include the number and type of new claims to be filed each year, the average cost of resolution of each new claim, the resolution of coverage issues with other excess insurance carriers with whom we have not yet achieved settlements, and the solvency risk with respect to our insurance carriers. Other factors that may affect our future liability include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms that may be made by state and federal courts, and the passage of state or federal tort reform legislation.
Other.
As described in Note 16 to the Consolidated Financial Statements in our
2015
Annual Report, we extend performance and operating cost guarantees beyond our normal warranty and service policies for extended periods on some of our products. We have accrued our estimate of the liability that may result under these guarantees and for service costs that are probable and can be reasonably estimated.
We have accrued for environmental investigatory, remediation, operating and maintenance costs, performance guarantees and other litigation and claims based on our estimate of the probable outcome of these matters. While it is possible that the outcome of these matters may differ from the recorded liability, we believe that resolution of these matters will not have a material impact on our competitive position, results of operations, cash flows or financial condition.
We also have other commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. We accrue contingencies based upon a range of possible outcomes. If no amount within this range is a better estimate than any other, then we accrue the minimum amount.
In the ordinary course of business, the Company and its subsidiaries are also routinely defendants in, parties to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some of these proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries and could result in fines, penalties, compensatory or treble damages or non-monetary relief. We do not believe that these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Note 15: Segment Financial Data
Our operations are classified into four principal segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems. The segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services.
As discussed in Note 2, on November 6, 2015, we completed the sale of Sikorsky to Lockheed Martin Corp. Amounts reported for 2015 in the table below exclude amounts attributable to Sikorsky, which have been reclassified to Discontinued Operations in the accompanying Condensed Consolidated Statement of Operations.
Results for the
quarters ended March 31, 2016 and 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Operating Profits
|
|
Operating Profit Margins
|
(Dollars in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Otis
|
$
|
2,715
|
|
|
$
|
2,745
|
|
|
$
|
466
|
|
|
$
|
527
|
|
|
17.2
|
%
|
|
19.2
|
%
|
UTC Climate, Controls & Security
|
3,728
|
|
|
3,852
|
|
|
606
|
|
|
729
|
|
|
16.3
|
%
|
|
18.9
|
%
|
Pratt & Whitney
|
3,588
|
|
|
3,332
|
|
|
410
|
|
|
419
|
|
|
11.4
|
%
|
|
12.6
|
%
|
UTC Aerospace Systems
|
3,505
|
|
|
3,548
|
|
|
538
|
|
|
569
|
|
|
15.3
|
%
|
|
16.0
|
%
|
Total segments
|
13,536
|
|
|
13,477
|
|
|
2,020
|
|
|
2,244
|
|
|
14.9
|
%
|
|
16.7
|
%
|
Eliminations and other
|
(179
|
)
|
|
(157
|
)
|
|
16
|
|
|
48
|
|
|
|
|
|
General corporate expenses
|
—
|
|
|
—
|
|
|
(91
|
)
|
|
(110
|
)
|
|
|
|
|
Consolidated
|
$
|
13,357
|
|
|
$
|
13,320
|
|
|
$
|
1,945
|
|
|
$
|
2,182
|
|
|
14.6
|
%
|
|
16.4
|
%
|
See Note 8 to the Condensed Consolidated Financial Statements for a discussion of restructuring costs included in segment operating results.
Note 16: Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers."
In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net)." The ASU clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements
.
In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing," which clarifies the guidance surrounding licensing arrangements and the identification of performance obligations.
On August 12, 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which delays the effective date of ASU 2014-09 by one year. The new standard is effective for reporting periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods; (i) a full retrospective adoption reflecting the application of the standard in each prior reporting period, or (ii) a modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized through retained earnings at the date of adoption. Early adoption is permitted for reporting periods beginning after December 15, 2016. We are in the process of evaluating the potential revenue implications of the standard change, which may result in changes to our revenue recognition practices; the elimination of the units-of-delivery method for certain U.S. Government programs; and the elimination of the completed contract method of accounting.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Upon adoption, investments that do not result in consolidation and are not accounted for under the equity method generally must be carried at fair value, with changes in fair value recognized in net income. The provisions of this ASU are effective for years beginning after December 15, 2017. We are currently evaluating the impact of this ASU.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." Under the amendments of this ASU, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date; (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged under the amendments of this ASU. The provisions of this ASU are effective for years beginning after December 15, 2018. We are currently evaluating the impact of this ASU.
In March 2016, the FASB issued ASU 2016-07, "Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting." This ASU eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Instead, the equity method of accounting should be applied prospectively from the date significant influence is obtained. In addition, the ASU requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The provisions of this ASU are effective for years beginning after December 15, 2016. We are currently evaluating the impact of this ASU.
In March 2016, the FASB issued ASU 2016-09, "Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." This ASU is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and
classification on the statement of cash flows. The provisions of this ASU are effective for years beginning after December 15, 2016. Early application is permitted. We are currently evaluating the impact of this ASU.
With respect to the unaudited condensed consolidated financial information of UTC for the
quarters ended March 31, 2016 and 2015
, PricewaterhouseCoopers LLP (PricewaterhouseCoopers) reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated
April 29, 2016
, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the Act) for its report on the unaudited condensed consolidated financial information because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareowners of United Technologies Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of United Technologies Corporation and its subsidiaries as of March 31, 2016 and the related condensed consolidated statements of operations and condensed consolidated statements of comprehensive income for the three-month period ended March 31, 2016 and 2015 and the condensed consolidated statement of cash flows for the three-month period ended March 31, 2016 and 2015. This interim financial information is the responsibility of the Corporation’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2015, and the related consolidated statements of operations, of comprehensive income, of cash flows, and of changes in equity for the year then ended (not presented herein), and in our report dated February 11, 2016, which included a paragraph that described the change in classification and presentation of debt issuance costs and deferred income taxes, and the leveling classification of pension assets in 2015, 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, 2015 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
April 29, 2016