NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at
March 31, 2018
and for the
quarters ended March 31, 2018 and 2017
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 (
2017
Annual Report) incorporated by reference in our Annual Report on Form 10-K for calendar year
2017
(
2017
Form 10-K).
Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets
Business Acquisitions and Dispositions.
During the three months ended
March 31, 2018
, our investment in business acquisitions was
$125 million
, and primarily consisted of an acquisition at Pratt & Whitney.
On
September 4, 2017
, we announced that we had entered into a merger agreement with
Rockwell Collins, Inc. (Rockwell Collins)
, under which we agreed to acquire Rockwell Collins. Under the terms of the merger agreement, each Rockwell Collins shareowner will receive
$93.33
per share in cash and a fraction of a share of UTC common stock equal to the quotient obtained by dividing
$46.67
by the average of the volume-weighted average prices per share of UTC common stock on the NYSE on each of the 20 consecutive trading days ending with the trading day immediately prior to the closing date, (the “UTC Stock Price”), subject to adjustment based on a two-way collar mechanism as described below (the “Stock Consideration”). The cash and UTC stock payable in exchange for each such share of Rockwell Collins common stock are collectively the “Merger Consideration.” The fraction of a share of UTC common stock into which each such share of Rockwell Collins common stock will be converted is the “Exchange Ratio.” The Exchange Ratio will be determined based upon the UTC Stock Price. If the UTC Stock Price is greater than $107.01 but less than $124.37, the Exchange Ratio will be equal to the quotient of (i) $46.67 divided by (ii) the UTC Stock Price, which, in each case, will result in the Stock Consideration having a value equal to $46.67. If the UTC Stock Price is less than or equal to $107.01 or greater than or equal to $124.37, then a two-way collar mechanism will apply, pursuant to which, (x) if the UTC Stock Price is greater than or equal to $124.37, the Exchange Ratio will be fixed at 0.37525 and the value of the Stock Consideration will be greater than $46.67, and (y) if the UTC Stock Price is less than or equal to $107.01, the Exchange Ratio will be fixed at 0.43613 and the value of the Stock Consideration will be less than $46.67. On January 11, 2018, the merger was approved by Rockwell Collins' shareowners. We currently expect that the merger will be completed mid-year 2018, subject to customary closing conditions, including the receipt of required regulatory approvals.
We anticipate that approximately
$15 billion
will be required to pay the aggregate cash portion of the Merger Consideration. We expect to fund the cash portion of the Merger Consideration through debt issuances and cash on hand. Additionally, we have entered into a
$6.5 billion
364-day unsecured bridge loan credit agreement that would be funded only to the extent certain anticipated debt issuances are not completed prior to the completion of the merger. We expect to assume approximately
$7 billion
of Rockwell Collins' outstanding debt upon completion of the merger.
Goodwill.
Changes in our goodwill balances for the
quarter ended March 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Balance as of
January 1, 2018
|
|
Goodwill
Resulting from Business Combinations
|
|
Foreign Currency Translation and Other
|
|
Balance as of March 31, 2018
|
Otis
|
$
|
1,737
|
|
|
$
|
—
|
|
|
$
|
39
|
|
|
$
|
1,776
|
|
UTC Climate, Controls & Security
|
10,009
|
|
|
1
|
|
|
229
|
|
|
10,239
|
|
Pratt & Whitney
|
1,511
|
|
|
56
|
|
|
(2
|
)
|
|
1,565
|
|
UTC Aerospace Systems
|
14,650
|
|
|
—
|
|
|
106
|
|
|
14,756
|
|
Total Segments
|
27,907
|
|
|
57
|
|
|
372
|
|
|
28,336
|
|
Eliminations and other
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Total
|
$
|
27,910
|
|
|
$
|
57
|
|
|
$
|
372
|
|
|
$
|
28,339
|
|
Intangible Assets.
Identifiable intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(dollars in millions)
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Gross Amount
|
|
Accumulated
Amortization
|
Amortized:
|
|
|
|
|
|
|
|
Service portfolios
|
$
|
2,285
|
|
|
$
|
(1,636
|
)
|
|
$
|
2,178
|
|
|
$
|
(1,534
|
)
|
Patents and trademarks
|
408
|
|
|
(243
|
)
|
|
399
|
|
|
(233
|
)
|
Collaboration intangible assets
|
4,198
|
|
|
(444
|
)
|
|
4,109
|
|
|
(384
|
)
|
Customer relationships and other
|
13,536
|
|
|
(4,233
|
)
|
|
13,352
|
|
|
(4,100
|
)
|
|
20,427
|
|
|
(6,556
|
)
|
|
20,038
|
|
|
(6,251
|
)
|
Unamortized:
|
|
|
|
|
|
|
|
Trademarks and other
|
2,124
|
|
|
—
|
|
|
2,096
|
|
|
—
|
|
Total
|
$
|
22,551
|
|
|
$
|
(6,556
|
)
|
|
$
|
22,134
|
|
|
$
|
(6,251
|
)
|
Customer relationship intangible assets include payments made to our customers to secure certain contractual rights. Such payments are capitalized when distinct rights are obtained and sufficient incremental cash flows to support the recoverability of the assets have been established. Otherwise, the applicable portion of the payments are expensed. We amortize these intangible assets based on the underlying pattern of economic benefit, which may result in an amortization method other than straight-line. In the aerospace industry, amortization based on the pattern of economic benefit generally results in lower amortization expense during the development period with amortization expense increasing as programs enter full production and aftermarket cycles. If a pattern of economic benefit cannot be reliably determined, a straight-line amortization method is used. We classify amortization of such payments as a reduction of sales. The collaboration intangible assets are amortized based upon the pattern of economic benefits as represented by the underlying cash flows.
Amortization of intangible assets was
$223 million
and
$205 million
for the
quarters ended March 31, 2018 and 2017
, respectively. The following is the expected amortization of intangible assets for the years
2018
through
2023
, which reflects the pattern of expected economic benefit on certain aerospace intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Remaining 2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
Amortization expense
|
|
$
|
684
|
|
|
$
|
875
|
|
|
$
|
894
|
|
|
$
|
902
|
|
|
$
|
889
|
|
|
$
|
906
|
|
Note 2: Revenue Recognition
ASU 2014-09 and its related amendments (collectively, the New Revenue Standard) are effective for reporting periods beginning after December 15, 2017, and interim periods therein. We adopted the New Revenue Standard effective January 1, 2018 and elected the modified retrospective approach. The results for periods before 2018 were not adjusted for the new standard and the cumulative effect of the change in accounting was recognized through retained earnings at the date of adoption.
Revenue Recognition Accounting Policy Summary.
We account for revenue in accordance with Accounting Standards Codification (ASC) Topic 606:
Revenue from Contracts with Customers
. Under Topic 606, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Some of our contracts with customers contain a single performance obligation, while other contracts contain multiple performance obligations most commonly when contracts span multiple phases of the product life-cycle such as development, production, maintenance and support. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on its standalone selling price.
We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price, including contractual discounts, contract incentive payments, estimates of award fees, and other sources of variable consideration, when determining the transaction price of each contract. We include variable consideration in estimated transaction price when there is a basis to reasonably estimate the amount. These estimates are based on historical experience, anticipated performance and our best judgment at the time. We consider whether our contracts provide customers with significant financing. Generally, our contracts do not contain significant financing.
Point in time revenue recognition.
Timing of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms. Performance obligations are satisfied as of a point in time for heating, ventilating, air-conditioning and refrigeration systems, certain alarm and fire detection and suppression systems, and certain aerospace components and engines components. Revenue is recognized when control of the product transfers to the customer, generally upon product shipment.
Over-time revenue recognition.
Performance obligations are satisfied over-time if the customer receives the benefits as we perform work, if the customer controls the asset as it is being produced, or if the product being produced for the customer has no alternative use and we have a contractual right to payment. Revenue is recognized for our construction-type and certain production-type contracts on an over-time basis. We recognize revenue on an over-time basis on certain long-term aerospace aftermarket contracts and aftermarket service work; development, fixed price, and other cost reimbursement contracts in our aerospace businesses; and elevator and escalator sales, installation, service, modernization and other construction contracts in our commercial businesses. Commercial businesses service revenue is primarily recognized on a straight-line basis over the contract period. For construction and installation contracts within our commercial businesses and aerospace performance obligations satisfied over time, revenue is recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs include labor, materials, and subcontractors' costs, or other direct costs, and where applicable on government and commercial contracts, indirect costs.
For certain of our long-term aftermarket contracts, revenue is recognized over the contract period. In the commercial businesses, revenue is primarily recognized on a straight-line basis over the contract period. In the aerospace businesses, we generally account for such contracts as a series of daily obligations to stand ready to provide product maintenance and aftermarket services. Revenues are primarily recognized in proportion to cost as sufficient historical evidence indicates that the cost of performing services under the contract are incurred on an other than straight-line basis. Aerospace contract modifications are routine, and contracts are often modified to account for changes in contract specifications or requirements. Contract modifications that are for goods or services that are not distinct are accounted for as part of the existing contract.
We incur costs for engineering and development of aerospace products directly related to existing or anticipated contracts with customers. Such costs generate or enhance our ability to satisfy our performance obligations under these contracts. We capitalize these costs as contract fulfillment costs to the extent the costs are recoverable from the associated contract margin and subsequently amortize the costs as the original equipment (OEM) products are delivered to the customer. In instances where intellectual property does not transfer to the customer, we defer the customer funding of OEM product engineering and development and recognize revenue when the OEM products are delivered to the customer. Costs to obtain contracts are not material.
Loss provisions on OEM contracts are recognized to the extent that estimated contract costs exceed the estimated consideration from the products contemplated under the contractual arrangement. For new commitments, we generally record loss provisions at the earlier of contract announcement or contract signing except for certain contracts under which losses are recorded upon receipt of the purchase order that obligates us to perform. For existing commitments, anticipated losses on contractual arrangements are recognized in the period in which losses become evident. Products contemplated under contractual arrangements include firm quantities of product sold under contract and, in the large commercial engine and wheels and brakes businesses, future highly probable sales of replacement parts required by regulation that are expected to be sold subsequently for incorporation into the original equipment. In the large commercial engine and wheels and brakes businesses, when the combined original equipment and aftermarket arrangement for each individual sales campaign are profitable, we record original equipment product losses, as applicable, at the time of delivery.
We review our cost estimates on significant contracts on a quarterly basis, and for others, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. We record changes in contract estimates using the cumulative catch-up method.
The New Revenue Standard
changed the revenue recognition practices for a number of revenue streams across our businesses, although the most significant impacts are concentrated in our aerospace units. Several businesses, which previously accounted for revenue on a point in time basis are now required to use an over-time model when their contracts meet one or more of the mandatory criteria established in the New Revenue Standard. Revenue is now recognized based on a percentage-of-completion for repair contracts within Otis and UTC Climate, Controls & Security; certain U.S. Government and commercial aerospace equipment contracts; and aerospace aftermarket service work. For these businesses, unrecognized sales related to the satisfied portion of the performance obligations of contracts in process as of the date of adoption of approximately
$220 million
were recorded through retained earnings. The ongoing effect of recording revenue on a percentage-of-completion basis within these businesses is not expected to be materially different than the previous revenue recognition method.
In addition to the foregoing, our aerospace businesses, in certain cases, also changed the timing of manufacturing cost recognition and certain engineering and development costs. In most circumstances, our commercial aerospace businesses identify the performance obligation as the individual OEM unit; revenues and costs to manufacture each unit are recognized upon OEM unit delivery. Under the prior accounting, the unit of accounting was the contract, and early-contract OEM unit costs in excess of the average unit costs expected over the contract were capitalized and amortized over lower-cost units later in the contract. With the adoption of the New Revenue Standard, deferred unit costs in excess of the contract average of
$438 million
as of January 1, 2018 were eliminated through retained earnings and as such will not be amortized into future earnings.
Under the New Revenue Standard, costs incurred for engineering and development of aerospace products under contracts with customers must be capitalized as contract fulfillment costs, to the extent recoverable from the associated contract margin, and subsequently amortized as the OEM products are delivered to the customer. Under prior accounting, we generally expensed costs of engineering and development of aerospace products. The new standard also requires that customer funding of OEM product engineering and development be deferred in instances where economic benefit does not transfer to the customer and recognized as revenue when the OEM products are delivered. Prior to the New Revenue Standard, any customer funding received for such development efforts was recognized when earned, with the corresponding costs recognized as cost of sales.
With the adoption of the New Revenue Standard, we capitalized engineering and development costs of approximately
$700 million
as contract fulfillment cost assets as of January 1, 2018. We also established previously recognized customer funding of approximately
$850 million
as a contract liability through retained earnings as of the adoption date.
We expect the New Revenue Standard will have an immaterial impact on our 2018 net income. Adoption of the New Revenue Standard has resulted in Statement of Operations classification changes between Net Sales, Cost of sales, Research & development, and Other income. The New Revenue Standard also resulted in the establishment of Contract asset and Contract liability balance sheet accounts, and in the reclassification of balances to these new accounts from Accounts receivable; Inventories and contracts in progress, net, and Accrued liabilities. In addition to the following disclosures, Note 16 provides incremental disclosures required by the New Revenue Standard, including disaggregation of revenue into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The following schedule quantifies the impact of adopting the New Revenue Standard on the statement of operations for the three months ended
March 31, 2018
. The effect of the new standard represents the increase (decrease) in the line item based on the adoption of the New Revenue Standard.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2018, under previous standards
|
|
Effect of the New Revenue Standard
|
|
2018, as reported
|
Net Sales:
|
|
|
|
|
|
Product sales
|
$
|
10,167
|
|
|
$
|
91
|
|
|
$
|
10,258
|
|
Service sales
|
4,853
|
|
|
131
|
|
|
4,984
|
|
|
15,020
|
|
|
222
|
|
|
15,242
|
|
Costs and Expenses:
|
|
|
|
|
|
Cost of products sold
|
7,886
|
|
|
130
|
|
|
8,016
|
|
Cost of services sold
|
3,168
|
|
|
96
|
|
|
3,264
|
|
Research and development
|
574
|
|
|
(20
|
)
|
|
554
|
|
Selling, general and administrative
|
1,710
|
|
|
1
|
|
|
1,711
|
|
|
13,338
|
|
|
207
|
|
|
13,545
|
|
Other income, net
|
232
|
|
|
(1
|
)
|
|
231
|
|
Operating profit
|
1,914
|
|
|
14
|
|
|
1,928
|
|
Non-service pension (benefit)
|
(191
|
)
|
|
—
|
|
|
(191
|
)
|
Interest expense, net
|
229
|
|
|
—
|
|
|
229
|
|
Income from operations before income taxes
|
1,876
|
|
|
14
|
|
|
1,890
|
|
Income tax expense
|
518
|
|
|
4
|
|
|
522
|
|
Net income
|
1,358
|
|
|
10
|
|
|
1,368
|
|
Less: Noncontrolling interest in subsidiaries' earnings
|
69
|
|
|
2
|
|
|
71
|
|
Net income attributable to common shareowners
|
$
|
1,289
|
|
|
$
|
8
|
|
|
$
|
1,297
|
|
The New Revenue Standard resulted in an increase to Product and Service sales and Cost of products and services sold primarily due to the change to a percentage-of-completion revenue model for certain U.S Government and commercial aerospace equipment contracts and aerospace aftermarket service work at Pratt & Whitney and UTC Aerospace Systems. The New Revenue Standard also resulted in an increase in Cost of products sold related to the timing of manufacturing cost recognition on early-contract OEM units sold during the quarter, with costs in excess of the contract average unit costs recorded through Cost of products sold.
The lower amounts of research and development expense recognized under the New Revenue Standard reflect the capitalization of costs of engineering and development of aerospace products as contract fulfillment costs under contracts with customers.
The following schedule reflects the effect of the New Revenue Standard on our balance sheet as of
March 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
March 31, 2018 under previous standard
|
|
Effect of the New Revenue Standard
|
|
March 31, 2018 as reported
|
Assets
|
|
|
|
|
|
Accounts receivable, net
|
$
|
13,105
|
|
|
$
|
(1,406
|
)
|
|
$
|
11,699
|
|
Inventories
|
10,788
|
|
|
(1,850
|
)
|
|
8,938
|
|
Contract assets, current
|
—
|
|
|
2,989
|
|
|
2,989
|
|
Other assets, current
|
1,456
|
|
|
(8
|
)
|
|
1,448
|
|
Future income tax benefits
|
1,741
|
|
|
22
|
|
|
1,763
|
|
Intangible assets, net
|
16,064
|
|
|
(69
|
)
|
|
15,995
|
|
Other assets
|
6,222
|
|
|
914
|
|
|
7,136
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
Accrued liabilities
|
$
|
13,547
|
|
|
$
|
(5,596
|
)
|
|
$
|
7,951
|
|
Contract liabilities, current
|
—
|
|
|
5,727
|
|
|
5,727
|
|
Other long term liabilities
|
12,472
|
|
|
933
|
|
|
13,405
|
|
|
|
|
|
|
|
Retained earnings
|
56,005
|
|
|
(472
|
)
|
|
55,533
|
|
The decrease in Retained earnings of
$472 million
in the table above reflects
$480 million
of adjustments to the balance sheet as of January 1, 2018, resulting from the adoption of the New Revenue Standard, partially offset by higher reported net income under the new revenue standard. The declines in Accounts receivable, net, Inventories, Other assets, current, and Intangible assets, net, reflect reclassifications to contract assets, and specifically for Inventories, earlier recognition of costs of products sold for contracts requiring an over-time method of revenue recognition. The increase in Other assets reflects the establishment of non-current contract assets and contract fulfillment cost assets.
The decline in accrued liabilities is primarily due to the reclassification of payments from customers in advance of work performed as contract liabilities. The Other long term liabilities increase primarily reflects the establishment of non-current contract liabilities for certain customer funding of OEM product engineering and development, which will be recognized as revenue when the OEM products are delivered to the customer.
Contract Assets and Liabilities.
Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. Total contract assets and contract liabilities as of
March 31, 2018
are as follows:
|
|
|
|
|
(dollars in millions)
|
March 31, 2018
|
Contract assets, current
|
$
|
2,989
|
|
Contract assets, noncurrent (included within Other assets)
|
1,088
|
|
Total contract assets
|
4,077
|
|
Contract liabilities, current
|
(5,727
|
)
|
Contract liabilities, noncurrent (included within Other long-term liabilities)
|
(4,881
|
)
|
Total contract liabilities
|
(10,608
|
)
|
Net contract liabilities
|
$
|
(6,531
|
)
|
Under the New Revenue Standard, during the
quarter ended March 31, 2018
, net contract liabilities increased to
$6,531 million
. This reflects the establishment of
$6,365 million
of net contract liabilities upon the adoption, and
$7,031 million
of advance payments from customers and reclassifications to receivables upon billing during the period. These increases were partially offset by the liquidation of beginning of period contract liabilities of
$1,207 million
as a result of revenue recognition. These increases were also offset by
$5,676 million
of revenue recognition within the period, and other less significant changes.
Remaining performance obligations
("RPO") are the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of
March 31, 2018
, our total RPO are
$99.8 billion
. Of this total, we expect approximately
40%
will be recognized as sales over the following 24 months.
Note 3: Earnings Per Share
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(dollars in millions, except per share amounts; shares in millions)
|
2018
|
|
2017
|
Net income attributable to common shareowners
|
$
|
1,297
|
|
|
$
|
1,386
|
|
Basic weighted average number of shares outstanding
|
789.9
|
|
|
793.5
|
|
Stock awards and equity units
|
10.5
|
|
|
8.8
|
|
Diluted weighted average number of shares outstanding
|
800.4
|
|
|
802.3
|
|
Earnings Per Share of Common Stock:
|
|
|
|
Basic
|
$
|
1.64
|
|
|
$
|
1.75
|
|
Diluted
|
1.62
|
|
|
1.73
|
|
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 because the effect would be anti-dilutive. For the
quarters ended March 31, 2018 and 2017
, the number of stock awards excluded from the computation was approximately
4.3 million
and
12.2 million
, respectively.
Note 4: Inventories and Contracts in Progress
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
March 31, 2018
|
|
December 31, 2017
|
Raw materials
|
$
|
2,079
|
|
|
$
|
2,038
|
|
Work-in-process
|
2,526
|
|
|
3,366
|
|
Finished goods
|
4,333
|
|
|
3,845
|
|
Contracts in progress
|
—
|
|
|
10,205
|
|
|
8,938
|
|
|
19,454
|
|
Less:
|
|
|
|
Progress payments, secured by lien, on U.S. Government contracts
|
—
|
|
|
(236
|
)
|
Billings on contracts in progress
|
—
|
|
|
(9,337
|
)
|
|
$
|
8,938
|
|
|
$
|
9,881
|
|
Inventories also include capitalized contract development costs related to certain aerospace programs at UTC Aerospace Systems. As of
December 31, 2017
, these capitalized costs were
$127 million
, which will be liquidated as production units are delivered to customers. Prior to the adoption of the New Revenue Standard, within our commercial aerospace business, inventory costs attributable to new engine offerings were recognized based on the average cost per unit expected over the life of each contract using the units-of-delivery method of percentage of completion accounting. Under this method, costs of initial engine deliveries in excess of the projected contract per unit average cost were capitalized and these capitalized amounts were subsequently expensed as additional engines are delivered for engines with costs below the projected contract per unit average cost over the life of the contract. As of
December 31, 2017
, inventory included
$438 million
of such capitalized amounts. Upon adoption of the New Revenue Standard, these amounts are no longer included in inventory.
Note 5: Borrowings and Lines of Credit
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
March 31, 2018
|
|
December 31, 2017
|
Commercial paper
|
$
|
930
|
|
|
$
|
300
|
|
Other borrowings
|
136
|
|
|
92
|
|
Total short-term borrowings
|
$
|
1,066
|
|
|
$
|
392
|
|
At
March 31, 2018
, 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
August 2021
. As of
March 31, 2018
, there were no borrowings under either of these 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, 2018
, our maximum commercial paper borrowing limit was
$4.35 billion
. Commercial paper borrowings at
March 31, 2018
include approximately
€750 million
(
$930 million
) of euro-denominated commercial paper. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, discretionary pension contributions, debt refinancing, dividend payments and repurchases of our common stock. The need for commercial paper borrowings arises when the use of domestic cash for general corporate purposes exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.
On February 1, 2018, we repaid at maturity the
$99 million
6.80% notes due in 2018 and on February 22, 2018, we repaid at maturity the
€750 million
EURIBOR plus 0.80% floating rate notes due in 2018.
In connection with the merger agreement with Rockwell Collins announced on September 4, 2017, we have entered into a
$6.5 billion
364-day unsecured bridge loan credit agreement that would be funded only to the extent certain anticipated debt issuances are not completed prior to the completion of the merger. See Note 1 for additional discussion.
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
March 31, 2018
|
|
December 31, 2017
|
6.800% notes due 2018
|
—
|
|
|
99
|
|
EURIBOR plus 0.800% floating rate notes due 2018 (€750 million principal value)
2
|
—
|
|
|
890
|
|
1.778% junior subordinated notes due 2018
|
1,100
|
|
|
1,100
|
|
LIBOR plus 0.350% floating rate notes due 2019
3
|
350
|
|
|
350
|
|
1.500% notes due 2019
1
|
650
|
|
|
650
|
|
EURIBOR plus 0.15% floating rate notes due 2019 (€750 million principal value)
2
|
930
|
|
|
890
|
|
8.875% notes due 2019
|
271
|
|
|
271
|
|
4.875% notes due 2020
1
|
171
|
|
|
171
|
|
4.500% notes due 2020
1
|
1,250
|
|
|
1,250
|
|
1.900% notes due 2020
1
|
1,000
|
|
|
1,000
|
|
8.750% notes due 2021
|
250
|
|
|
250
|
|
1.950% notes due 2021
1
|
750
|
|
|
750
|
|
1.125% notes due 2021 (€950 million principal value)
1
|
1,178
|
|
|
1,127
|
|
2.300% notes due 2022
1
|
500
|
|
|
500
|
|
3.100% notes due 2022
1
|
2,300
|
|
|
2,300
|
|
1.250% notes due 2023 (€750 million principal value)
1
|
930
|
|
|
890
|
|
2.800% notes due 2024
1
|
800
|
|
|
800
|
|
1.875% notes due 2026 (€500 million principal value)
1
|
620
|
|
|
593
|
|
2.650% notes due 2026
1
|
1,150
|
|
|
1,150
|
|
3.125% notes due 2027
1
|
1,100
|
|
|
1,100
|
|
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
1
|
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
1
|
850
|
|
|
850
|
|
3.750% notes due 2046
1
|
1,100
|
|
|
1,100
|
|
4.050% notes due 2047
1
|
600
|
|
|
600
|
|
Project financing obligations
|
175
|
|
|
158
|
|
Other (including capitalized leases)
|
197
|
|
|
195
|
|
Total principal long-term debt
|
26,306
|
|
|
27,118
|
|
Other (fair market value adjustments and discounts)
|
(25
|
)
|
|
(25
|
)
|
Total long-term debt
|
26,281
|
|
|
27,093
|
|
Less: current portion
|
1,128
|
|
|
2,104
|
|
Long-term debt, net of current portion
|
$
|
25,153
|
|
|
$
|
24,989
|
|
|
|
1
|
We may redeem these notes at our option pursuant to their terms.
|
|
|
2
|
The three-month EURIBOR rate as of
March 31, 2018
was approximately -0.328%. 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
|
The three-month LIBOR rate as of
March 31, 2018
was approximately 2.312%.
|
The average maturity of our long-term debt at
March 31, 2018
is approximately
12 years
. The average interest expense rate on our total borrowings for the
quarters ended March 31, 2018 and 2017
were as follows:
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
2018
|
|
2017
|
Average interest expense rate
|
3.4
|
%
|
|
3.5
|
%
|
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 issuances, subject to our internal limitations on the amount of equity and debt to be issued under this shelf registration statement.
Note 6: Income Taxes
On December 22, 2017 Public Law 115-97 “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” was enacted. This law is commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA). In accordance with Staff Accounting Bulletin 118 (SAB 118) issued on December 22, 2017, the U.S. income tax amounts recorded attributable to the TCJA’s deemed repatriation provision, the revaluation of U.S. deferred taxes and the tax consequences relating to states with current conformity to the Internal Revenue Code are provisional amounts. Due to the enactment date and tax complexities of the TCJA, the Company has not completed its accounting related to these items.
Prior to enactment of the TCJA, with few exceptions, U.S. income taxes had not been provided on undistributed earnings of UTC's international subsidiaries as the Company had intended to reinvest such earnings permanently outside the U.S. or to repatriate such earnings only when it was tax effective to do so. The Company continues to evaluate the impact of the TCJA on its existing accounting position related to the undistributed earnings. Due to the inherent complexities in determining any incremental U.S. Federal and State taxes and the non-U.S. taxes that may be due if all of these earnings were remitted to the U.S. and as provided for by SAB 118 this evaluation has not yet been completed and no provisional amount has been recorded in regard to the undistributed amounts. After completing its evaluation, the Company will accrue any additional taxes due on previously undistributed earnings to be distributed in the future.
The Company will continue to accumulate and refine the relevant data and computational elements needed to finalize its accounting for the effects of the TCJA by December 22, 2018.
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, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, Poland, Singapore, South Korea, Spain, Switzerland, 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 2006.
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 a net reduction within the range of $
90 million
to $
500 million
of unrecognized tax benefits may occur within the next 12 months as a result of additional worldwide uncertain tax positions, the closure of tax statutes, or the revaluation of current uncertain tax positions arising from the issuance of legislation, regulatory or other guidance or developments in examinations, in appeals, or in the courts. The range of potential change includes provisional amounts related to the TCJA based on currently available information. See Note 15, 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.
During the quarter, the Examination Division of the Internal Revenue Service commenced audit field work for UTC’s 2016 tax year, combining it with the previously commenced audit of tax years 2014 and 2015. The combined audit of tax years 2014, 2015 and 2016 is expected to continue beyond 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.
In March 2017, the FASB issued ASU 2017-07,
Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. This ASU requires an employer to report the service cost component of net periodic pension benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, with other cost components presented separately from the service cost component and outside of income from operations. This ASU also allows only the service cost component of net periodic pension benefit cost to be eligible for capitalization when applicable. This ASU was effective for years beginning after December 15, 2017. The Company adopted this standard on January 1, 2018 applying the presentation requirements retrospectively. We elected to apply the practical expedient, which allows us to reclassify amounts disclosed previously in the employee benefit plans note as the basis for applying retrospective presentation for comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. Provisions related to presentation of the service cost component eligibility for capitalization were applied prospectively.
The effect of the retrospective presentation change related to the net periodic benefit cost of our defined benefit pension and postretirement plans on our condensed consolidated statement of operations was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31, 2017
|
(dollars in millions)
|
Previously Reported
|
|
Effect of Change Higher/(Lower)
|
|
As Revised
|
Cost of product sold
|
$
|
7,263
|
|
|
$
|
48
|
|
|
$
|
7,311
|
|
Cost of services sold
|
2,814
|
|
|
11
|
|
|
2,825
|
|
Research and development
|
577
|
|
|
9
|
|
|
586
|
|
Selling, general and administrative
|
1,482
|
|
|
55
|
|
|
1,537
|
|
Other income
|
588
|
|
|
—
|
|
|
588
|
|
Non-service pension (benefit)
|
—
|
|
|
(123
|
)
|
|
(123
|
)
|
Contributions to our plans were as follows:
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(dollars in millions)
|
2018
|
|
2017
|
Defined benefit plans
|
$
|
37
|
|
|
$
|
46
|
|
Defined contribution plans
|
94
|
|
|
90
|
|
There were no contributions to our domestic defined benefit pension plans in the
quarters ended March 31, 2018 and 2017
. 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)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
93
|
|
|
$
|
93
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
279
|
|
|
278
|
|
|
6
|
|
|
7
|
|
Expected return on plan assets
|
(563
|
)
|
|
(540
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(10
|
)
|
|
(9
|
)
|
|
(1
|
)
|
|
—
|
|
Recognized actuarial net loss (gain)
|
101
|
|
|
143
|
|
|
(2
|
)
|
|
(3
|
)
|
Net settlement and curtailment (gain) loss
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit (income) cost
|
$
|
(101
|
)
|
|
$
|
(34
|
)
|
|
$
|
4
|
|
|
$
|
5
|
|
As approved in 2016, effective January 1, 2017, a voluntary lump-sum option is available for the frozen final average earnings benefits of certain U.S. salaried employees upon termination of employment after 2016. This option provides participants with the choice of electing to receive a lump-sum payment in lieu of receiving a future monthly pension benefit. This plan change reduced the projected benefit obligation by
$170 million
as of December 31, 2016.
Note 8: Restructuring Costs
During the
quarter ended March 31, 2018
, we recorded net pre-tax restructuring costs totaling
$69 million
for new and ongoing restructuring actions. We recorded charges in the segments as follows:
|
|
|
|
|
(dollars in millions)
|
|
Otis
|
$
|
26
|
|
UTC Climate, Controls & Security
|
14
|
|
Pratt & Whitney
|
—
|
|
UTC Aerospace Systems
|
27
|
|
Eliminations and other
|
2
|
|
Total
|
$
|
69
|
|
Restructuring charges incurred during the
quarter ended March 31, 2018
primarily relate to actions initiated during
2018
and
2017
, and were recorded as follows:
|
|
|
|
|
(dollars in millions)
|
|
Cost of sales
|
$
|
39
|
|
Selling, general and administrative
|
30
|
|
Total
|
$
|
69
|
|
2018 Actions
.
During the
quarter ended March 31, 2018
, we recorded net pre-tax restructuring costs of
$12 million
, comprised of
$4 million
in cost of sales and
$8 million
in selling, general and administrative expenses. The
2018
actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations.
We are targeting to complete the majority of the remaining workforce and facility related cost reduction actions during
2018
and
2019
. No specific plans for other significant actions have been finalized at this time. The following table summarizes the accrual balance and utilization for the
2018
restructuring actions for the
quarter ended March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Severance
|
|
Facility Exit, Lease Termination and Other Costs
|
|
Total
|
Net pre-tax restructuring costs
|
11
|
|
|
1
|
|
|
12
|
|
Utilization and foreign exchange
|
(3
|
)
|
|
(1
|
)
|
|
(4
|
)
|
Balance at March 31, 2018
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
The following table summarizes expected, incurred and remaining costs for the
2018
restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Expected
Costs
|
|
Costs Incurred Quarter Ended
March 31, 2018
|
|
Remaining Costs at
March 31, 2018
|
Otis
|
$
|
13
|
|
|
$
|
(9
|
)
|
|
$
|
4
|
|
UTC Climate, Controls & Security
|
22
|
|
|
(1
|
)
|
|
21
|
|
Pratt & Whitney
|
—
|
|
|
—
|
|
|
—
|
|
UTC Aerospace Systems
|
15
|
|
|
—
|
|
|
15
|
|
Eliminations and other
|
2
|
|
|
(2
|
)
|
|
—
|
|
Total
|
$
|
52
|
|
|
$
|
(12
|
)
|
|
$
|
40
|
|
2017 Actions
.
During the
quarter ended March 31, 2018
, we recorded net pre-tax restructuring costs totaling
$51 million
for restructuring actions initiated in
2017
, including
$30 million
in cost of sales and
$21 million
in selling, general and administrative expenses. The
2017
actions relate to ongoing cost reduction efforts, including workforce reductions,
consolidation of field operations, and costs to exit legacy programs. The following table summarizes the accrual balances and utilization for the
2017
restructuring actions for the
quarter ended March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Severance
|
|
Facility Exit,
Lease
Termination and
Other Costs
|
|
Total
|
Restructuring accruals at December 31, 2017
|
$
|
84
|
|
|
$
|
1
|
|
|
$
|
85
|
|
Net pre-tax restructuring costs
|
39
|
|
|
12
|
|
|
51
|
|
Utilization and foreign exchange
|
(35
|
)
|
|
(15
|
)
|
|
(50
|
)
|
Balance at March 31, 2018
|
$
|
88
|
|
|
$
|
(2
|
)
|
|
$
|
86
|
|
The following table summarizes expected, incurred and remaining costs for the
2017
restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Expected
Costs
|
|
Costs Incurred in 2017
|
|
Costs Incurred Quarter Ended
March 31, 2018
|
|
Remaining Costs at
March 31, 2018
|
Otis
|
$
|
74
|
|
|
$
|
(43
|
)
|
|
$
|
(15
|
)
|
|
$
|
16
|
|
UTC Climate, Controls & Security
|
90
|
|
|
(76
|
)
|
|
(7
|
)
|
|
7
|
|
Pratt & Whitney
|
7
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
UTC Aerospace Systems
|
152
|
|
|
(43
|
)
|
|
(29
|
)
|
|
80
|
|
Eliminations and other
|
7
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
Total
|
$
|
330
|
|
|
$
|
(176
|
)
|
|
$
|
(51
|
)
|
|
$
|
103
|
|
2016
and Prior Actions.
During the
quarter ended March 31, 2018
, we recorded net pre-tax restructuring costs totaling
$6 million
for restructuring actions initiated in
2016
and prior.
As of March 31, 2018
, we have approximately
$108 million
of accrual balances remaining related to
2016
and prior actions.
Note 9: Financial Instruments
We enter into derivative instruments primarily for risk management purposes, 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
$20.7 billion
and
$19.1 billion
at
March 31, 2018
and
December 31, 2017
, respectively.
The following table summarizes the fair value and presentation in the Condensed Consolidated Balance Sheets for derivative instruments as of
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Balance Sheet Location
|
March 31, 2018
|
|
December 31, 2017
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Foreign exchange contracts
|
Asset Derivatives:
|
|
|
|
|
Other assets, current
|
$
|
90
|
|
|
$
|
77
|
|
|
Other assets
|
122
|
|
|
101
|
|
|
Total asset derivatives
|
$
|
212
|
|
|
$
|
178
|
|
|
Liability Derivatives:
|
|
|
|
|
Accrued liabilities
|
(10
|
)
|
|
(10
|
)
|
|
Other long-term liabilities
|
(16
|
)
|
|
(8
|
)
|
|
Total liability derivatives
|
$
|
(26
|
)
|
|
$
|
(18
|
)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
Foreign exchange contracts
|
Asset Derivatives:
|
|
|
|
|
Other assets, current
|
123
|
|
|
70
|
|
|
Other assets
|
6
|
|
|
5
|
|
|
Total asset derivatives
|
$
|
129
|
|
|
$
|
75
|
|
|
Liability Derivatives:
|
|
|
|
|
Accrued liabilities
|
(42
|
)
|
|
(57
|
)
|
|
Other long-term liabilities
|
(4
|
)
|
|
(3
|
)
|
|
Total liability derivatives
|
$
|
(46
|
)
|
|
$
|
(60
|
)
|
The effect of cash flow hedging relationships on accumulated other comprehensive income for the
quarters ended March 31, 2018 and 2017
are presented in the table below. The amounts of gain or (loss) are attributable to foreign exchange contract activity and are recorded as a component of Product sales when reclassified from accumulated other comprehensive income.
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(dollars in millions)
|
2018
|
|
2017
|
Gain recorded in Accumulated other comprehensive loss
|
$
|
45
|
|
|
$
|
64
|
|
(Gain) loss reclassified from Accumulated other comprehensive loss into Product sales
|
(27
|
)
|
|
5
|
|
The table above reflects the effect of cash flow hedging relationships on the Condensed Consolidated Statements of Operations for the
quarters ended March 31, 2018 and 2017
. The Company utilizes the critical terms match method in assessing derivatives for hedge effectiveness. Accordingly, the hedged items and derivatives designated as hedging instruments are highly effective.
As discussed in Note 5,
we have approximately €2.95 billion of euro-denominated long-term debt and €750 million of euro-denominated commercial paper borrowings outstanding, which qualify as a net investment hedge against our investments in European businesses
.
As of March 31, 2018, the net investment hedge is deemed to be effective.
Assuming current market conditions continue, a
$36 million
pre-tax gain 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, 2018
, all derivative contracts accounted for as cash flow hedges will mature by
April 2022
.
The effect of derivatives not designated as hedging instruments that is included below within Other income, net, on the Condensed Consolidated Statement of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(dollars in millions)
|
2018
|
|
2017
|
Foreign exchange contracts
|
$
|
51
|
|
|
$
|
12
|
|
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, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018 (dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
49
|
|
|
$
|
49
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
341
|
|
|
—
|
|
|
341
|
|
|
—
|
|
Derivative liabilities
|
(72
|
)
|
|
—
|
|
|
(72
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 (dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
64
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
253
|
|
|
—
|
|
|
253
|
|
|
—
|
|
Derivative liabilities
|
(78
|
)
|
|
—
|
|
|
(78
|
)
|
|
—
|
|
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 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, 2018
, there were no significant transfers in or out of Level 1 and Level 2.
As of
March 31, 2018
, 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, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(dollars in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Long-term receivables
|
$
|
137
|
|
|
$
|
130
|
|
|
$
|
127
|
|
|
$
|
121
|
|
Customer financing notes receivable
|
612
|
|
|
594
|
|
|
609
|
|
|
596
|
|
Short-term borrowings
|
(1,066
|
)
|
|
(1,066
|
)
|
|
(392
|
)
|
|
(392
|
)
|
Long-term debt (excluding capitalized leases)
|
(26,256
|
)
|
|
(27,153
|
)
|
|
(27,067
|
)
|
|
(29,180
|
)
|
Long-term liabilities
|
(310
|
)
|
|
(276
|
)
|
|
(362
|
)
|
|
(330
|
)
|
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 at
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Long-term receivables
|
$
|
130
|
|
|
$
|
—
|
|
|
$
|
130
|
|
|
$
|
—
|
|
Customer financing notes receivable
|
594
|
|
|
—
|
|
|
594
|
|
|
—
|
|
Short-term borrowings
|
(1,066
|
)
|
|
—
|
|
|
(930
|
)
|
|
(136
|
)
|
Long-term debt (excluding capitalized leases)
|
(27,153
|
)
|
|
—
|
|
|
(26,925
|
)
|
|
(228
|
)
|
Long-term liabilities
|
(276
|
)
|
|
—
|
|
|
(276
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Long-term receivables
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
121
|
|
|
$
|
—
|
|
Customer financing notes receivable
|
596
|
|
|
—
|
|
|
596
|
|
|
—
|
|
Short-term borrowings
|
(392
|
)
|
|
—
|
|
|
(300
|
)
|
|
(92
|
)
|
Long-term debt (excluding capitalized leases)
|
(29,180
|
)
|
|
—
|
|
|
(28,970
|
)
|
|
(210
|
)
|
Long-term liabilities
|
(330
|
)
|
|
—
|
|
|
(330
|
)
|
|
—
|
|
We had commercial aerospace financing and other contractual commitments totaling approximately
$15.1 billion
and
$15.3 billion
as of
March 31, 2018
and
December 31, 2017
, 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 because 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, notes receivable, and leases 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.
Prior to the adoption of the New Revenue Standard, long-term trade accounts receivable, including unbilled receivables related to long-term aftermarket contracts, were principally amounts arising from the sale of goods and the delivery of services with a contract maturity date or realization period of greater than one year, and were recognized as "Other assets" in our Condensed Consolidated Balance Sheet. With the adoption of the New Revenue Standard, these unbilled receivables are classified as non-current contract assets 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, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
March 31, 2018
|
|
December 31, 2017
|
Long-term trade accounts receivable
|
$
|
74
|
|
|
$
|
973
|
|
Notes and leases receivable
|
423
|
|
|
424
|
|
Total long-term receivables
|
$
|
497
|
|
|
$
|
1,397
|
|
Customer credit ratings range from customers with an extremely strong capacity to meet financial obligations to customers whose uncollateralized receivables are 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
$140 million
and
$170 million
of our total long-term receivables were considered to bear high credit risk as of
March 31, 2018
and
December 31, 2017
, 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 include reserves of
$17 million
as of
March 31, 2018
and
December 31, 2017
, are individually evaluated for impairment. At
March 31, 2018
and
December 31, 2017
, we did not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or are considered to be unrecoverable.
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, 2018 and 2017
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
2018
|
|
2017
|
(dollars in millions)
|
Share-owners'
Equity
|
|
Non-controlling Interest
|
|
Total
Equity
|
|
Share-owners'
Equity
|
|
Non-controlling Interest
|
|
Total
Equity
|
Equity, beginning of period
|
$
|
29,610
|
|
|
$
|
1,811
|
|
|
$
|
31,421
|
|
|
$
|
27,579
|
|
|
$
|
1,590
|
|
|
$
|
29,169
|
|
Comprehensive income for the period:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
1,297
|
|
|
71
|
|
|
1,368
|
|
|
1,386
|
|
|
82
|
|
|
1,468
|
|
Total other comprehensive income
|
588
|
|
|
33
|
|
|
621
|
|
|
1
|
|
|
25
|
|
|
26
|
|
Total comprehensive income for the period
|
1,885
|
|
|
104
|
|
|
1,989
|
|
|
1,387
|
|
|
107
|
|
|
1,494
|
|
Common Stock issued under employee plans
|
71
|
|
|
|
|
71
|
|
|
79
|
|
|
|
|
79
|
|
Common Stock repurchased
|
(25
|
)
|
|
|
|
(25
|
)
|
|
(933
|
)
|
|
|
|
(933
|
)
|
Dividends on Common Stock
|
(535
|
)
|
|
|
|
(535
|
)
|
|
(505
|
)
|
|
|
|
(505
|
)
|
Dividends on ESOP Common Stock
|
(18
|
)
|
|
|
|
(18
|
)
|
|
(18
|
)
|
|
|
|
(18
|
)
|
Dividends attributable to noncontrolling interest
|
|
|
(66
|
)
|
|
(66
|
)
|
|
|
|
|
(48
|
)
|
|
(48
|
)
|
Capital contributions
|
|
|
120
|
|
|
120
|
|
|
|
|
43
|
|
|
43
|
|
Purchase of subsidiary shares from noncontrolling interest, net
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Disposition of noncontrolling interest
|
|
|
|
(8
|
)
|
|
(8
|
)
|
|
|
|
|
—
|
|
|
—
|
|
Redeemable noncontrolling interest fair value adjustment
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
New Revenue Standard adoption impact
|
(480
|
)
|
|
|
|
|
(480
|
)
|
|
—
|
|
|
|
|
|
—
|
|
Other
|
29
|
|
|
(2
|
)
|
|
27
|
|
|
5
|
|
|
(13
|
)
|
|
(8
|
)
|
Equity, end of period
|
$
|
30,534
|
|
|
$
|
1,958
|
|
|
$
|
32,492
|
|
|
$
|
27,594
|
|
|
$
|
1,678
|
|
|
$
|
29,272
|
|
A summary of the changes in each component of Accumulated other comprehensive (loss) income, net of tax for the
quarters ended March 31, 2018 and 2017
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, 2018
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
(2,950
|
)
|
|
$
|
(4,652
|
)
|
|
$
|
5
|
|
|
$
|
72
|
|
|
$
|
(7,525
|
)
|
Other comprehensive income (loss) before
reclassifications, net
|
376
|
|
|
8
|
|
|
—
|
|
|
45
|
|
|
429
|
|
Amounts reclassified, pre-tax
|
—
|
|
|
88
|
|
|
—
|
|
|
(27
|
)
|
|
61
|
|
Tax (benefit) expense reclassified
|
130
|
|
|
(23
|
)
|
|
—
|
|
|
(4
|
)
|
|
103
|
|
ASU 2016-01 adoption impact
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
Balance at March 31, 2018
|
$
|
(2,444
|
)
|
|
$
|
(4,579
|
)
|
|
$
|
—
|
|
|
$
|
86
|
|
|
$
|
(6,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2017
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
$
|
(3,480
|
)
|
|
$
|
(5,045
|
)
|
|
$
|
353
|
|
|
$
|
(162
|
)
|
|
$
|
(8,334
|
)
|
Other comprehensive income (loss) before
reclassifications, net
|
121
|
|
|
—
|
|
|
(21
|
)
|
|
50
|
|
|
150
|
|
Amounts reclassified, pre-tax
|
—
|
|
|
131
|
|
|
(383
|
)
|
|
5
|
|
|
(247
|
)
|
Tax (benefit) expense reclassified
|
—
|
|
|
(48
|
)
|
|
147
|
|
|
(1
|
)
|
|
98
|
|
Balance at March 31, 2017
|
$
|
(3,359
|
)
|
|
$
|
(4,962
|
)
|
|
$
|
96
|
|
|
$
|
(108
|
)
|
|
$
|
(8,333
|
)
|
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. We had approximately $5 million of unrealized gains on these securities recorded in Accumulated other comprehensive loss in our Consolidated Balance Sheet as of December 31, 2017. We adopted this standard effective January 1, 2018, with these amounts recorded directly to retained earnings as of that date.
Amounts reclassified that relate to our defined benefit pension and postretirement plans include the amortization of prior service costs 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).
Amounts reclassified that relate to unrealized gains (losses) on available-for-sale securities, pre-tax includes approximately
$500 million
of previously unrealized gains reclassified to other income as a result of sales of significant investments in available-for-sale securities in the quarter ended March 31, 2017, including UTC Climate, Controls & Security's sale of investments in Watsco, Inc.
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.
Note 13: Variable Interest Entities
Pratt & Whitney holds a 61% interest in the IAE International Aero Engines AG (IAE) collaboration with MTU Aero Engines AG (MTU) and Japanese Aero Engines Corporation (JAEC) 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 program through involvement with the collaborators.
Additionally, Pratt & Whitney, JAEC and MTU are participants in International Aero Engines, LLC (IAE LLC), whose business purpose is to coordinate the design, development, manufacturing and product support for the PW1100G-JM engine for the Airbus A320neo aircraft and the PW1400G-JM engine for the Irkut MC21 aircraft. Pratt & Whitney holds a 59% net interest and a 59% ownership interest in IAE LLC. IAE and IAE LLC retain limited equity with the primary economics of the programs passed to the participants.
As such, we have determined that IAE and IAE LLC are variable interest entities with Pratt & Whitney the primary beneficiary. IAE and IAE LLC have, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for variable interest entities in our Condensed Consolidated Balance Sheet are as follows:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
March 31, 2018
|
|
December 31, 2017
|
Current assets
|
$
|
3,635
|
|
|
$
|
3,976
|
|
Noncurrent assets
|
1,410
|
|
|
1,534
|
|
Total assets
|
$
|
5,045
|
|
|
$
|
5,510
|
|
|
|
|
|
Current liabilities
|
$
|
3,577
|
|
|
$
|
3,601
|
|
Noncurrent liabilities
|
1,817
|
|
|
2,086
|
|
Total liabilities
|
$
|
5,394
|
|
|
$
|
5,687
|
|
Note 14: 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, 2017
. The changes in the carrying amount of service and product warranties and product performance guarantees for the
quarter ended March 31, 2018 and 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2018
|
|
2017
|
Balance as of January 1
|
|
$
|
1,146
|
|
|
$
|
1,199
|
|
Warranties and performance guarantees issued
|
|
115
|
|
|
78
|
|
Settlements made
|
|
(106
|
)
|
|
(56
|
)
|
Other
|
|
6
|
|
|
1
|
|
Balance as of March 31
|
|
$
|
1,161
|
|
|
$
|
1,222
|
|
Note 15: Contingent Liabilities
Summarized below are the matters previously described in Note 18 of the Notes to the Consolidated Financial Statements in our
2017
Annual Report, incorporated by reference in our
2017
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 authorities with jurisdiction over our foreign operations. As described in Note 1 to the Consolidated Financial Statements in our
2017
Annual Report, we have accrued for the costs of environmental remediation activities, including but not limited to investigatory, remediation, operating and maintenance costs and performance guarantees, 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
2017
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 anti-bribery, 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 also 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 or challenge certain matters. 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.
Cost Accounting Standards Claim
As previously disclosed, in December 2013, a Divisional Administrative Contracting Officer of the United States Defense Contract Management Agency asserted a claim against Pratt & Whitney to recover overpayments of approximately $177 million plus interest (approximately $74.9 million through March 31, 2018). 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 $267 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 $147 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).
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 this matter.
Asbestos Matters
As previously disclosed, 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 approximately
$343 million
and is principally recorded in Other long-term liabilities on our Condensed Consolidated Balance Sheet as of
March 31, 2018
. This amount is on a pre-tax basis, not discounted, and excludes the Company’s legal fees to defend the asbestos claims (which will continue to be expensed by the Company as they are incurred). In addition, the Company has an insurance recovery receivable for probable asbestos related recoveries of approximately
$147 million
, which is included primarily in Other assets on our Condensed Consolidated Balance Sheet as of
March 31, 2018
.
The amounts recorded by UTC for asbestos-related liabilities and insurance recoveries 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 outcomes or resolution of such claims, the average cost of resolution of each new claim, the amount of insurance available, allocation methodologies, the contractual terms with each insurer with whom we have reached settlements, 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, legal rulings that may be made by state and federal courts, and the passage of state or federal legislation. At least annually, the Company evaluates all of these factors and, with input from an outside actuarial expert, makes any necessary adjustments to both our estimated asbestos liabilities and insurance recoveries.
Other.
As described in Note 14 of this Form 10-Q and Note 17 to the Consolidated Financial Statements in our
2017
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 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 instances, 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 16: 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 7, 2017 amounts have been recasted based on the adoption of ASU 2017-07.
Results for the
quarters ended March 31, 2018 and 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Operating Profits
|
|
Operating Profit Margins
|
(dollars in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Otis
|
$
|
3,037
|
|
|
$
|
2,804
|
|
|
$
|
450
|
|
|
$
|
447
|
|
|
14.8
|
%
|
|
15.9
|
%
|
UTC Climate, Controls & Security
|
4,376
|
|
|
3,892
|
|
|
592
|
|
|
931
|
|
|
13.5
|
%
|
|
23.9
|
%
|
Pratt & Whitney
|
4,329
|
|
|
3,758
|
|
|
413
|
|
|
356
|
|
|
9.5
|
%
|
|
9.5
|
%
|
UTC Aerospace Systems
|
3,817
|
|
|
3,611
|
|
|
588
|
|
|
531
|
|
|
15.4
|
%
|
|
14.7
|
%
|
Total segments
|
15,559
|
|
|
14,065
|
|
|
2,043
|
|
|
2,265
|
|
|
13.1
|
%
|
|
16.1
|
%
|
Eliminations and other
|
(317
|
)
|
|
(250
|
)
|
|
(11
|
)
|
|
(18
|
)
|
|
|
|
|
General corporate expenses
|
—
|
|
|
—
|
|
|
(104
|
)
|
|
(103
|
)
|
|
|
|
|
Consolidated
|
$
|
15,242
|
|
|
$
|
13,815
|
|
|
$
|
1,928
|
|
|
$
|
2,144
|
|
|
12.6
|
%
|
|
15.5
|
%
|
Total sales by segment include inter-segment sales, which are generally made at prices approximating those that the selling entity is able to obtain on external sales. Segment information for the
quarter ended March 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Otis
|
|
UTC Climate, Controls & Security
|
|
Pratt & Whitney
|
|
UTC Aerospace Systems
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Primary Geographical Markets
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
845
|
|
|
$
|
2,095
|
|
|
$
|
3,121
|
|
|
$
|
2,654
|
|
|
$
|
8,715
|
|
Europe
|
1,006
|
|
|
1,384
|
|
|
173
|
|
|
607
|
|
|
3,170
|
|
Asia Pacific
|
922
|
|
|
685
|
|
|
368
|
|
|
84
|
|
|
2,059
|
|
Other
|
264
|
|
|
212
|
|
|
667
|
|
|
472
|
|
|
1,615
|
|
Total segment
|
$
|
3,037
|
|
|
$
|
4,376
|
|
|
$
|
4,329
|
|
|
$
|
3,817
|
|
|
15,559
|
|
Eliminations and other
|
|
|
|
|
|
|
|
|
(317
|
)
|
Consolidated
|
|
|
|
|
|
|
|
|
$
|
15,242
|
|
Segment sales disaggregated by product type and product versus service for the
quarter ended March 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Otis
|
|
UTC Climate, Controls & Security
|
|
Pratt & Whitney
|
|
UTC Aerospace Systems
|
|
Total
|
Product Type
|
|
|
|
|
|
|
|
|
|
Commercial and industrial, non aerospace
|
$
|
3,037
|
|
|
$
|
4,376
|
|
|
$
|
21
|
|
|
$
|
15
|
|
|
$
|
7,449
|
|
Commercial aerospace
|
—
|
|
|
—
|
|
|
3,199
|
|
|
2,911
|
|
|
6,110
|
|
Military aerospace
|
—
|
|
|
—
|
|
|
1,109
|
|
|
891
|
|
|
2,000
|
|
Total segment
|
$
|
3,037
|
|
|
$
|
4,376
|
|
|
$
|
4,329
|
|
|
$
|
3,817
|
|
|
$
|
15,559
|
|
|
|
|
|
|
|
|
|
|
|
Sales Type
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
1,219
|
|
|
$
|
3,597
|
|
|
$
|
2,537
|
|
|
$
|
3,188
|
|
|
$
|
10,541
|
|
Service
|
1,818
|
|
|
779
|
|
|
1,792
|
|
|
629
|
|
|
5,018
|
|
Total segment
|
$
|
3,037
|
|
|
$
|
4,376
|
|
|
$
|
4,329
|
|
|
$
|
3,817
|
|
|
$
|
15,559
|
|
Note 17: Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the Condensed Consolidated Statement of Operations. In addition, this standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor doesn’t convey risks and rewards or control, the lease is treated as operating.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases and lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We expect that upon adoption we will recognize ROU assets and lease liabilities and that the amounts could be material. We do not expect the ASU to have a material impact on our cash flows or results of operations.
In February 2018, the FASB issued ASU 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220)
. The new standard allows companies to reclassify to retained earnings the stranded tax effects in accumulated other comprehensive income (“AOCI”) from the newly-enacted US Tax Cuts and Jobs Act. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are still evaluating the impact of our pending adoption of the new standard on our consolidated financial statements. However,we expect that upon adoption we will recognize a reclassification from AOCI to retained earnings that could be material. We do not expect this ASU to have a material impact on our cash flows and results of operations.
With respect to the unaudited condensed consolidated financial information of UTC for the
quarters ended March 31, 2018 and 2017
, 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 27, 2018
, 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.