2018 Annual Report
Creating value through
customer focus
and innovation
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Financials at a Glance
United Technologies provides high-technology products and services to the aerospace and
commercial building industries worldwide. In 2018 UTC net sales were $66.5 billion.
Adjusted net sales 1
(dollars in billions)
Adjusted diluted
earnings per common
share from continuing
operations 1
(dollars per share)
Cash flow from
operations
(dollars in billions)
57.9 56.5 57.4 60.2
66.5
6.46 6.30
6.61 6.65
7.61
7.0
6.8
6.4
6.3
5.6
14
15
16
17
18
14
15
16
17
18
14
15
16
17
18
Research and
development 2
(dollars in billions)
Dividends paid per
common share
(dollars per share)
Debt to capital 3
(percent)
4.5
3.8
3.8
3.9
4.0
2.56 2.62 2.72
2.84
2.36
53
45
47
41
38
14
15
16
17
18
14
15
16
17
18
14
15
16
17
18
United Technologies Corp. is a global leader in the aerospace and building industries. Our
aerospace businesses — Collins Aerospace Systems and Pratt & Whitney — are redefining
the future of flight with next-generation aircraft engines and integrated systems and
components. Our commercial businesses — Carrier and Otis — are pioneering intelligent
building solutions and services that keep people more productive, secure and on the move,
more comfortably and sustainably.
Our company was founded by some of the world’s greatest inventors. Through the
imagination and spirit of our 240,000 employees, we are continuing their legacy of
innovation, focused on delivering unsurpassed value to our customers.
To learn more, visit www.utc.com.
About the cover: Danielle Grolman, senior engineer, exemplifies United Technologies’ long and
storied legacy of innovation. She is one of more than 35,000 scientists and engineers working
across the company to develop new and better solutions for our customers.
1 See page 77 for additional information
regarding these non-GAAP measures.
2 Amounts include company- and
customer-funded research and
development. Prior year amounts have
been revised to reflect the adoption
of ASU 2017-07, Compensation-
Retirement Benefits (Topic 715),
Improving the Presentation of Net
Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost.
3 The increase in the 2018 debt to
capitalization ratio primarily reflects
additional borrowings in 2018 used
to finance the acquisition of Rockwell
Collins as well as the acquisition of
Rockwell Collins’ outstanding debt.
Contents
02 Letter to Shareowners
04 Business Highlights
08 Innovation
09 Our People
10 Social Impact
11 Financials
33 Cautionary Note Concerning Factors
That May Affect Future Results
77 Reconciliation of Non-GAAP Measures
to Corresponding GAAP Measures
78 Board of Directors
79 Leadership
80 Shareowner Information
Inside Back Cover
Recognition
“ At United Technologies we take great pride in
our relentless focus on meeting the needs of our
customers and fostering a culture of innovation.
This enables us to drive continuous improvement in
all that we do and extend our industry leadership,
which grows shareowner value.”
Greg Hayes, Chairman & CEO
LEADERSHIP TEAM
The United Technologies leadership
team carries on the company’s long-
standing commitment to customer
service and innovation. Their passion
for excellence and continuous
improvement is what enables us to
deliver outstanding performance.
FIRST ROW: Gregory J. Hayes,
Chairman & CEO; Elizabeth B. Amato,
Executive Vice President & Chief Human
Resources Officer; Akhil Johri,
Executive Vice President &
Chief Financial Officer
SECOND ROW: Vincent M. Campisi,
Senior Vice President & Chief Digital
Officer, and Timothy J. McBride,
Senior Vice President, Government
Relations; Robert F. Leduc, President,
Pratt & Whitney; Robert J. McDonough,
President, Carrier
THIRD ROW: Kelli Parsons, Senior
Vice President & Chief Communications
Officer; Paul Eremenko, Senior Vice
President & Chief Technology Officer;
Michael R. Dumais, Executive Vice
President, Operations & Strategy, and
Charles D. Gill Jr., Executive Vice
President & General Counsel
FOURTH ROW: Robert K. Ortberg,
Chief Executive Officer, Collins
Aerospace Systems; Judith F. Marks,
President, Otis; David L. Gitlin,
President & Chief Operating Officer,
Collins Aerospace Systems
United Technologies Corporation 01
Dear
Fellow Investor
Greg Hayes, Chairman & CEO
The year 2018 will be remembered for
many things at United Technologies.
A year of record sales and earnings.
A year in which the Otis maintenance
portfolio exceeded 2 million units for
the first time. A year in which Pratt &
Whitney manufactured more than
1,000 large commercial and military
engines for the first time in more
than 30 years. And a year in which
Carrier grew its top line by 6 percent
organically while introducing more
than 100 new products. 2018 also saw
the completion of the Rockwell Collins
acquisition, which combined with our
UTC Aerospace Systems business
allowed us to create the preeminent
aerospace systems supplier, now
named Collins Aerospace Systems.
Underpinning all the successes of 2018 is
our relentless focus on delivering the most
advanced and innovative products and
services to our customers around the world.
And all this was possible only through the
dedication and diligence of our 240,000
employees. As I have said many times,
companies don’t innovate, people do.
Likewise, companies don’t design, develop,
manufacture or service our products, people
do. So please join me in thanking all the people
of United Technologies who have made this
great performance in 2018 possible. Here are
some additional highlights.
8%
Organic growth *
$7.61
Adjusted earnings per share *
$4.4B
Free cash flow *
* See page 77 for additional information regarding
non-GAAP financial measures.
STRONG FINANCIAL PERFORMANCE
In 2018 United Technologies had sales of
$66.5 billion, driven by 8 percent organic
growth. Earnings per share on an adjusted basis
were $7.61, a 14 percent increase over 2017.
HIGHLIGHTS FROM OUR BUSINESSES
In addition to manufacturing over 1,000 large
The most momentous decision in 2018,
Spending on research and development totaled
commercial and military engines, Pratt &
however, was our decision to return United
$4 billion, of which more than $2.5 billion was
Whitney signed a $2 billion contract to supply
Technologies to its roots as a preeminent
company-funded. We generated $6.3 billion
F135 engines in support of the Joint Strike
aerospace systems supplier while establishing
of cash flow from operations, and we invested
Fighter program. Revenue from commercial
Carrier and Otis as standalone independent
$1.9 billion in capital expenditures to fund
maintenance, repair and overhaul (MRO)
companies. This decision, perhaps the most
difficult decision a Board of Directors can
future organic growth. Net free cash flow was
$4.4 billion. Dividends totaled $2.2 billion,
services increased significantly, and the
Geared Turbofan engine aftermarket network
make, will establish three industry-leading,
and in October 2018 the Board approved a
continued to mature, more than doubling the
focused businesses that will drive long-term
5 percent increase in the dividend rate to
number of engines overhauled in our shops
value for investors, customers and employees.
$2.94 per share on an annual basis.
compared to 2017.
02 2018 Annual Report
Collins Aerospace extended its industry
escalators to metro, rail and airport projects
talented, purpose-driven professionals. Many
leadership in 2018. The business was awarded
in 11 cities. Investment in digital also began
are leaders in their communities — volunteering
a contract to provide nacelles for the Dassault
to bear fruit with the launch of a new digitally
to make a positive social impact, mentoring
Falcon 6X and selected to provide content on
enhanced Otis Signature Service and the IoT-
schoolchildren, encouraging STEM education
Boeing’s U.S. Air Force T-X jet trainer, including
enabled Otis ONE platform that uses remote
and building a more sustainable future.
the ACES 5 ejection seat, landing gear, and
diagnostics, data analytics and machine
wheels and brakes. The company also enjoyed
learning to predict and prevent shutdowns.
significant demand for its wheel and brake
systems as more than 35 airlines selected
its equipment, representing commitments
totaling more than $500 million. Commercial
GROWING OUR DIGITAL FOOTPRINT
The relentless pace at which products and
aftermarket sales at legacy UTC Aerospace
services are becoming digitally enabled and
Systems were strong as well, up 12 percent
connected is fundamentally transforming
organically in 2018.
Against a backdrop of challenging geopolitical
conditions, our commercial businesses also
achieved many successes.
how we live and work. Our team in the new
United Technologies Digital Accelerator in
Brooklyn, New York, delivers fresh thinking
and capabilities to the design of innovative
customer experiences, streamlined
Carrier opened a state-of-the-art building
manufacturing capabilities and intelligent
technology and customer experience center
solutions that unlock new forms of value.
in Palm Beach Gardens, Florida. More than
Our accelerator houses a growing community
12,000 customers and guests have already
of digital experts who are passionate about
seen firsthand how our innovative products
making things smarter, more efficient and
and services work together to enhance
more connected. Core to our digital
building efficiency. The Carrier business, which
capabilities is data analytics, and in 2018
represents nearly 80 brands across heating
we acquired Predikto Inc., an analytics
and air-conditioning, refrigeration, fire and
software company known for its cloud-based
security, and building automation solutions,
predictive technology.
We remain committed to being an open,
inclusive and diverse company. As part of
the Paradigm for Parity coalition, we are
committed to achieving gender parity in our
senior leadership by 2030. We graduated the
first classes from our Re-Empower Program,
which helps individuals get the confidence,
support and training needed to re-enter
the workforce after a voluntary absence. In
2018 we invested more than $100 million in
employee learning and job training programs.
And, as a leadership team, we are investing our
time in sponsorship, preparing future leaders
who will one day sit in our seats.
THE PATH AHEAD
I couldn’t be more excited about the future
of our company. Our businesses are well-
positioned to benefit from the global trends of
rapid urbanization, an expanding middle class
and unprecedented growth in commercial
aviation. We have the size, scale and talent
continued its product innovation acceleration,
launching more than 200 new products in the
past two years. In 2018 Carrier streamlined
and strengthened its portfolio through the
divestiture of equipment manufacturer Taylor
Company and the acquisition of S2 Security,
a leading developer of unified security and
video management solutions.
Our technology R&D investments and activities
to thrive. As we embark on this historic
are increasingly focused on high-impact areas
transformation to become three strong,
that are critical to United Technologies’ future
industry-leading companies, I am energized
growth. These include connected products,
by the challenges and opportunities before us.
autonomy and electrification — and they are
among the top priorities for our team at the
United Technologies Research Center. In 2018
we launched United Technologies Advanced
In closing, I want to again express gratitude
to our employees for a remarkable year. Thank
you also to our valued customers for placing
your trust in us and our products. And my
thanks to you, our shareowners, for investing
in us.
A focus on innovation also helped Otis
Projects (UTAP) under the leadership of our
to reap its share of big wins in 2018. The
Chief Technology Officer. UTAP blends a fast-
business landed significant contracts for
paced, start-up-like culture with UTC’s deep
Resorts World Las Vegas, SNCF French rail,
technical expertise to develop high-risk/high-
the Bangkok Metropolitan Rapid Transit in
Thailand and Haikou Twin Towers in China.
Otis also strengthened its leadership in China’s
reward product demonstrators.
infrastructure segment, securing contracts
to supply more than 2,500 elevators and
INVESTING IN OUR PEOPLE
United Technologies is a global team of
Gregory J. Hayes
Chairman & Chief Executive Officer
United Technologies Corporation 03
Anthony Hargrove, an assembler at
the Collins Aerospace Aerostructures
facility in Everett, Washington, works
on an aircraft nacelle. Nacelles house
and protect the engine, optimize
air flows through it and manage a
number of functions, including noise
abatement, de-icing and braking.
Malik Saleh (seated) and Emmanuel Derouillat, both
senior systems engineers at the Collins Aerospace
Engineering office in Bothell, Washington, work at a
reconfigurable flight deck display test platform. The flight
deck enables tests to be conducted in an environment
similar to that of actual flight, allows several applications
to be tested simultaneously, and flags and corrects
problems before a system is delivered to the customer.
Collins Aerospace Systems
Collins Aerospace is a leader in
technologically advanced and intelligent
solutions for the aerospace and
defense industry. It is one of the largest
aerospace systems companies in the
world, created in 2018 through the
combination of UTC Aerospace Systems
and Rockwell Collins. The company
designs, manufactures and services
systems and components, and provides
integrated solutions for commercial,
military and space platforms.
During the year Collins Aerospace had a
number of big wins that are now poised to
deliver new and improved capabilities for
next-generation platforms.
On the commercial side, Boeing announced
that it would equip its next-generation
737MAX single-aisle jet with Collins
Aerospace’s Enhanced Flight Vision System
and dual Head-up Guidance System as
an option for operators. The EFVS allows
operations in lower visibility conditions, and
the HGS increases pilot and co-pilot safety.
Airbus is undergoing a digital transformation
using the FOMAX on-board connectivity
solution, which enables airlines to collect
maintenance and performance data, and
transmit it to ground-based operations in
near real time. And Norwegian Air Shuttle is
moving closer to a fully connected aircraft fleet
with CabinConnect high-speed broadband
connectivity solution. Collins Aerospace also
was chosen by Dassault Aviation to provide an
advanced nacelle system for its new Falcon 6X
business jet.
On the military side, Collins Aerospace was
selected by Boeing to provide its ACES 5
ejection seat and fully integrated landing gear
system for the U.S. Air Force’s new T-X jet
trainer. And it will develop the main electric
power generation system for South Korea’s
KF-X fighter jet, which will include the latest
state-of-the-art variable speed constant
frequency generator.
In 2018 Collins Aerospace also enjoyed
significant demand for its wheel and brake
systems. More than 35 airlines selected
this equipment, representing commitments
totaling more than $500 million. The company
also announced the development of a next-
generation vehicle management computer that
will enable fly-by-wire and autonomous flight
for civil and military aircraft.
73,300
Employees
$16.6B
Net sales
$2.6B
Adjusted operating profit *
* See page 77 for additional information
regarding non-GAAP financial measures.
04 2018 Annual Report
Pratt & Whitney’s F135 engine powers all three
variants of the F-35 Lightning II, the most advanced
military aircraft in the world. During the year, Pratt
& Whitney was awarded a U.S. Department of
Defense contract for 135 F135 engines. Here, Jose
Garcia, business acquisition manager for the Joint
Strike Fighter program, admires an engine at Pratt &
Whitney’s Middletown Engine Center in Connecticut.
Demand continues to grow for Pratt & Whitney’s
Geared Turbofan engine. The company not only
is ramping up production but also is expanding
its maintenance, repair and overhaul facilities to
serve customers globally. Here Kaitlyn Sooklal
works on a GTF engine at a Pratt & Whitney
MRO facility in West Palm Beach, Florida.
Pratt & Whitney
Pratt & Whitney is a world leader in
the design, manufacture and service
of aircraft engines and auxiliary power
systems, and has been revolutionizing
modern flight for almost a century.
The Geared Turbofan engine is a game-
changer and in a league of its own, with
16 percent better fuel efficiency and up to
a 75 percent smaller noise footprint than
the previous generation of engines.
In 2018 Pratt & Whitney celebrated the entry
into service of Embraer’s E190-E2, powered
exclusively by the GTF. Thirteen airlines
celebrated their first GTF-powered aircraft
delivery, including Delta Air Lines’ acceptance
of its first A220 aircraft, and 12 airlines
announced new GTF orders. With demand
growing for the GTF, Pratt & Whitney is taking
steps to ensure that customers have not only
a world-class engine but also world-class
service. The company is expanding its global
network of maintenance, repair and overhaul
facilities, and expects to have eight in place
by 2020.
Demand for business jets also is on the
upswing, bringing new opportunities to Pratt
& Whitney. The PW800 engine entered service
with the introduction of the Gulfstream G500
ultra-long-range jet, and the PW812D engine
was selected for the Falcon 6X business jet
that Dassault Aviation is developing.
Pratt & Whitney continues to power a vast
range of military aircraft. During the year,
Pratt & Whitney was awarded a U.S.
Department of Defense contract for 135 F135
engines. The F135 powers all three variants
of the F-35 Lightning II, the world’s most
advanced fighter jet. More recently, Pratt &
Whitney celebrated the first acceptance and
delivery of the PW4062-powered KC-46
tanker to the U.S. Air Force.
41,600
Employees
$19.4B
Net sales
$1.6B
Adjusted operating profit *
* See page 77 for additional information
regarding non-GAAP financial measures.
United Technologies Corporation 05
Carrier brings a high level of connectivity to
its HVAC systems, enabling building owners
and facility managers, like Carrier’s Alex
Garcia, to make informed decisions relative to
comfort demands, service and maintenance
requirements, and ongoing performance.
Angie Gomez, general manager at Edwards,
works with on-site security in Palm Beach
Gardens, Florida, to utilize Carrier’s suite of
products and solutions for intelligent buildings
across HVAC, security, video, access control
and fire detection and suppression.
54,400
Employees
$18.9B
Net sales
$3.1B
Adjusted operating profit *
* See page 77 for additional information
regarding non-GAAP financial measures.
06 2018 Annual Report
Carrier
Carrier is a leading global provider
of innovative HVAC, refrigeration,
fire, security and building automation
technologies. The company’s portfolio
includes industry-leading brands such
as Carrier, Chubb, Kidde, Edwards,
LenelS2 and Automated Logic.
Carrier’s businesses enable modern life,
delivering efficiency, safety, security, comfort,
productivity and sustainability across a wide
range of residential, commercial and industrial
applications. Through accelerated innovation,
the company has released more than 100 new
products for the fourth consecutive year.
In 2018 Carrier moved into the Center for
Intelligent Buildings, its new global headquarters
in Palm Beach Gardens, Florida. Designed to
LEED Platinum standards, this first-of-its-kind
building showcases Carrier’s vast portfolio
of technologies and demonstrates how
they can be integrated to improve the
occupant experience.
Carrier’s ductless business introduced an
industry-defining innovation with a new single
zone ductless system. At 42 SEER, there’s
nothing more efficient in North America.
The system features built-in Wi-Fi that offers
control from virtually anywhere, plus innovative
smart humidity and occupancy sensors that
provide maximum home comfort.
Automated Logic developed the new OptiFlex
virtual integrator platform that enables
building operators to monitor up to 50,000
data points from various building systems,
subsystems and devices using a single
computer server. The winner of the AHR Expo
Innovation award in the building automation
category, OptiFlex delivers data that can be
turned into actionable insights to improve
overall building performance.
Through the acquisition of S2 Security,
Carrier formed LenelS2, a global leader in
commercial and enterprise security systems.
LenelS2 provides scalable, cutting-edge
access control and video solutions to small-
and mid-size companies.
Carrier Transicold celebrated the 50th
anniversary of the invention of the front-wall
refrigeration unit for marine shipping that
revolutionized the global transport of perishable
and frozen goods. It also inked major sales to
Evergreen Line, T.S. Lines Ltd. of Taiwan and
MSC Mediterranean Shipping Company.
Jeneviene Ferrante, an apprentice in Otis’
San Francisco field operations, is part
of a global team of 33,000 dedicated
professionals who maintain 2 million
elevators, escalators and moving walkways
in the Otis service portfolio around the world.
In 2018 Otis won the contract to supply 54 SkyRise
high-speed elevators and other equipment for The
Spiral, a 65-story office tower going up in New York
City’s Hudson Yards district. Four Otis SkyBuild
self-climbing elevators will be used to help speed
construction during the project, which is due for
completion in 2022.
Otis
Otis is the world’s leading maker and
maintainer of elevators, escalators and
moving walkways.
Over the past 165 years, Otis has transformed
cities, changed how people live and work, and
revolutionized architecture itself. Otis is once
again transforming the industry it created,
harnessing 21st-century technologies to enrich
the experience of the 2 billion passengers Otis
moves each day, all while delivering a higher
level of personalized service to its customers.
The new Otis ONE digital service platform
will minimize equipment downtime and keep
people on the move. Otis ONE sensors collect
real-time performance data that cloud-based
algorithms analyze to predict and prevent
shutdowns. It is called predictive maintenance,
and it redefines the very nature of service.
In 2018 Otis also launched Signature Service,
its new global service brand that combines
the latest digital technology with enhanced
processes and the expertise of 33,000 Otis
mechanics in the field.
Otis’ revolutionary SkyBuild self-climbing
elevator is helping to speed construction
at some of the world’s most iconic projects
underway in 2018, including Resorts World
Las Vegas, The Spiral at New York City’s
Hudson Yards and London’s Twentytwo.
The SkyBuild elevator gets crews and
materials where they need to be quickly
and safely — without an external hoist
and without exposure to the weather.
The internal system rises in one-floor
increments as a building is going up and
operates at speeds three times faster than
a conventional external hoist. The result:
Each crew member can get an additional 30
to 60 minutes of productive time on the job
each day. Once construction is complete,
each SkyBuild system quickly converts to
a permanent SkyRise elevator, Otis’ most
advanced high-rise system to date.
As urbanization accelerates, China is rapidly
building out its infrastructure. Otis is part
of that effort. In 2018 the company won
contracts to supply more than 2,500 elevators
and escalators for metro, rail and airport
projects in 11 cities.
68,500
Employees
$12.9B
Net sales
$2.0B
Adjusted operating profit *
* See page 77 for additional information
regarding non-GAAP financial measures.
United Technologies Corporation 07
Innovation
United Technologies is synonymous
with innovation. The company was
founded by some of the greatest
inventors of all time and today is home
to many of the world’s most brilliant
engineers, scientists and developers.
Innovation is woven into the fabric of the
company. And leading the effort are two
distinct organizations — engineering and
research, and digital. Both made substantial
contributions to company milestones in 2018.
On the aerospace side, Collins Aerospace
Systems and Pratt & Whitney celebrated the
Embraer E-Jet E2’s entry into service. The
aircraft is equipped with significant Collins
Aerospace content, including engine controls,
nacelles, wheels and carbon brakes, fire
protection, evacuation systems, air data
systems, Head-up Guidance System, electric
and emergency power generation, and primary
and secondary power distribution. The aircraft
also features Pratt & Whitney’s latest Geared
Turbofan variant, which continues to exceed
expectations for fuel efficiency, noise reduction
and emissions.
On the commercial building side, Carrier
launched more than 100 new products for
the fourth year in a row, including a new
HVAC rooftop unit that offers a 40 percent
improvement in efficiency. Otis is on track
to connect its global portfolio of 2 million
elevators and escalators. Its new Otis ONE
service platform collects real-time performance
data to predict and prevent shutdowns.
We have made significant investments in our
research centers, a move that will enable us to
expand our capabilities in scientific modeling
and simulation; advanced materials and
manufacturing; high-power electrical systems;
connectivity and embedded intelligence; and
cyber-physical security.
We also are expanding our digital capabilities.
We are aggressively using our domain
expertise, data analytics and software
development to design solutions that enable
customers to achieve new levels of value,
while also accelerating growth across our
business lines.
Diana Giulietti, senior engineer, works
in United Technologies’ new additive
manufacturing facility in East Hartford,
Connecticut. Additive manufacturing is one
of the most transformative technologies to
come along in decades. Using 3D modeling
software, it enables rapid prototyping and
reduces costs, timing and risk.
At our state-of-the-art digital hub in Brooklyn,
New York, a team of nearly 150 data science,
design, product and software experts are
working together to develop solutions that
make the most of big data and the increasing
connectivity of products and services. Their
mission is to ensure that United Technologies
is a leader in the digital world, developing
products and services that deliver value for
customers and drive our own efficiencies.
$4.0B
invested in company- and
customer-funded research
08 2018 Annual Report
Our People
We bring together people with
different viewpoints, experiences and
backgrounds, because great ideas can
come from anyone, anywhere. That is
why we are committed to a workplace
of inclusion and diversity, one where
employees can share their ideas
openly and all have the opportunity
to succeed.
We recognize that in much of corporate
America, women are under-represented in
senior leadership. We are taking steps to
correct that. We have joined the Paradigm
for Parity coalition to achieve gender parity
by 2030. At the end of 2018, women held
30 percent of senior positions at United
Technologies. In addition to advancing
women, the effort is expected to enable UTC
to continue to attract, develop and retain a
diverse workforce that will fuel innovation
and growth for the future.
To help employees advance in their careers,
we encourage lifelong learning and make
significant investments in their education.
Since 1996, we have invested $1.3 billion in
the Employee Scholar Program, with more than
40,000 employees who have earned degrees.
Additionally, we spend more than $100 million
a year on learning and development. Each year
our employees complete more than 2 million
hours of training through internal training
programs, web-based e-learning, virtual
classrooms and external seminars.
United Technologies has moved the world
forward for more than a century. Today we are
building on that legacy and are committed to
creating an extraordinary future. Our people
will make that possible. That is why one of our
most important priorities is to create a culture
where they can learn, grow and belong.
240,000
employees
50%
women in senior leadership
by 2030
$100M
invested in learning
and job training annually
Cara Backman, machining cell operator,
works at Pratt & Whitney’s North Berwick,
Maine, facility. Machining cells are sets of
machines that are grouped by the products
or parts they produce. They enhance
material flow, reduce costs and improve
lead times and quality.
Robert Pedraza, fixtures assembly
technician, helps assemble car operating
panels for elevators being upgraded or
modernized. He is part of the fixtures
operation in the Otis Service Center in
Bloomfield, Connecticut. The center is
one of the largest of its type in the world,
stocking almost 40,000 components.
Yuliya Babushkina, business development
manager for Collins Aerospace Systems in
Seattle, provides on-site customer support
for sensors and fire protection systems to
The Boeing Company.
Cong Vu has been recognized for individual
technical achievement by the Australian
Security Industry Association, a befitting tribute
to someone whose contributions at Chubb
span products, system design, technician
training and technical field support. Vu, Chubb’s
electronic security regional technical officer
in Sydney, has earned numerous product
certifications and has national qualifications
in telecommunications and security.
United Technologies Corporation 09
Social Impact
We define our social impact in broad terms. This means
being an engaged member of the community, minimizing our
environmental footprint, encouraging employee volunteerism
and making investments that improve our society.
COMMUNITY
In 2018 we refocused our community
commitments to prioritize two areas: Investing
in Our Future and Investing in Our Communities.
Green Shoots program. The Otis Mover
initiative in Brazil is dedicated to encouraging
employee volunteerism.
Through financial and mentoring support for
FIRST teams and The STEMIE (STEM +
Invention + Entrepreneurship) Coalition’s
student inventors, among other initiatives, we
aim to inspire the next generation’s diverse
technical workforce.
Our business units also support programs that
measurably improve the well-being of their
communities. Collins Aerospace supports the
FIRST Tech Challenge and also contributes to
the Orbis International Flying Eye Hospital.
Pratt & Whitney sponsors Engineers Without
Borders. Carrier employees teach youngsters
the importance of sustainability through the
SUSTAINABILITY
Since 1997 we have reduced our cumulative
greenhouse gas emissions by more than
1 million metric tons, saved 3 billion gallons
of water and brought innovative thinking to
the prevention of workplace injuries — all
during a period when we nearly tripled
our sales.
Our factory sustainability goals challenge us
every day to ensure that the innovation and
economic growth we are driving on behalf
of society also serve to protect our planet’s
resources for generations to come.
Greenhouse gas emissions
(million metric tons CO2e)
2.03 1.96 1.96 1.90
1.72
15
16
17
18 2020
Goal
Worldwide water consumption
(billion gallons)
1.77
1.55
1.46 1.45
1.33
15
16
17
18 2020
Goal
Consistent with the Greenhouse Gas Protocol,
UTC’s Environment, Health and Safety goals,
targets and associated baselines are adjusted
to reflect the impact of acquired companies at
the time of acquisition and remove divested
companies from UTC’s measured performance.
Our factory and operational environmental
goals measure progress in absolute terms and
are not adjusted as a result of increases or
decreases in production.
Children at the Hongmei Primary School near
Shanghai participate in Carrier’s Green Shoots
program. The outreach initiative is focused
on promoting sustainability and encouraging
sustainable behavior. To date the program has
reached more than 50,000 students.
For almost 25 years, we have supported
FIRST, a mentor-based robotics competition
that encourages young people to study STEM
subjects (science, technology, engineering and
math) and pursue technical careers. It is one
of the many ways we are inspiring the next
generation of inventors.
10 2018 Annual Report
Financials
12 Five-Year Summary
13 Management’s Discussion and Analysis
33
Cautionary Note Concerning Factors That May
Affect Future Results
35
Management’s Report on Internal Control over
Financial Reporting
36
Report of Independent Registered Public Accounting Firm
37 Consolidated Statement of Operations
38 Consolidated Statement of Comprehensive Income
39 Consolidated Balance Sheet
40 Consolidated Statement of Cash Flows
41 Consolidated Statement of Changes in Equity
42 Notes to Consolidated Financial Statements
76 Selected Quarterly Financial Data
Go online to view the annual report and see more of our business highlights
and achievements: 2018ar.utc.com.
11
United Technologies Corporation
Five-Year Summary
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2018
2017
2016
2015
2014
For The Year
Net sales
Research and development
Restructuring costs
Net income from continuing operations 1
Net income from continuing operations attributable to common shareowners 1
Basic earnings per share—Net income from continuing operations
attributable to common shareowners
Diluted earnings per share—Net income from continuing operations
attributable to common shareowners
Cash dividends per common share
Average number of shares of Common Stock outstanding:
Basic
Diluted
Cash flows provided by operating activities of continuing operations
Capital expenditures 2
Acquisitions, including debt assumed & equity issued
Repurchases of Common Stock 3
Dividends paid on Common Stock (excluding ESOP)
At Year End
Working capital 2, 4
Total assets 2
Long-term debt, including current portion 2, 5
Total debt 2, 5
Total debt to total capitalization 5
Total equity 5, 6
Number of employees 7
$ 66,501 $ 59,837 $ 57,244 $ 56,098 $ 57,900
2,489
354
6,468
6,066
2,262
396
4,356
3,996
2,427
253
4,920
4,552
2,376
290
5,436
5,065
2,462
307
5,654
5,269
6.58
6.50
2.84
800
810
6,322
1,902
31,142
325
2,170
5.76
5.70
2.72
790
799
5,631
2,014
231
1,453
2,074
6.19
6.13
2.62
818
826
6,412
1,699
712
2,254
2,069
4.58
4.53
2.56
873
883
6,755
1,652
556
10,000
2,184
6.75
6.65
2.36
898
912
6,979
1,594
530
1,500
2,048
$
4,135 $
8,467 $
6,644 $
4,088 $
134,211
44,068
45,537
53%
40,610
240,200
96,920
27,093
27,485
47%
31,421
204,700
89,706
23,300
23,901
45%
29,169
201,600
87,484
19,499
20,425
41%
28,844
197,200
5,921
86,338
19,575
19,701
38%
32,564
211,500
Note 1 2018 amounts include unfavorable tax charges of approximately $744 million primarily related to non U.S. taxes that will become due when earnings of certain
international subsidiaries are remitted, a $300 million pre-tax charge resulting from customer contract matters, partially offset by a $799 million pre-tax gain on the sale
of Taylor. 2017 amounts include unfavorable tax charges of approximately $690 million related to U.S. tax reform legislation enacted in December, 2017, commonly
referred to as the Tax Cuts and Jobs Act of 2017 (TCJA) and a $196 million pre-tax charge resulting from customer contract matters, partially offset by pre-tax gains of
approximately $500 million on sales of available for sale securities. 2016 amounts include a $423 million pre-tax pension settlement charge resulting from defined benefit
plan de-risking actions. 2015 amounts include pre-tax charges of: $867 million as a result of a settlement with the Canadian government, $295 million from customer
contract negotiations at Collins Aerospace Systems, and $237 million related to pending and future asbestos claims.
Note 2 Excludes assets and liabilities of discontinued operations held for sale, for all periods presented.
Note 3 The decrease in share repurchases in 2018 is due to the temporary suspension of activity in connection with the acquisition of Rockwell Collins announced on
September 4, 2017, excluding activity relating to our employee savings plans. Share repurchases in 2015 include share repurchases under accelerated repurchase
agreements of $2.6 billion in the first quarter of 2015 and $6.0 billion in the fourth quarter of 2015.
Note 4 Working capital in 2018 includes the addition of contract assets and liabilities of $3.5B and $5.7B, respectively in accordance with the New Revenue Standard as well as
an increase in current borrowings of $1.8 billion. Working capital in 2015 includes approximately $2.4 billion of taxes payable related to the gain on the sale of Sikorsky,
which were paid in 2016. As compared with 2014, 2015 working capital also reflects the reclassification of current deferred tax assets and liabilities to non-current assets
and liabilities in connection with the adoption of Accounting Standards Update 2015-17.
Note 5 The increase in the 2018 debt to total capitalization ratio primarily reflects additional borrowings in 2018 used to finance the acquisition of Rockwell Collins. The increase
in the 2017 and 2016 debt to total capitalization ratio primarily reflects additional borrowings to fund share repurchases, 2017 discretionary pension contributions, and
for general corporate purposes.
Note 6 The increase in total equity in 2018 is due to UTC common stock issued as Merger Consideration for Rockwell Collins. The decrease in total equity in 2015, as
compared with 2014, reflects the sale of Sikorsky and the share repurchase program. The decrease in total equity in 2014, as compared with 2013, reflects unrealized
losses of approximately $2.9 billion, net of taxes, associated with the effect of market conditions on our pension plans.
Note 7 The increase in employees in 2018 is due to the addition of approximately 30,000 of Rockwell Collins employees. The decrease in employees in 2015, as compared with
2014, primarily reflects the 2015 divestiture of Sikorsky.
12
2018 Annual Report Management’s Discussion and Analysis
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
BUSINESS OVERVIEW
We are a global provider of high technology products and services
to the building systems and aerospace industries. Our operations for
the periods presented herein are classified into four principal business
segments: Otis, Carrier (formerly referred to as UTC Climate, Controls
& Security), Pratt & Whitney, and Collins Aerospace Systems (a
combination of the segment formerly referred to as UTC Aerospace
Systems and Rockwell Collins). Otis and Carrier are referred to as the
“commercial businesses,” while Pratt & Whitney and Collins Aerospace
Systems are referred to as the “aerospace businesses.”
On November 26, 2018, we announced the completion of the
acquisition of Rockwell Collins and our intention to separate our
commercial businesses into independent entities. The separation will
result in three global, industry-leading companies:
• United Technologies, comprised of Collins Aerospace Systems
and Pratt & Whitney, will be the preeminent systems supplier to
the aerospace and defense industry;
• Otis, the world’s leading manufacturer of elevators, escalators and
moving walkways; and
• Carrier, a global provider of HVAC, refrigeration, building
automation, fire safety and security products with leadership
positions across its portfolio.
The proposed separations are expected to be effected through spin-
offs of Otis and Carrier that are intended to be tax-free for the Company’s
shareowners for U.S. federal income tax purposes, and are expected to
be completed by mid-year 2020. Separation of Otis and Carrier from UTC
via spin-off transactions will be subject to the satisfaction of customary
conditions, including, among others, final approval by the Company’s
Board of Directors, receipt of tax rulings in certain jurisdictions and/or
a tax opinion from external counsel (as applicable), the filing with the
Securities and Exchange Commission (SEC) and effectiveness of Form 10
registration statements, and satisfactory completion of financing.
The commercial businesses generally serve customers in the
worldwide commercial and residential property industries, with Carrier
also serving customers in the commercial and transport refrigeration
industries. The aerospace businesses serve commercial and government
aerospace customers in both the original equipment and aftermarket
parts and services markets. Our consolidated net sales were derived
from the commercial and aerospace businesses as follows:
Commercial and industrial
Military aerospace and space
Commercial aerospace
2018
47%
14%
39%
2017
50%
13%
37%
2016
50%
12%
38%
100%
100%
100%
Our consolidated net sales were derived from original equipment
manufacturing (OEM) and aftermarket parts and services as follows:
OEM
Aftermarket parts and services
2018
54%
46%
2017
53%
47%
2016
55%
45%
100%
100%
100%
Our worldwide operations can be affected by industrial, economic
and political factors on both a regional and global level. Our operations
include original equipment manufacturing and extensive related
aftermarket parts and services in both our commercial and aerospace
businesses. Our business mix also reflects the combination of shorter
cycles at Carrier and in our commercial aerospace spares businesses,
and longer cycles at Otis and in our aerospace OEM and aftermarket
maintenance businesses. Our customers are in both the public and
private sectors, and our businesses reflect an extensive geographic
diversification that has evolved with continued globalization. Refer
to Note 19 of the Consolidated Financial Statements for additional
discussion of sales attributed to geographic regions.
As part of our growth strategy, we invest in businesses in certain
countries that carry high levels of currency, political and/or economic
risk, such as Argentina, Brazil, China, India, Indonesia, Mexico, Poland,
Russia, South Africa, Turkey, Ukraine and countries in the Middle East.
As of December 31, 2018, the net assets in any one of these countries
did not exceed 5% of consolidated shareowners’ equity.
In a referendum on June 23, 2016, voters in the United Kingdom
(the U.K.) voted in favor of the U.K.’s exiting the European Union (the
EU). The manner in which the U.K. decides to exit the EU could have
negative macroeconomic consequences. Our 2018 full year sales in and
from the U.K. were approximately $3 billion and represented less than
5% of our overall sales, and we do not believe the U.K.’s withdrawal
from the EU will significantly impact our businesses in the near term.
Organic sales growth was 8% in 2018, reflecting growth across all
segments driven by:
• higher commercial aftermarket, commercial OEM, and military
sales at Pratt & Whitney
• higher commercial aftermarket and military sales, and higher
commercial aerospace OEM sales at Collins Aerospace Systems
• growth in North America residential HVAC, global commercial
HVAC, and transport refrigeration sales at Carrier
• higher Otis service sales in North America and Asia, and higher
Otis new equipment sales in Europe, Asia excluding China, and
North America, partially offset by a decline in China
We expect organic sales growth in 2019 to be 3% to 5%,
with foreign exchange expected to have an unfavorable impact of
approximately 1%. We continue to invest in new platforms and new
markets to position the Company for long-term growth, while remaining
focused on innovation, structural cost reduction, disciplined capital
allocation and execution to meet or exceed customer and shareowner
commitments.
As discussed below in “Results of Operations,” operating profit
in both 2018 and 2017 includes the impact from activities that are
not expected to recur often or that are not otherwise reflective of the
underlying operations, such as the beneficial impact of net gains from
sales of investments, the unfavorable impact of contract matters with
customers, transaction, acquisition and integration costs, and other
significant non-recurring and non-operational items. Our earnings
growth strategy contemplates earnings from organic sales growth,
including growth from new product development and product
improvements, structural cost reductions, operational improvements,
and incremental earnings from our investments in acquisitions.
13
United Technologies Corporation Management’s Discussion and Analysis
As noted above, on November 26, 2018, pursuant to the terms
and conditions of the previously announced Agreement and Plan of
Merger, dated September 4, 2017 (the “Merger Agreement”), among
United Technologies Corporation (the “Company”), Riveter Merger Sub
Corp., a Delaware corporation and a wholly owned subsidiary of the
Company (“Merger Sub”), and Rockwell Collins, Inc. (“Rockwell Collins”),
Merger Sub merged with and into Rockwell Collins (the “Merger”),
with Rockwell Collins continuing as the surviving corporation of the
Merger. As a result of the Merger, Rockwell Collins has become a wholly
owned subsidiary of the Company and each share of common stock,
par value $0.01 per share, of Rockwell Collins issued and outstanding
immediately prior to the effective time of the Merger (the “Effective
Time”) (other than shares held by Rockwell Collins, the Company,
Merger Sub or any of their respective wholly owned subsidiaries) was
converted into the right to receive (1) $93.33 in cash, without interest,
and (2) .37525 shares of Company common stock (together, the
“Merger Consideration”), less any applicable withholding taxes, with
cash paid in lieu of fractional shares. At the Effective Time, each then-
outstanding Rockwell Collins stock option was canceled in exchange
for the right to receive the Merger Consideration in respect of each net
option share subject to such option, less applicable tax withholding,
with the number of net option shares calculated by subtracting from
the total number of shares subject to such option a number of shares
with a value equal to the aggregate applicable exercise price. At the
Effective Time, each then-outstanding Rockwell Collins restricted stock
award, and each Rockwell Collins restricted stock unit award, whether
performance-based or time-based, granted prior to the date of the
Merger Agreement or to a non-employee director of Rockwell Collins,
became fully vested and was canceled in exchange for the right to
receive the Merger Consideration in respect of each share of Rockwell
Collins common stock subject to such award (with the number of
shares subject to any performance-based restricted stock unit award
deemed to be equal to the target number of shares), less applicable
tax withholding. At the Effective Time, each then-outstanding Rockwell
Collins restricted stock unit award, whether performance-based or
time-based, granted on or after the date of the Merger Agreement
was assumed by the Company and converted into a time-based
restricted stock unit award of the Company with an equivalent value
(as calculated in accordance with the formula set forth in the Merger
Agreement, and with any performance-based restricted stock unit
award deemed to be achieved at target level). At the Effective Time,
each then-outstanding Rockwell Collins deferred stock unit award
that was payable by its terms upon the consummation of the Merger
was canceled in consideration for the right to receive (i) if payable in
cash by its terms, a lump sum cash payment equal to the product of
the value of the Merger Consideration and the number of shares of
Rockwell Collins common stock relating to such deferred stock unit
award, less applicable tax withholding, or (ii) if payable in shares by its
terms, the Merger Consideration in respect of each share of Rockwell
Collins common stock subject to such award, less applicable tax
14
withholding. At the Effective Time, each then-outstanding Rockwell
Collins deferred stock unit award that was not payable by its terms
upon the consummation of the Merger was assumed by the Company
and converted into a deferred stock unit award of the Company with an
equivalent value (as calculated in accordance with the formula set forth
in the Merger Agreement).
The total aggregate consideration payable in the Merger was
$15.5 billion in cash and 62.2 million shares of Company common
stock. In addition, $7.8 billion of Rockwell Collins debt was outstanding
at the time of the Merger.
In total, our investments in businesses in 2018 and 2017 totaled
$31,142 million (including debt assumed of $7,784 million and stock
issued of $7,960 million) and $231 million, respectively. In addition
to Rockwell Collins, acquisitions completed in 2018 primarily include
an acquisition at Carrier and at Pratt & Whitney. Our investments in
businesses in 2017 included a number of small acquisitions primarily in
our commercial businesses.
Both acquisition and restructuring costs associated with business
combinations are expensed as incurred. Depending on the nature and
level of acquisition activity, earnings could be adversely impacted due
to acquisition and restructuring actions initiated in connection with
the integration of businesses acquired. For additional discussion of
acquisitions and restructuring, see “Liquidity and Financial Condition,”
“Restructuring Costs” and Notes 2 and 13 to the Consolidated
Financial Statements.
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). We may
consider future opportunities for repatriation of our non-U.S. earnings,
and accelerated de-leveraging, in addition to investments in our
operations, limited additional share repurchases to offset the effects
of dilution related to our stock-based compensation programs - see
Note 12.
Discontinued Operations
On November 6, 2015, we completed the sale of Sikorsky to Lockheed
Martin Corp. for approximately $9.1 billion in cash. As noted above, the
results of operations and the related cash flows of Sikorsky have been
reclassified to Discontinued Operations in our Consolidated Statements
of Operations, Comprehensive Income and Cash Flows for all periods
presented. Proceeds from the sale were used to fund $6 billion of share
repurchases through accelerated share repurchase (ASR) agreements
entered into on November 11, 2015. In connection with the sale of
Sikorsky, we made tax payments of approximately $2.5 billion in 2016.
Net income from discontinued operations attributable to common
shareowners for the year ended December 31, 2016 reflects the final
purchase price adjustment for the sale of Sikorsky, and the net effects
of filing Sikorsky’s 2015 tax returns.
2018 Annual Report Management’s Discussion and Analysis
RESULTS OF OPERATIONS
Net Sales
(DOLLARS IN MILLIONS)
Net sales
2018
2017
2016
$ 66,501 $ 59,837 $ 57,244
Percentage change year-over-year
11%
5%
2%
The factors contributing to the total percentage change year-over-
year in total net sales are as follows:
Organic volume
Foreign currency translation
Acquisitions and divestitures, net
Other
Total % Change
2018
8%
1%
1%
1%
11%
2017
4%
—
1%
—
5%
All four segments experienced organic sales growth during
2018. Pratt & Whitney sales grew 14% organically, reflecting higher
commercial aftermarket, commercial OEM, and military sales. Collins
Aerospace Systems grew 8% organically, driven by higher commercial
aftermarket and military sales, and higher commercial OEM sales.
Organic sales growth of 6% at Carrier was driven by growth in North
America residential HVAC, global commercial HVAC, and transport
refrigeration sales. Otis sales grew 3% organically, reflecting higher
service sales in North America and Asia, and higher new equipment
sales in Europe, Asia excluding China, and North America, partially
offset by a decline in China.
All four segments also experienced organic sales growth during
2017. Pratt & Whitney sales were up 9% organically, reflecting higher
commercial aftermarket sales and higher military sales, partially offset
by lower commercial engine sales. Organic sales at Carrier increased
4%, driven by growth in North America residential HVAC, global
commercial HVAC, and commercial refrigeration sales. Organic sales
at Collins Aerospace Systems grew 2%, primarily driven by an increase
in commercial aerospace aftermarket sales partially offset by lower
commercial aerospace OEM sales. Otis sales increased 2% organically,
reflecting higher service sales in North America and Asia, and higher
new equipment sales growth in North America and Europe, partially
offset by a decline in China.
Cost of Products and Services Sold
The organic increase in total cost of products and services sold in
2018 was primarily driven by the organic sales increases noted above.
The 2% increase in Other primarily reflects the impact of the adoption of
the New Revenue Standard (1%) and a customer contract settlement
at Pratt & Whitney (1%), partially offset by the absence of a prior year
customer contract matter at Pratt & Whitney.
The organic increase in total cost of products and services sold
in 2017 was primarily driven by the organic sales increases noted
above and higher negative engine margin at Pratt & Whitney due to
unfavorable mix and ramp-related costs.
Gross Margin
(DOLLARS IN MILLIONS)
Gross margin
Percentage of net sales
2018
2017
2016
$ 16,516
$ 15,636
$ 15,773
24.8%
26.1%
27.6%
The 130 basis point decrease in gross margin as a percentage of
sales in 2018, includes a 300 basis point decline in Pratt & Whitney's
gross margin driven by the unfavorable year-over-year impact of
customer contract matters and higher negative engine margin from
higher engine deliveries. Collins Aerospace Systems' gross margin
declined 40 basis points as the benefits of higher commercial
aftermarket volumes and cost reduction were more than offset by
adverse commercial OEM and military OEM mix, and higher warranty
expense. Gross margin at Otis declined 140 basis points largely driven
by unfavorable price and mix, primarily in China. These declines were
partially offset by a 40 basis point increase in Carrier's gross margin as
favorable pricing and the favorable year-over-year impact of contract
adjustments related to a large commercial project and a prior year
product recall program were partially offset by increased commodities
and logistics costs.
The 150 basis point decrease in gross margin as a percentage of
sales in 2017, as compared with 2016, primarily reflects a 170 basis
point decline in Pratt & Whitney's gross margin driven by higher negative
engine margin due to unfavorable mix and ramp related costs; a 180
basis point decline in gross margin at Otis driven by unfavorable price
and mix, primarily in China; and a 150 basis point decline in gross
margin at Carrier reflecting adverse price and mix and the unfavorable
impact of a product recall program. These decreases were partially
offset by a 10 basis point increase in gross margin at Collins Aerospace
driven by higher commercial aftermarket volumes.
(DOLLARS IN MILLIONS)
2018
2017
2016
Total cost of products and services sold
$ 49,985 $ 44,201 $ 41,471
Percentage change year-over-year
13%
7%
3%
Research and Development
The factors contributing to the total percentage change year-over-
year in total cost of products and services sold are as follows:
Organic volume
Foreign currency translation
Acquisitions and divestitures, net
Other
Total % Change
2018
9%
1%
1%
2%
13%
2017
7%
—
—
—
7%
(DOLLARS IN MILLIONS)
Company-funded
Percentage of net sales
Customer-funded
Percentage of net sales
2018
2017
2016
$ 2,462
$ 2,427
$ 2,376
3.7%
4.1%
4.2%
$ 1,517
$ 1,514
$ 1,405
2.3%
2.5%
2.5%
Research and development spending is subject to the variable
nature of program development schedules and, therefore, year-over-
year variations in spending levels are expected. The majority of the
company-funded spending is incurred by the aerospace businesses and
relates largely to the next generation engine product family at Pratt &
15
United Technologies Corporation Management’s Discussion and Analysis
Whitney and the Embraer E-Jet E2, Airbus A320neo, Bombardier
Global 7500, Mitsubishi Regional Jet, and Airbus A350 programs at
Collins Aerospace Systems. In 2018, company-funded research and
development increased 1% over the prior year. This increase was
primarily driven by Collins Aerospace (1%) as higher spend across
various commercial programs was largely offset by the deferral of certain
development costs as contract fulfillment costs in accordance with the
New Revenue Standard. Company-funded research and development
expense at Pratt & Whitney was consistent with the prior year.
Customer-funded research and development was consistent with
the prior year, as a decrease at Collins Aerospace Systems, primarily
driven by the deferral of certain development costs as contract fulfillment
costs in accordance with the New Revenue Standard, was offset by
an increase at Pratt & Whitney, primarily driven by higher research and
development expenses on military development programs.
The year-over-year increase in company-funded research and
development (2%) in 2017, compared with 2016, is primarily driven by
continued investment in new products at Carrier (1%) and increased
spending on strategic initiatives at Otis (1%). Customer-funded research
and development increased 6% primarily driven by increased spending
on U.S. Government development programs at Pratt & Whitney, partially
offset by lower spend within Collins Aerospace Systems related to
several commercial and military aerospace programs.
Selling, General and Administrative
(DOLLARS IN MILLIONS)
2018
2017
2016
Selling, general and administrative
$ 7,066
$ 6,429
$ 5,958
Percentage of net sales
10.6%
10.7%
10.4%
Selling, general and administrative expenses increased 10% in
2018, but decreased 10 basis points as a percentage of net sales.
The increase reflects the impact of incremental selling, general and
administrative expenses resulting from the acquisition of Rockwell
Collins (1%). In addition, 2018 reflects higher expenses at Collins
Aerospace Systems (3%) primarily driven by increased headcount and
employee compensation related expenses; an increase at Carrier (2%)
primarily driven by employee compensation related expenses; higher
expenses at Pratt & Whitney (1%) driven by increased headcount
and employee compensation related expenses and costs to support
higher volumes; and higher expenses at Otis (1%) resulting from
higher labor and information technology costs. The remaining increase
includes transaction costs related to the acquisition of Rockwell Collins
and the proposed separation of our commercial businesses into
independent entities.
Selling, general and administrative expenses increased 8% in 2017
and reflect an increase in expenses related to recent acquisitions (1%)
and the impact of higher restructuring expenses (1%). The increase also
reflects higher expenses at Pratt & Whitney (2%) driven by increased
headcount and employee compensation related expenses; higher
expenses at Otis (1%) resulting from higher labor and information
technology costs; and higher expenses at Collins Aerospace Systems
(1%) and Carrier (3%) primarily driven by employee compensation
related expenses.
We are continuously evaluating our cost structure and have
implemented restructuring actions as a method of keeping our cost
structure competitive. As appropriate, the amounts reflected above
include the beneficial impact of restructuring actions on Selling, general
and administrative expenses. See Note 13: Restructuring Costs and the
Restructuring Costs section of Management's Discussion and Analysis
of Financial Condition and Results of Operations for further discussion.
Other Income, Net
(DOLLARS IN MILLIONS)
Other income, net
2018
2017
$ 1,565
$ 1,358
2016
$ 782
Other income, net includes the operational impact of equity
earnings in unconsolidated entities, royalty income, foreign exchange
gains and losses as well as other ongoing and infrequently occurring
items. The year-over-year increase in Other income, net (15%) is
primarily driven by the gain on the sale of Taylor Company (59%),
partially offset by the absence of a prior year gain from the sale of
Carrier's investments in Watsco, Inc. (28%), lower year-over-year gains
on the sale of securities (11%), an impairment of assets related to a
previously acquired Collins Aerospace Systems business (4%) and the
absence of a prior year gain on the sale of a Carrier business (2%).
Other income, net increased $576 million in 2017, compared with
2016, primarily driven by $379 million of gains resulting from Carrier's
sale of its investments in Watsco, Inc. (48%), as well as higher year-over
year foreign exchange gains and losses (9%), and higher year-over-year
gains on the sale of securities (8%) across the UTC businesses.
Interest Expense, Net
(DOLLARS IN MILLIONS)
Interest expense
Interest income
Interest expense, net
Average interest expense rate - average
outstanding borrowings during the year:
Short-term borrowings
Total debt
Average interest expense rate - outstanding
borrowings as of December 31:
Short-term borrowings
Total debt
2018
2017
2016
$ 1,225
$ 1,017
$ 1,161
(187)
(108)
(122)
$ 1,038
$
909
$ 1,039
1.5%
3.5%
1.2%
3.5%
1.1%
3.5%
2.3%
3.5%
1.3%
4.1%
0.6%
3.7%
Interest expense, net increased 14% in 2018 as compared
with 2017. The increase in interest expense reflects the impact of
the August 16, 2018 issuance of notes representing $11 billion in
aggregate principal; the May 4, 2017 issuance of notes representing $4
billion in aggregate principal; and the May 18, 2018 issuance of Euro-
denominated notes representing €2 billion in aggregate principal. These
increases were partially offset by the favorable impact of the repayment
at maturity of the following: 1.800% notes in June 2017 representing
$1.5 billion in aggregate principal; the 6.8% notes in February 2018
representing $99 million of aggregate principal; the Euro-denominated
floating rate notes in February 2018 representing €750 million in
aggregate principal; and the 1.778% notes in May 2018 representing
16
2018 Annual Report $1.1 billion of aggregate principal. The average maturity of our long-term
debt at December 31, 2018 is approximately 11 years.
The $11 billion in aggregate principal amount of notes issued on
August 16, 2018 was primarily used to fund the cash consideration
in the acquisition of Rockwell Collins and related fees, expenses and
other amounts. The increase in interest income in 2018 as compared
with 2017 primarily reflects interest earned on higher cash balances,
including interest earned on cash from the $11 billion of notes issued
and held prior to funding the acquisition.
The decrease in interest expense during 2017, as compared with
2016, was primarily driven by the absence of a net extinguishment
loss of approximately $164 million related to the December 1, 2016
redemption of certain outstanding notes. The unfavorable impact of the
May 4, 2017 and November 1, 2016 issuance of notes representing $8
billion in aggregate principal was largely offset by the favorable impact
of the significantly lower interest rates on these notes as compared
to the 5.375% and 6.125% notes redeemed on December 1, 2016,
representing $2.25 billion in aggregate principal, and the favorable
impact of these early redemptions and the repayment at maturity of our
1.800% notes due 2017, representing $1.5 billion in aggregate principal.
The average maturity of our long-term debt at December 31, 2017
is approximately 11 years. See Note 9 to our Consolidated Financial
Statements for further discussion of our borrowing activity.
The year-over-year increase in the weighted-average interest rate
for short-term borrowings was primarily driven by increases in LIBOR
rates in 2018. The decrease in the weighted-average interest rate for
short-term borrowings for 2017 versus 2016 was primarily due to higher
average Euro-denominated commercial paper borrowings as compared
to 2016. We had no Euro-denominated commercial paper borrowing
outstanding at December 31, 2017, resulting in the higher weighted-
average interest rate for short-term borrowings as of December 31,
2017, as compared to December 31, 2016.
Income Taxes
Effective income tax rate
2018
31.7%
2017
36.6%
2016
23.8%
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).
The 2018 effective tax rate reflects a net charge of $744 million
of TCJA related adjustments. The amount primarily relates to non-U.S.
taxes that will become due when previously reinvested earnings of
certain international subsidiaries are remitted, as discussed in Note 11.
The Company has completed its accounting for the TCJA as described
in Staff Accounting Bulletin (SAB 118). In 2019, the Company will
continue to review and incorporate, as necessary, updates related to
forthcoming U.S. Treasury Regulations, other interpretive guidance,
and the finalization of the deemed inclusions to be reported on the
Company’s 2018 U.S. federal income tax return.
The 2017 effective tax rate reflects a tax charge of $690 million
attributable to the passage of the TCJA. This amount relates to U.S.
Management’s Discussion and Analysis
income tax attributable to previously undistributed earnings of UTC's
international subsidiaries and equity investments, net of foreign tax
credits, and the revaluation of U.S. deferred income taxes.
The effective income tax rates for 2017 and 2016 reflect tax
benefits associated with lower tax rates on international earnings.
The expiration of statutes of limitations during 2017 resulted in a
favorable adjustment of $55 million largely offset by the unfavorable
impact related to a retroactive Quebec tax law change enacted on
December 7, 2017 and the absence of certain credits, tax law changes
and audit settlements included in 2016 described below.
The 2016 effective tax rate reflects $206 million of favorable
adjustments related to the conclusion of the review by the Examination
Division of the Internal Revenue Service of both the UTC 2011 and
2012 tax years and the Goodrich Corporation 2011 and 2012 tax years
through the date of its acquisition. In addition, at the end of 2016,
France enacted a tax law change reducing its corporate income tax rate
which resulted in a tax benefit of $25 million.
For additional discussion of income taxes and the effective income
tax rate, see “Critical Accounting Estimates—Income Taxes” and
Note 11 to the Consolidated Financial Statements.
Net Income Attributable to Common Shareowners from
Continuing Operations
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2018
2017
2016
Net income from continuing operations
attributable to common shareowners
Diluted earnings per share from
continuing operations
$ 5,269
$ 4,552
$ 5,065
$ 6.50
$ 5.70
$ 6.13
To help mitigate the volatility of foreign currency exchange rates on
our operating results, we maintain foreign currency hedging programs,
the majority of which are entered into by Pratt & Whitney Canada
(P&WC). In 2018, foreign currency, including hedging at P&WC, had a
favorable impact on our consolidated operational results of $0.02 per
diluted share. In 2017, foreign currency, including hedging at P&WC,
had a favorable impact on our consolidated operational results of
$0.13 per diluted share. In 2016, foreign currency, including hedging at
P&WC, had a favorable impact on our consolidated operational results
of $0.05 per diluted share. For additional discussion of foreign currency
exposure, see “Market Risk and Risk Management—Foreign Currency
Exposures.”
Net income from continuing operations attributable to common
shareowners for the year ended December 31, 2018 includes
restructuring charges, net of tax benefit, of $228 million ($307 million
pre-tax) as well as a net charge for significant non-operational and/or
nonrecurring items, including the impact of taxes, of $668 million.
Non-operational and/or nonrecurring items include a tax charge in
connection with the passage of the TCJA as described in Note 11
and the unfavorable impact of a customer contract matter at Pratt &
Whitney, partially offset by a gain on Carrier's sale of Taylor Company.
The effect of restructuring charges and nonrecurring items on diluted
earnings per share for the year ended December 31, 2018 was a
charge of $1.11 per share.
17
United Technologies Corporation Management’s Discussion and Analysis
Net income from continuing operations attributable to common
Restructuring Costs
shareowners for the year ended December 31, 2017 includes
restructuring charges, net of tax benefit, of $176 million ($253 million
pre-tax) as well as the net unfavorable impact of significant non-
operational and/or nonrecurring items, net of tax, of $587 million.
Non-operational and/or nonrecurring items include a tax charge in
connection with the passage of the TCJA as described in Note 11, the
unfavorable impact of customer contract matters at Pratt & Whitney,
and the unfavorable impact of a product recall program at Carrier,
partially offset by gains resulting from Carrier's sale of its investments in
Watsco, Inc. The effect of restructuring charges and nonrecurring items
on diluted earnings per share for 2017 was a charge of $0.95 per share.
Net income from continuing operations attributable to common
shareowners for the year ended December 31, 2016 includes
restructuring charges, net of tax benefit, of $192 million ($290 million
pre-tax) as well as the net unfavorable impact of significant non-
operational and/or non-recurring items, net of tax, of $203 million.
Non-operational and/or nonrecurring items include a pension settlement
charge resulting from pension de-risking actions, a net extinguishment
loss related to the early redemption of certain outstanding notes, and
the unfavorable impact of customer contract matters at Pratt & Whitney.
These items were partially offset by favorable tax adjustments related
to the conclusion of the review by the Examination Division of the
Internal Revenue Service of the 2011 and 2012 tax years. The effect of
restructuring charges and non-recurring items on diluted earnings per
share for the year ended December 31, 2016 was a charge of $0.48
per share.
Net Loss Attributable to Common Shareowners from
Discontinued Operations
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2018
2017
2016
Net loss attributable to common shareowners
from discontinued operations
Diluted earnings per share from
discontinued operations
$ —
$ —
$ —
$
(10)
$ —
$ (0.01)
Net loss from discontinued operations attributable to common
shareowners for the year ended December 31, 2016 reflects the final
purchase price adjustment for the sale of Sikorsky, and the net effects
of filing Sikorsky's 2015 tax returns.
(DOLLARS IN MILLIONS)
Restructuring costs
2018
$ 307
2017
$ 253
2016
$ 290
Restructuring actions are an essential component of our operating
margin improvement efforts and relate to existing and recently acquired
operations. Charges generally arise from severance related to workforce
reductions, facility exit and lease termination costs associated with
the consolidation of field and manufacturing operations and costs to
exit legacy programs. We continue to closely monitor the economic
environment and may undertake further restructuring actions to
keep our cost structure aligned with the demands of the prevailing
market conditions.
2018 Actions. During 2018, we recorded net pre-tax restructuring
charges of $207 million relating to ongoing cost reduction actions
initiated in 2018. We are targeting to complete in 2019 and 2020 the
majority of the remaining workforce and facility related cost reduction
actions initiated in 2018. Approximately 95% of the total pre-tax charge
will require cash payments, which we have funded and expect to
continue to fund with cash generated from operations. During 2018,
we had cash outflows of approximately $84 million related to the 2018
actions. We expect to incur additional restructuring and other charges
of $79 million to complete these actions. We expect recurring pre-tax
savings to increase over the two-year period subsequent to initiating the
actions to approximately $270 million annually, of which, approximately
$37 million was realized in 2018.
2017 Actions. During 2018 and 2017, we recorded net pre-tax
restructuring charges of $94 million and $176 million, respectively, for
actions initiated in 2017. We are targeting to complete in 2019 the
majority of the remaining workforce and all facility related cost reduction
actions initiated in 2017. Approximately 76% of the total pre-tax charge
will require cash payments, which we have and expect to continue to
fund with cash generated from operations. During 2018, we had cash
outflows of approximately $100 million related to the 2017 actions.
We expect to incur additional restructuring charges of $91 million
to complete these actions. We expect recurring pre-tax savings to
increase over the two-year period subsequent to initiating the actions to
approximately $240 million annually.
In addition, during 2018, we recorded net pre-tax restructuring costs totaling $6 million for restructuring actions initiated in 2016 and prior. For
additional discussion of restructuring, see Note 13 to the Consolidated Financial Statements.
SEGMENT REVIEW
( DOLLARS IN MILLIONS )
Otis
Carrier
Pratt & Whitney
Collins Aerospace Systems
Total segment
Eliminations and other
General corporate expenses
Consolidated
18
Net Sales
Operating Profits
Operating Profit Margin
2018
2017
2016
2018
2017
2016
$ 12,904
$ 12,341
$ 11,893
$
1,915
$ 2,002
$ 2,125
18,922
19,397
16,634
67,857
17,812
16,160
14,691
61,004
(1,356)
(1,167)
—
—
16,851
14,894
14,465
58,103
(859)
—
3,777
1,269
2,303
9,264
(236)
(475)
3,165
1,300
2,191
8,658
(81)
(439)
2,848
1,501
2,167
8,641
(18)
(402)
2018
14.8%
20.0%
6.5%
13.8%
13.7%
2017
16.2%
17.8%
8.0%
14.9%
14.2%
2016
17.9%
16.9%
10.1%
15.0%
14.9%
$ 66,501
$ 59,837
$ 57,244
$
8,553
$ 8,138
$ 8,221
12.9%
13.6%
14.4%
2018 Annual Report Management’s Discussion and Analysis
Commercial Businesses
The financial performance of our commercial businesses can be
influenced by a number of external factors including fluctuations in
residential and commercial construction activity, regulatory changes,
interest rates, labor costs, foreign currency exchange rates, customer
attrition, raw material and energy costs, credit markets and other
global and political factors. Carrier’s financial performance can also be
influenced by production and utilization of transport equipment, and
weather conditions for its residential business. Geographic and industry
diversity across the commercial businesses help to balance the impact
of such factors on our consolidated operating results, particularly in the
face of uneven economic growth. At constant currency and excluding
the effect of acquisitions and divestitures, Carrier equipment orders for
2018 increased 8% in comparison to 2017 driven by growth in transport
refrigeration (39%) and residential HVAC (11%). At constant currency
and excluding the impact of the New Revenue Standard, Otis new
equipment orders increased 4% in comparison to the prior year as order
growth in North America (11%), and China (6%) was offset by order
declines in Europe (3%).
Total commercial business sales generated outside the U.S., including
U.S. export sales, were 62% and 63% in 2018 and 2017, respectively.
The following table shows sales generated outside the U.S., including U.S.
export sales, for each of the commercial business segments:
Otis
Carrier
2018
73%
54%
2017
73%
55%
Otis is the world’s largest elevator and escalator manufacturing,
installation and service company. Otis designs, manufactures, sells
and installs a wide range of passenger and freight elevators as well as
escalators and moving walkways. In addition to new equipment, Otis
provides modernization products to upgrade elevators and escalators
as well as maintenance and repair services for both its products and
those of other manufacturers. Otis serves customers in the commercial,
residential and infrastructure property sectors around the world. Otis
sells direct and through sales representatives and distributors.
( DOLLARS IN MILLIONS )
Net Sales
Cost of Sales
Operating Expenses and Other
Operating Profits
Organic / Operational
Foreign currency translation
Acquisitions and divestitures, net
Restructuring costs
Other
Total % change
2018 Compared with 2017
The organic sales increase of 3% primarily reflects higher service sales (2%),
driven by growth in North America and Asia, and higher new equipment
sales (1%) driven by growth in Europe, Asia excluding China, and North
America (combined, 2%), partially offset by a decline in China (1%).
The operational profit decrease of 4% was driven by:
• unfavorable price and mix (8%), primarily in China
• higher selling, general and administrative expenses and research
and development costs (3%)
• unfavorable commodity costs (2%)
• unfavorable transactional foreign exchange from mark-to-market
adjustments (1%)
2018
2017
2016 2018 Compared with 2017 2017 Compared with 2016
Total Increase (Decrease) Year-Over-Year for:
$ 12,904
$ 12,341
$ 11,893
9,192
3,712
1,797
8,612
3,729
1,727
8,085
3,808
1,683
$ 563
580
5 %
7 %
$ 448
527
4 %
7 %
$ 1,915
$ 2,002
$ 2,125
$ (87)
(4)%
$ (123)
(6)%
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
2018
2017
Net
Sales
Cost of
Sales
Operating
Profits
Net
Sales
Cost of
Sales
Operating
Profits
3%
1%
—
—
1%
5%
5%
1%
—
—
1%
7%
(4)%
2 %
—
(1)%
(1)%
(4)%
2%
—
1%
—
1%
4%
5%
—
1%
—
1%
7%
(7)%
1 %
—
—
—
(6)%
These decreases were partially offset by:
• profit contribution from the higher sales volumes noted above (8%)
• favorable productivity (2%)
2017 Compared with 2016
The organic sales increase of 2% primarily reflects higher service sales
(1%) driven by growth in North America and Asia, and higher new
equipment sales (1%) driven by growth in North America and Europe,
partially offset by a decline in China.
19
United Technologies Corporation Management’s Discussion and Analysis
The operational profit decrease of 7% was driven by:
• unfavorable price and mix (11%), primarily in China
• higher selling, general and administrative expenses (2%), primarily
labor and information technology costs
• higher research and development costs (1%)
These decreases were partially offset by:
• profit contribution from the higher sales volumes noted above (4%)
• favorable productivity (3%)
Carrier is a leading provider of heating, ventilating, air conditioning
(HVAC), refrigeration, fire, security, and building automation products,
solutions, and services for commercial, government, infrastructure, and
residential property applications and refrigeration and transportation
applications. Carrier provides a wide range of building systems, including
cooling, heating, ventilation, refrigeration, fire, flame, gas, and smoke
detection, portable fire extinguishers, fire suppression, intruder alarms,
access control systems, video surveillance, and building control systems.
Carrier also provides a broad array of related building services, including
audit, design, installation, system integration, repair, maintenance, and
monitoring services. Carrier also provides refrigeration and monitoring
products and solutions to the transport industry.
( DOLLARS IN MILLIONS )
Net Sales
Cost of Sales
Operating Expenses and Other
Operating Profits
Organic / Operational
Foreign currency translation
Acquisitions and divestitures, net
Restructuring costs
Other
Total % change
2018
2017
2016
2018 Compared with 2017
2017 Compared with 2016
$ 18,922
$ 17,812
$ 16,851
$ 1,110
13,337
12,630
11,695
707
6%
6%
$ 961
935
6%
8%
Total Increase (Decrease) Year-Over-Year for:
5,585
1,808
5,182
2,017
5,156
2,308
$ 3,777
$ 3,165
$ 2,848
$
612
19%
$ 317
11%
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
2018
2017
Net
Sales
6 %
1 %
(1)%
—
—
Cost of
Sales
Operating
Profits
Net
Sales
Cost of
Sales
Operating
Profits
6 %
1 %
(1)%
—
—
6 %
—
(1)%
1 %
13 %
19 %
4%
1%
1%
—
—
6%
5%
—
2%
—
1%
8%
(1)%
—
—
(2)%
14 %
11 %
6 %
6%
2018 Compared with 2017
The organic sales increase of 6% was driven primarily by growth in
North America residential HVAC (2%), global commercial HVAC (2%),
and global refrigeration (2%).
The operational profit increase of 6% was driven by:
• profit contribution from the higher sales volumes noted above, net
of mix (6%)
• the year-over-year impact of contract adjustments related to a
large commercial project (3%)
• favorable pricing, net of commodities (2%)
These increases were partially offset by:
• higher logistics costs (3%)
• higher research and development costs (1%)
The 13% increase in Other primarily reflects the year-over-year
impact of gains on sale of businesses and investments (11%), primarily
driven by the sale of Taylor Company in 2018 (25%), partially offset by
the absence of the prior year sale of investments in Watsco, Inc. (12%).
The remaining increase in Other is largely driven by the year-over-year
impact of a prior year product recall program (2%).
20
2018 Annual Report Management’s Discussion and Analysis
2017 Compared with 2016
The organic sales increase of 4% was driven by growth in North
America residential HVAC (1%), global commercial HVAC (1%), and
commercial refrigeration (1%).
Operational profit decreased by 1% as the profit contribution from
higher sales volumes, net of adverse price (6%) and the beneficial impact
from restructuring savings (2%), were more than offset by the impact of
unfavorable mix (7%) and unfavorable contract adjustments related to
a large commercial project (1%). The 14% increase in “other” primarily
reflects gains on the sale of investments (16%), primarily Watsco, Inc.,
and the absence of prior year acquisition and integration costs (1%),
partially offset by the impact of a product recall program (3%).
Aerospace Businesses
The financial performance of Pratt & Whitney and Collins Aerospace
Systems is directly tied to the economic conditions of the commercial
aerospace and defense aerospace industries. In particular, Pratt & Whitney
experiences intense competition for new commercial airframe/engine
combinations. Engine suppliers may offer substantial discounts and
other financial incentives, performance and operating cost guarantees,
and participate in financing arrangements in an effort to compete for
the aftermarket associated with these engine sales. These OEM engine
sales may result in losses on the engine sales, which economically are
recovered through the sales and profits generated over the engine’s
maintenance cycle. At times, the aerospace businesses also enter into
development programs and firm fixed-price development contracts, which
may require the company to bear cost overruns related to unforeseen
technical and design challenges that arise during the development stage
of the program. Customer selections of engines and components can
also have a significant impact on later sales of parts and service. Predicted
traffic levels, load factors, worldwide airline profits, general economic
activity and global defense spending have been reliable indicators for
new aircraft and aftermarket orders within the aerospace industry.
Spare part sales and aftermarket service trends are affected by many
factors, including usage, technological improvements, pricing, regulatory
changes and the retirement of older aircraft. Our commercial aftermarket
businesses continue to evolve as an increasing proportion of our
aerospace businesses’ customers are covered under Fleet Management
Programs (FMPs) and other long-term maintenance programs. FMPs are
comprehensive long-term spare part and maintenance agreements with
our customers. We expect a continued shift to FMPs in lieu of transactional
spare part sales as new engines enter customers’ fleets on FMP and
legacy fleets are retired. In 2018, as compared with 2017, total commercial
aerospace aftermarket sales increased 12% at Pratt & Whitney and 17%
at Collins Aerospace Systems.
Our long-term aerospace contracts are subject to strict safety and
performance regulations which can affect our ability to estimate costs
precisely. Contract cost estimation for the development of complex
projects, in particular, requires management to make significant
judgments and assumptions regarding the complexity of the work to be
performed, availability of materials, the performance by subcontractors,
the timing of funding from customers and the length of time to complete
the contract. As a result, we review and update our cost estimates on
significant contracts on a quarterly basis, and no less frequently than
annually for all others, and when circumstances change and warrant a
modification to a previous estimate. Changes in estimates relate to the
current period impact of revisions to total estimated contract sales and
costs at completion. We record changes in contract estimates primarily
using the cumulative catch-up method. Operating profits included net
unfavorable changes in aerospace contract estimates of approximately
$50 million, $110 million and $157 million in 2018, 2017 and 2016,
respectively, primarily the result of unexpected increases in estimated
costs related to Pratt & Whitney long term aftermarket contracts. In
accordance with our revenue recognition policy, losses, if any, on
long-term contracts are provided for when anticipated. There were
no material loss provisions recorded on OEM contracts in continuing
operations in 2018 or 2017.
Performance in the general aviation sector is closely tied to the
overall health of the economy. We continue to see growth in a strong
commercial airline industry. Airline traffic, as measured by revenue
passenger miles (RPMs), grew approximately 7% in the first eleven
months of 2018.
Our military sales are affected by U.S. Department of Defense
spending levels. Total sales to the U.S. Government were $7.4 billion in
2018, $5.8 billion in 2017, and $5.6 billion in 2016, and were 11% of
total UTC sales in 2018, and 10% in both 2017 and 2016. The defense
portion of our aerospace business is also affected by changes in market
demand and the global political environment. Our participation in long-
term production and development programs for the U.S. Government
has contributed positively to our results in 2018 and is expected to
continue to benefit results in 2019.
Pratt & Whitney is among the world’s leading suppliers of aircraft
engines for the commercial, military, business jet and general aviation
markets. Pratt & Whitney provides fleet management services and
aftermarket maintenance, repair and overhaul services. Pratt & Whitney
produces and develops families of large engines for wide- and narrow-
body and large regional aircraft in the commercial market and for fighter,
bomber, tanker and transport aircraft in the military market. P&WC is
among the world’s leading suppliers of engines powering general and
business aviation, as well as regional airline, utility and military airplanes,
and helicopters. Pratt & Whitney and P&WC also produce, sell and
service auxiliary power units for commercial and military aircraft. Pratt &
Whitney’s products are sold principally to aircraft manufacturers, airlines
and other aircraft operators, aircraft leasing companies and the U.S. and
foreign governments.
21
United Technologies Corporation Management’s Discussion and Analysis
( DOLLARS IN MILLIONS )
Net Sales
Cost of Sales
Operating Expenses and Other
Operating Profits
Organic * / Operational *
Foreign currency (including P&WC net hedging) *
Acquisitions and divestitures, net
Restructuring costs
Other
Total % change
2018
2017
2016
2018 Compared with 2017
2017 Compared with 2016
$ 19,397
$ 16,160
$ 14,894
$ 3,237
16,301
13,093
11,814
3,208
20%
25%
$ 1,266
1,279
9 %
11 %
Total Increase (Decrease) Year-Over-Year for:
3,096
1,827
3,067
1,767
3,080
1,579
$ 1,269
$ 1,300
$ 1,501
$
(31)
(2)%
$
(201)
(13)%
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
Net
Sales
14%
—
—
—
6%
20%
2018
Cost of
Sales
Operating
Profits
17%
1%
—
—
7%
25%
(8)%
—
—
1 %
5 %
(2)%
Net
Sales
9 %
1 %
—
—
(1)%
9 %
2017
Cost of
Sales
12 %
Operating
Profits
(12)%
—
—
—
(1)%
11 %
9 %
(1)%
3 %
(12)%
(13)%
* As discussed further in the “Business Overview” and “Results of Operations” sections, for Pratt & Whitney only, the transactional impact of foreign exchange hedging at P&WC has been
netted against the translational foreign exchange impact for presentation purposes in the above table. For all other segments, these foreign exchange transactional impacts are included
within the organic sales/operational operating profit caption in their respective tables. Due to its significance to Pratt & Whitney’s overall operating results, we believe it is useful to segregate
the foreign exchange transactional impact in order to clearly identify the underlying financial performance.
2018 Compared with 2017
The organic sales increase of 14% primarily reflects higher commercial
aftermarket sales (6%), higher commercial OEM sales (5%) and
increased military sales (3%). The 6% increase in Other primarily reflects
the impact of the adoption of the New Revenue Standard (4%) and the
absence of a prior year customer contract matter (2%).
The operational profit decrease of 8% was primarily driven by:
• lower commercial OEM profit contribution (27%) primarily driven
by higher negative engine margin on higher deliveries
• higher selling, general and administrative expenses (5%)
• the absence of the favorable impact from a prior year license
agreement (4%)
2017 Compared with 2016
The organic sales increase of 9% primarily reflects higher commercial
aftermarket sales (8%) and higher military sales (4%), partially offset
by lower commercial engine sales (2%), unfavorable year-over-year
contract settlements (1%), and the absence of prior year sales of legacy
hardware (1%). The 1% decrease in Other reflects the year-over-year
impact of customer contract matters.
The operational profit decrease of 12% was primarily driven by:
• lower OEM profit contribution (27%) reflecting higher negative
engine margin and other ramp-related costs and lower volume
at P&WC partially offset by the profit contribution from higher
military sales
• higher research and development costs (2%)
• higher selling, general and administrative expenses and research
These decreases were partially offset by:
• higher commercial aftermarket profit contribution (23%), driven by
the sales increase noted above
• higher military profit contribution (5%), driven by the sales increase
and development costs (9%)
• unfavorable year-over-year contract settlements (5%)
• the absence of prior year sales of legacy hardware (3%)
These decreases were partially offset by:
noted above
• higher aftermarket profit contribution (29%) driven by increases in
The 5% increase in Other primarily reflects the favorable impact
resulting from the adoption of the New Revenue Standard (13%)
partially offset by the unfavorable year-over-year impact of contract
settlements (8%).
both commercial and military aftermarket sales
• the favorable impact of a licensing agreement (3%)
The 12% decrease in Other primarily reflects the year-over-year
impact of customer contract matters (7%), the absence of the favorable
impact of a prior year program termination (2%), and the absence of
a prior year benefit from the licensing of certain intellectual property
rights (2%).
22
2018 Annual Report Management’s Discussion and Analysis
Collins Aerospace Systems is a leading global provider of
technologically advanced aerospace products and aftermarket service
solutions for aircraft manufacturers, airlines, regional, business and
general aviation markets, military, space and undersea operations.
Collins Aerospace Systems’ product portfolio includes electric power
generation, power management and distribution systems, air data
and aircraft sensing systems, engine control systems, intelligence,
surveillance and reconnaissance systems, engine components,
environmental control systems, fire and ice detection and protection
systems, propeller systems, engine nacelle systems, including thrust
reversers and mounting pylons, interior and exterior aircraft lighting,
aircraft seating and cargo systems, actuation systems, landing systems,
including landing gear and wheels and brakes, space products and
subsystems, integrated avionics systems, precision targeting, electronic
warfare and range and training systems, flight controls, communications
systems, navigation systems, oxygen systems, simulation and
training systems, food and beverage preparation, storage and galley
systems, lavatory and wastewater management systems. Collins
Aerospace Systems also designs, produces and supports cabin
interior, communications and aviation systems and products and
provides information management services through voice and data
communication networks and solutions worldwide. Aftermarket services
include spare parts, overhaul and repair, engineering and technical
support, training and fleet management solutions, and information
management services. Collins Aerospace Systems sells aerospace
products and services to aircraft manufacturers, airlines and other
aircraft operators, the U.S. and foreign governments, maintenance,
repair and overhaul providers, and independent distributors.
( DOLLARS IN MILLIONS )
Net Sales
Cost of Sales
Operating Expenses and Other
Operating Profits
Organic / Operational
Foreign currency translation
Acquisitions and divestitures, net
Restructuring costs
Other
Total % change
2018 Compared with 2017
The organic sales growth of 8% primarily reflects higher commercial
aftermarket and military sales (combined, 6%) and higher commercial
aerospace OEM sales (2%).
The increase in operational profit of 10% primarily reflects:
• higher commercial aftermarket and military profit contribution
(combined, 18%) primarily driven by the commercial aftermarket
sales growth noted above
• higher commercial aerospace OEM profit contribution (3%)
These increases were partially offset by:
• higher selling, general, and administrative expenses (7%)
• higher warranty costs (4%)
2017 Compared with 2016
The organic sales growth of 2% primarily reflects an increase in
commercial aerospace aftermarket sales (3%), partially offset by lower
commercial aerospace OEM sales (1%).
The increase in operational profit of 4% primarily reflects higher
commercial aerospace profit contribution driven by the commercial
aftermarket sales growth noted above, partially offset by lower
commercial aerospace OEM profit contribution (net, 7%). This net
increase was partially offset by higher selling, general, and administrative
expenses (3%).
2018
2017
2016
2018 Compared with 2017
2017 Compared with 2016
$ 16,634
$ 14,691
$ 14,465
$ 1,943
12,336
10,838
10,689
1,498
13%
14%
$ 226
149
2%
1%
Total Increase (Decrease) Year-Over-Year for:
4,298
1,995
3,853
1,662
3,776
1,609
$ 2,303
$ 2,191
$ 2,167
$
112
5%
$
24
1%
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
2018
Net
Sales
Cost of
Sales
Operating
Profits
8%
—
5%
—
—
7%
1%
6%
—
—
13%
14%
Eliminations and Other
10 %
(1)%
1 %
(4)%
(1)%
5 %
Net
Sales
2%
—
—
—
—
2017
Cost of
Sales
Operating
Profits
2 %
—
(1)%
—
—
4 %
—
(1)%
(2)%
—
1 %
2%
1 %
Net Sales
Operating Profits
( DOLLARS IN MILLIONS )
2018
2017
2016
2018
2017
2016
Eliminations and other
$ (1,356) $ (1,167)
$ (859)
$ (236)
$ (81)
$ (18)
General corporate
expenses
—
—
—
(475)
(439)
(402)
Eliminations and other reflects the elimination of sales, other
income and operating profit transacted between segments, as well as
the operating results of certain smaller businesses. The year-over-year
increase in sales eliminations in 2018 as compared with 2017 reflects
an increase in the amount of inter-segment eliminations, principally
between our aerospace businesses. The year-over-year decrease in
operating profit for 2018 as compared with 2017, is driven by higher
inter-segment profit eliminations resulting from increased inter-segment
activity amongst our aerospace businesses, transaction costs related
to the acquisition of Rockwell Collins and the strategic review of the
Company’s portfolio of businesses, and lower year-over-year gains on
sales of securities.
23
United Technologies Corporation Management’s Discussion and Analysis
The year-over-year increase in the amount of sales eliminations
in 2017 as compared with 2016 reflects an increase in the amount of
inter-segment sales eliminations, principally between our aerospace
businesses. The year-over-year increase in operating profit for 2017 as
compared with 2016 is largely driven by the absence of a $423 million
pension settlement charge resulting from pension de-risking actions
taken in the prior year, partially offset by transaction costs related to the
merger agreement with Rockwell Collins, and an increase in the amount
of inter-segment eliminations between our aerospace businesses.
The year-over-year increase in general corporate expenses for 2017,
as compared with 2016 primarily reflects higher expenses related to
salaries, wages and employee benefits.
Liquidity and Financial Condition
(DOLLARS IN MILLIONS)
Cash and cash equivalents
Total debt
Net debt (total debt less cash and cash equivalents)
Total equity
Total capitalization (total debt plus total equity)
Net capitalization (total debt plus total equity
less cash and cash equivalents)
Total debt to total capitalization
Net debt to net capitalization
2018
2017
$ 6,152 $ 8,985
45,537
39,385
40,610
86,147
27,485
18,500
31,421
58,906
79,995
49,921
53%
49%
47%
37%
We assess our liquidity in terms of our ability to generate cash
to fund our operating, investing and financing activities. Our principal
source of liquidity is operating cash flows from continuing operations.
For 2018 our cash flows from continuing operations, net of capital
expenditures was $4.4 billion. In addition to operating cash flows, other
significant factors that affect our overall management of liquidity include:
capital expenditures, customer financing requirements, investments in
businesses, dividends, common stock repurchases, pension funding,
access to the commercial paper markets, adequacy of available bank
lines of credit, redemptions of debt and the ability to attract long-term
capital at satisfactory terms.
At December 31, 2018, we had cash and cash equivalents of
$6,152 million, of which approximately 72% was held by UTC’s foreign
subsidiaries. We manage our worldwide cash requirements by reviewing
available funds among the many subsidiaries through which we conduct
our business and the cost effectiveness with which those funds can be
accessed. As previously discussed, on December 22, 2017, the TCJA
was enacted. 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 repatriate. The Company
no longer intends to reinvest certain undistributed earnings of its
international subsidiaries that have been previously taxed in the U.S.
and has recorded non U.S. taxes that will become due when earnings
of certain international subsidiaries are remitted to the U.S. For the
remainder of the Company’s undistributed international earnings, unless
tax effective to repatriate, UTC will continue to reinvest these earnings
permanently. We have repatriated $6.2 billion of overseas cash for the
year ended December 31, 2018.
24
On occasion, we are required to maintain cash deposits with certain
banks with respect to contractual obligations related to acquisitions
or divestitures or other legal obligations. As of December 31, 2018,
2017 and 2016, the amount of such restricted cash was approximately
$60 million, $33 million and $32 million, respectively.
On November 26, 2018, we completed the acquisition of Rockwell
Collins. Under the terms of the merger agreement, each share of
common stock, par value $0.01 per share, of Rockwell Collins issued
and outstanding immediately prior to the effective time of the Merger
(other than shares held by Rockwell Collins, the Company, Merger Sub
or any of their respective wholly owned subsidiaries) was converted into
the right to receive (1) $93.33 in cash, without interest, and (2) 0.37525
of a share of Company common stock, par value $1.00 per share, and
cash in lieu of fractional shares (together, the “Merger Consideration”),
less any applicable withholding taxes. The total aggregate consideration
payable in the Merger was $15.5 billion in cash ($14.9 billion net of
cash acquired) and 62.2 million shares of Company common stock. In
addition, $7.8 billion of Rockwell Collins debt was outstanding as of the
acquisition date.
Our domestic pension funds experienced a negative return on
assets of 5% during 2018 and a positive return on assets of 15.0%
during 2017. Approximately 88% of these domestic pension plans’
funds are invested in readily-liquid investments, including equity, fixed
income, asset-backed receivables and structured products. The
balance of these domestic pension plans’ funds (12%) is invested
in less-liquid but market-valued investments, including real estate
and private equity. As part of our long-term strategy to de-risk our
defined benefit pension plans, we made discretionary contributions
of approximately $1.9 billion to our domestic defined benefit pension
plans in 2017. Across our global pension plans, higher discount rates
for pension obligations and the acquisition of Rockwell Collins, partially
offset by higher discount rates for interest cost and 2018 actual returns
on plan assets, will result in a net periodic pension benefit in 2019 that
is expected to be approximately $100 million favorable relative to 2018
amounts. As part of the Rockwell acquisition on November 26, 2018,
we assumed approximately $3.7 billion of projected pension benefit
obligations and $3.4 billion of plan assets.
Historically, our strong debt ratings and financial position
have enabled us to issue long-term debt at favorable market rates.
Our ability to obtain debt financing or additional credit facilities at
comparable risk-based interest rates is partly a function of our existing
debt-to-total-capitalization level as well as our credit standing. Our
debt-to-total-capitalization increased 600 basis points from 47%
at December 31, 2017 to 53% at December 31, 2018 primarily
reflecting additional borrowings in 2018 used to finance the acquisition
of Rockwell Collins as well as the acquisition of Rockwell Collins’
outstanding debt. The average maturity of our long-term debt at
December 31, 2018 is approximately 11 years.
At December 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. Additionally, on November 26, 2018, we entered
into a $1.5 billion revolving credit agreement, which will mature on
2018 Annual Report May 25, 2019. As of December 31, 2018, 2017 and 2016, there were
no borrowings under any of these revolving credit agreements. The
undrawn portions of our revolving credit agreements are also available
to serve as backup facilities for the issuance of commercial paper. In
addition to the credit facilities referenced above, we expect to enter
into additional credit facilities in 2019 for general corporate purposes,
including to pay existing debt.
As of December 31, 2018, our maximum commercial paper
borrowing authority was $4.35 billion. Commercial paper borrowings at
December 31, 2018 of $1,257 million include approximately €750 million
($858 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.
We had the following issuances of debt in 2018, 2017 and 2016.
Management’s Discussion and Analysis
2 The net proceeds from these debt issuances were used to fund the repayment of
commercial paper and for other general corporate purposes.
3 The net proceeds received from these debt issuances were used for general
corporate purposes.
4 The net proceeds received from these debt issuances were used to fund the repayment
at maturity of our 1.800% notes due 2017, representing $1.5 billion in aggregate principal
and other general corporate purposes.
We made the following repayments of debt in 2018, 2017 and 2016:
(DOLLARS IN MILLIONS)
Repayment Date
Description of Notes
Aggregate Principal Balance
December 14, 2018:
Variable-rate term loan due 2020
(1 month LIBOR plus 1.25%) 1
May 4, 2018:
1.778% junior subordinated notes
February 22, 2018:
EURIBOR plus 0.80% floating
rate notes
February 1, 2018:
6.80% notes
June 1, 2017:
1.800% notes
$
482
$ 1,100
€
750
$
99
$ 1,500
$ 1,000
$ 1,250
(DOLLARS IN MILLIONS)
Issuance Date
Description of Notes
Aggregate Principal Balance
December 1, 2016:
5.375% notes due in 2017 2
August 16, 2018:
3.350% notes due 2021 1
3.650% notes due 2023 1
3.950% notes due 2025 1
4.125% notes due 2028 1
4.450% notes due 2038 1
4.625% notes due 2048 2
LIBOR plus 0.65% floating rate
notes due 2021 1
May 18, 2018:
1.150% notes due 2024 3
€
2.150% notes due 2030 3
EURIBOR plus 0.20% floating rate
notes due 2020 3
6.125% notes due in 2019 2
1 This term loan was assumed in connection with the Rockwell Collins acquisition and
subsequently repaid.
2 These notes were redeemed under our redemption notice issued on November 1, 2016.
A combined net extinguishment loss of approximately $164 million was recognized within
Interest expense, net in the accompanying Consolidated Statement of Operations.
750
750
500
750
We believe our future operating cash flows will be sufficient to meet
our future operating cash needs. Further, we continue to have access
to the commercial paper markets and our existing credit facilities,
and our ability to obtain debt or equity financing or additional credit
facilities provides potential sources of liquidity should they be required
or appropriate.
November 13, 2017:
EURIBOR plus 0.15% floating rate
notes due 2019 2
May 4, 2017:
1.900% notes due 2020 4
2.300% notes due 2022 4
2.800% notes due 2024 4
3.125% notes due 2027 4
4.050% notes due 2047 4
November 1, 2016:
1.500% notes due 2019 2
1.950% notes due 2021 2
2.650% notes due 2026 2
3.750% notes due 2046 2
LIBOR plus 0.35% floating rate
notes due 2019 2
February 22, 2016:
1.125% notes due 2021 3
€
1.875% notes due 2026 3
EURIBOR plus 0.80% floating rate
notes due 2018 3
1 The net proceeds received from these debt issuances were used to partially finance the
cash consideration portion of the purchase price for Rockwell Collins and fees, expenses
and other amounts related to the acquisition of Rockwell Collins.
Cash Flow—Operating Activities of Continuing Operations
(DOLLARS IN MILLIONS)
Net cash flows provided by operating
activities of continuing operations
2018
2017
2016
$ 6,322
$ 5,631
$ 6,412
2018 Compared with 2017
Cash generated from continuing operating activities in 2018 was
approximately $691 million higher than 2017. Cash outflows for working
capital increased $703 million over the prior period to support higher
top line organic growth. Factoring activity resulted in a decrease of
approximately $148 million in cash generated from operating activities
during the year ended, December 31, 2018, as compared to the prior
year. This decrease was primarily driven from lower factoring levels
at Pratt & Whitney and Carrier. Factoring activity does not reflect the
factoring of certain aerospace receivables performed at customer
request for which we are compensated by the customer for the
extended collection cycle.
25
$ 1,000
2,250
1,500
3,000
750
1,750
€
750
$ 1,000
500
800
1,100
600
$
650
750
1,150
1,100
350
950
500
750
United Technologies Corporation Management’s Discussion and Analysis
The 2018 cash outflows from working capital were $755 million.
Accounts receivable increased approximately $2.4 billion due to
an increase in sales volume. Contract assets, current increased
$604 million due to costs in excess of billings primarily at Pratt &
Whitney driven by military engines, at Otis due to progression on major
projects, and at Collins Aerospace Systems. Inventory increased
$537 million primarily driven by an increase in production for the Geared
Turbofan at Pratt & Whitney, increases at Carrier to support higher sales
volume and increases at Collins Aerospace Systems. This was partially
offset by decreases in Other assets of $161 million primarily due to tax
refunds received, an increase in Accounts payable and accrued liabilities
of approximately $2.4 billion, driven by higher inventory purchasing
activity at Pratt & Whitney and higher direct material purchases at Collins
Aerospace Systems, as well as an increase in Contract liabilities, current
of $205 million driven by progress payments on major contracts and
seasonal advanced billings at Otis.
The funded status of our defined benefit pension plans is
dependent upon many factors, including returns on invested assets, the
level of market interest rates and actuarial mortality assumptions. We
can contribute cash or UTC shares to our plans at our discretion, subject
to applicable regulations. Total cash contributions to our global defined
benefit pension plans were $147 million, $2,112 million and $303 million
during 2018, 2017 and 2016, respectively. As of December 31, 2018,
the total investment by the global defined benefit pension plans in the
Company’s securities was less than 1% of total plan assets. Our qualified
domestic defined benefit pension plans are approximately 97% funded
on a projected benefit obligation basis as of December 31, 2018, and
we are not required to make additional contributions through the end
of 2024. We expect to make total contributions of approximately $100
million to our global defined benefit pension plans in 2019. Contributions
to our global defined benefit pension plans in 2019 are expected to meet
or exceed the current funding requirements.
2017 Compared with 2016
As part of our long-term strategy to de-risk our defined benefit pension
plans, we made discretionary contributions of approximately $1.9 billion
to our domestic defined benefit pension plans in 2017. Including the
effects of this contribution, cash generated from operating activities
of continuing operations in 2017 was $781 million lower than 2016.
Lower net income and the higher global pension contributions were
partially offset by lower investments in working capital of approximately
$1.1 billion and approximately $0.6 billion in favorable Other operating
activities, net. The 2017 Other operating activities, net was driven by
increases in net noncurrent income tax liabilities resulting from the TCJA
enacted in December 2017 as discussed above, partially offset by gains
on sales of investments included in net income, including Carrier’s sale
of investments in Watsco, Inc.
The 2017 cash outflows for working capital ($52 million) were
primarily driven by increases in inventories of approximately $1.1 billion,
primarily in our aerospace businesses supporting an increase in
forecasted OEM deliveries and related aftermarket demand, including
approximately $200 million of inventory costs attributable to new engine
offerings 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, as discussed in Note 6. Accounts
receivable increases at Pratt & Whitney were partially offset by declines
at Carrier. Factoring activity provided an increase of approximately
$700 million in cash generated from operating activities of continuing
operations in 2017, as compared to the prior year period. This
increase does not reflect the factoring of certain aerospace receivables
performed at customer request for which we are compensated by the
customer for the extended payment cycle. These increases were largely
offset by the net increase in accrued liabilities and accounts payable
of approximately $1.6 billion, primarily driven by production volumes at
Pratt & Whitney.
For 2016, cash outflows for working capital ($1,161 million) were
primarily driven by increases in inventory in our aerospace businesses
to support deliveries and other contractual commitments, including
approximately $220 million of inventory costs attributable to new engine
offerings 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, as discussed in Note 6.
Increases in accounts receivable at Pratt & Whitney and our commercial
businesses were partially offset by increases in accounts payable and
accrued liabilities across all of our businesses.
Cash Flow—Investing Activities of Continuing Operations
(DOLLARS IN MILLIONS)
Net cash flows used in investing activities of
continuing operations
2018
2017
2016
$ (16,973)
$ (3,019)
$ (2,509)
2018 Compared with 2017
Cash flows used in investing activities of continuing operations for
2018 and 2017 primarily reflect capital investments/dispositions of
businesses, expenditures, cash investments in customer financing
assets, payments related to our collaboration intangible assets and
contractual rights to provide product on new aircraft platforms and
settlements of derivative contracts. The $14 billion increase in cash
flows used in investing activities from the prior year primarily relates
to the $14.9 billion of cash paid for the acquisition of Rockwell Collins
(net of cash acquired) and the absence of $596 million in net proceeds
received from Carrier’s sale of investments in Watsco, Inc. in 2017,
partially offset by proceeds from the sale of Taylor Company in June
2018 by Carrier of $1.0 billion, a decrease in customer financing
assets of $593 million and $143 million in receipts from settlements of
derivative contracts compared to payments of $317 million in 2017.
Capital expenditures in 2018 ($1,902 million) primarily relate to
investments in production capacity at Pratt & Whitney, investments in
production capacity and several small projects at Collins Aerospace
Systems, and new facilities and investments in products and information
technology at Carrier, and investments in digital and information
technology at Otis.
Cash investments in businesses (net of cash acquired) in 2018
($15.4 billion) primarily relate to the acquisition of Rockwell Collins in
November 2018. Dispositions of businesses in 2018 of $1.1 billion
primarily relate to the sale of Taylor Company.
26
2018 Annual Report Customer financing activities, primarily driven by additional Geared
Turbofan engines to support customer fleets, were a net use of cash
of $382 million and $975 million in 2018 and 2017, respectively. We
may also arrange for third-party investors to assume a portion of our
commitments. At December 31, 2018, we had commercial aerospace
financing and other contractual commitments of approximately
$15.5 billion related to commercial aircraft and certain contractual rights
to provide product on new aircraft platforms, of which as much as
$1.7 billion may be required to be disbursed during 2019. As discussed
in Note 1 to the Consolidated Financial Statements, we have entered
into certain collaboration arrangements, which may include participation
by our collaborators in these commitments. At December 31, 2018,
our collaborators’ share of these commitments was approximately
$5.3 billion of which as much as $468 million may be required to be
disbursed to us during 2019. Refer to Note 5 to the Consolidated
Financial Statements for additional discussion of our commercial
aerospace industry assets and commitments.
In 2018, we increased our collaboration intangible assets by
approximately $400 million, which primarily relates to payments made
under our 2012 agreement to acquire Rolls-Royce’s collaboration
interests in IAE.
As discussed in Note 14 to the Consolidated Financial Statements,
we enter into derivative instruments for risk management purposes
only, including derivatives designated as hedging instruments under the
Derivatives and Hedging Topic of the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (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. During the years ended December 31,
2018 and 2017, we had net cash receipts of approximately $143 million
and net cash payments of approximately $317 million, respectively, from
the settlement of these derivative instruments.
2017 Compared with 2016
Cash flows used in investing activities of continuing operations for
2017 and 2016 primarily reflect capital expenditures, cash investments
in customer financing assets, cash investments in businesses, and
payments related to our collaboration intangible assets and contractual
rights to provide product on new aircraft platforms. In 2017, we realized
net proceeds of $596 million from Carrier’s sale of investments in
Watsco, Inc.
In 2017, we increased our collaboration intangible assets by
approximately $380 million, of which approximately $340 million
represented payments made under our 2012 agreement to acquire
Rolls-Royce’s ownership and collaboration interests in IAE. Capital
Management’s Discussion and Analysis
expenditures for 2017 ($2,014 million) primarily relate to investments in
production capacity at Pratt & Whitney and Collins Aerospace Systems,
as well as new facilities at Pratt & Whitney and Carrier. Cash investments
in businesses in 2017 ($231 million) consisted of a number of small
acquisitions, primarily in our commercial businesses.
Cash Flow—Financing Activities of Continuing Operations
(DOLLARS IN MILLIONS)
Net cash flows provided by (used in)
financing activities of continuing operations
2018
2017
2016
$ 7,965
$ (993)
$ (1,188)
2018 Compared with 2017
Our financing activities primarily include the issuance and repayment
of short term and long term debt, payment of dividends and stock
repurchases. Net cash provided by financing activities increased
$8,958 million in 2018 compared to the prior year due to an increase in
long-term debt issuances of $8.5 billion, including the $11 billion issued
in 2018 for the financing of the Rockwell Collins acquisition, and a
decrease in repurchases of common stock of $1.1 billion, partially offset
by an increase in repayments of long-term debt of $0.9 billion.
Commercial paper borrowings and revolving credit facilities provide
short-term liquidity to supplement operating cash flows and are used
for general corporate purposes, including the funding of potential
acquisitions and repurchases of our stock. We had approximately
$1.3 billion of outstanding commercial paper at December 31, 2018.
At December 31, 2018, management had remaining authority to
repurchase approximately $2.0 billion of our common stock under the
October 14, 2015 share repurchase program. Under this program,
shares may be purchased on the open market, in privately negotiated
transactions, under accelerated share repurchase programs, and
under plans complying with Rules 10b5-1 and 10b-18 under the
Securities Exchange Act of 1934, as amended. We may also reacquire
shares outside of the program from time to time in connection with
the surrender of shares to cover taxes on vesting of restricted stock
and in connection with our employee savings plan. We made cash
payments of approximately $325 million to repurchase approximately
2.7 million shares of our common stock during the year ended
December 31, 2018.
We paid aggregate dividends on common stock of approximately
$2.2 billion and $2.1 billion in 2018 and 2017, respectively. On
February 4, 2019, the Board of Directors declared a dividend of $0.735
per share payable March 10, 2019 to shareowners of record at the
close of business on February 15, 2019.
We have an existing universal shelf registration statement filed with
the SEC for an indeterminate amount of debt and equity securities for
future issuance, subject to our internal limitations on the amount of debt
to be issued under this shelf registration statement.
27
United Technologies Corporation Management’s Discussion and Analysis
2017 Compared with 2016
The timing and levels of certain cash flow activities, such as acquisitions
and repurchases of our stock, have resulted in the issuance of both
long-term and short-term debt, including approximately $3.4 billion
and $4.0 billion of net long-term debt issuances in 2017 and 2016,
respectively. Commercial paper borrowings and revolving credit facilities
provide short-term liquidity to supplement operating cash flows and are
used for general corporate purposes, including the funding of potential
acquisitions and repurchases of our stock. We had approximately
$300 million and $522 million of outstanding commercial paper at
December 31, 2017 and 2016, respectively. Commercial paper
borrowings at December 31, 2016 were comprised of approximately
€500 million ($522 million) of Euro-denominated commercial paper. We
had no Euro-denominated commercial paper borrowings outstanding at
December 31, 2017.
At December 31, 2017, we made cash payments of approximately
$1.45 billion to repurchase approximately 12.9 million shares of our
common stock during the year ended December 31, 2017. In addition
to the transactions under the ASR agreements discussed above, we
repurchased approximately 22 million shares of our common stock for
approximately $2.25 billion during the year ended December 31, 2016.
In both 2017 and 2016, we paid aggregate dividends on common
stock of approximately $2.1 billion.
Cash Flow—Discontinued Operations
(DOLLARS IN MILLIONS)
Net cash flows used in discontinued operations
2018
$ —
2017
$ —
2016
$ (2,526)
Cash flows used in operating activities of discontinued operations
in 2016 primarily reflect the payment of taxes associated with the
net gain realized on the sale of Sikorsky to Lockheed Martin Corp. in
November 2015.
CRITICAL ACCOUNTING ESTIMATES
Preparation of our financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Note 1 to the Consolidated Financial
Statements describes the significant accounting policies used in
preparation of the Consolidated Financial Statements. Management
believes the most complex and sensitive judgments, because of their
significance to the Consolidated Financial Statements, result primarily
from the need to make estimates about the effects of matters that are
inherently uncertain. The most significant areas involving management
judgments and estimates are described below. Actual results in these
areas could differ from management’s estimates.
Long-Term Contract Accounting. Effective January 1, 2018,
we adopted ASU 2014-09 and its related amendments (collectively,
the New Revenue Standard) and elected the modified retrospective
approach. Note 3 of the Consolidated Financial Statements contains
further detail regarding the adoption of the New Revenue Standard
and its impact on the Consolidated Financial Statements as of and
for the year ended December 31, 2018. 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. The estimation of contract margin requires
management’s judgment. As described in Note 1, the New Revenue
Standard changed the revenue recognition practices for a number of
revenue streams across our businesses. Several of our businesses
which previously accounted for revenue on a point in time basis are
now required to use an over-time revenue recognition model when their
contracts meet one or more of the mandatory criteria established in
the New Revenue Standard. Revenue is now recognized on an over-
time basis using an input method for repair contracts within Otis and
Carrier; certain U.S. Government and commercial aerospace equipment
contracts; and aerospace aftermarket service work. We measure
progress toward completion for these contracts using costs incurred
to date relative to total estimated costs at completion. This over-time
basis using an input method requires estimates of future revenues and
costs over the full term of product and/or service delivery. Incurred costs
represent work performed, which correspond with and best depict
transfer of control to the customer. Contract costs are incurred over a
period of time, which can be several years, and the estimation of these
costs requires management’s judgment.
The long-term nature of these contracts, the complexity of the
products, and the strict safety and performance standards under which
they are regulated can affect our ability to estimate costs and margin
precisely. As a result, we review our cost estimates on significant
contracts on a quarterly basis and for others, at least 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.
Income Taxes. The future tax benefit arising from deductible
temporary differences and tax carryforwards was $4.7 billion
at December 31, 2018 and $3.8 billion at December 31, 2017.
Management believes that our earnings during the periods when the
temporary differences become deductible will be sufficient to realize
the related future income tax benefits, which may be realized over an
extended period of time. For those jurisdictions where the expiration
date of tax carryforwards or the projected operating results indicate that
realization is not likely, a valuation allowance is provided.
In assessing the need for a valuation allowance, we estimate future
taxable income, considering the feasibility of ongoing tax planning
strategies and the realizability of tax loss carryforwards. Valuation
allowances related to deferred tax assets can be affected by changes
to tax laws, changes to statutory tax rates and future taxable income
levels. In the event we were to determine that we would not be able
to realize all or a portion of our deferred tax assets in the future, we
would reduce such amounts through an increase to tax expense in the
period in which that determination is made or when tax law changes are
enacted. Conversely, if we were to determine that we would be able to
realize our deferred tax assets in the future in excess of the net carrying
amounts, we would decrease the recorded valuation allowance through
a decrease to tax expense in the period in which that determination
is made.
28
2018 Annual Report Management’s Discussion and Analysis
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. For those tax positions
where it is more likely than not that a tax benefit will be sustained, we
have recorded the largest amount of tax benefit with a greater than
50% likelihood of being realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. For those
income tax positions where it is not more likely than not that a tax
benefit will be sustained, no tax benefit has been recognized in the
financial statements. See Notes 1 and 11 to the Consolidated Financial
Statements for further discussion. Also see Note 18 for discussion of
UTC administrative review proceedings with the German Tax Office.
See Note 11 to the Consolidated Financial Statements for
additional provision items recorded in regards to TCJA.
Goodwill and Intangible Assets. Our investments in businesses
net of cash acquired in 2018 totaled $31.1 billion (including debt
assumed of $7.8 billion and stock issued of $8 billion). The assets
and liabilities of acquired businesses are recorded under the
acquisition method of accounting at their estimated fair values at
the dates of acquisition. Goodwill represents costs in excess of fair
values assigned to the underlying identifiable net assets of acquired
businesses. Intangible assets consist of service portfolios, patents,
trademarks/tradenames, customer relationships and other intangible
assets including a collaboration asset established in connection with our
2012 agreement to acquire Rolls-Royce’s ownership and collaboration
interests in IAE, as discussed above and in Note 2 to the Consolidated
Financial Statements. As a result of the acquisition of Rockwell
Collins, goodwill and intangible assets were recorded in the amount of
$20.5 billion and $10.8 billion, respectively. The fair value for acquired
customer relationship intangibles is determined as of the acquisition
date based on estimates and judgments regarding expectations for
the future after-tax cash flows arising from the follow-on revenue from
customer relationships that existed on the acquisition date over their
estimated lives, including the probability of expected future contract
renewals and revenue, less a contributory assets charge, all of which is
discounted to present value. The fair value of the tradename intangible
assets were determined utilizing the relief from royalty method which is
a form of the income approach. Under this method, a royalty rate based
on observed market royalties is applied to projected revenue supporting
the tradename and discounted to present value using an appropriate
discount rate. See Note 2 to the Consolidated Financial Statements for
further details.
Also included within other intangible assets are payments made to
secure certain contractual rights to provide product on new commercial
aerospace platforms. Such payments are capitalized when there are
distinct rights obtained and there are sufficient incremental cash flows
to support the recoverability of the assets established. Otherwise, the
applicable portion of the payments are expensed. Capitalized payments
made on these contractual commitments are amortized as a reduction
of sales. We amortize these intangible assets based on the pattern of
economic benefit, which typically results 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 increasing amortization
expense 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. The gross value of these contractual
commitments at December 31, 2018 was approximately $11.3 billion,
of which approximately $2.7 billion has been paid to date. We record
these payments as intangible assets when such payments are no longer
conditional. The recoverability of these intangibles is dependent upon
the future success and profitability of the underlying aircraft platforms
including the associated aftermarket revenue streams.
Goodwill and intangible assets deemed to have indefinite lives are
not amortized, but are subject to annual, or more frequent if necessary,
impairment testing using the guidance and criteria described in the
Intangibles—Goodwill and Other Topic of the FASB ASC. On July 1,
2017, we early adopted ASU 2017-04, which eliminates Step 2 of the
goodwill impairment test, which required a hypothetical purchase price
allocation to measure goodwill impairment. A goodwill impairment loss
is now measured at the amount by which a reporting unit’s carrying
value exceeds its fair value, without exceeding the recorded amount
of goodwill. In developing our estimates for the fair value of our
reporting units, significant judgment is required in the determination of
the appropriateness of using a qualitative assessment or quantitative
assessment. For these quantitative assessments that are performed, fair
value is primarily based on income approaches using discounted cash
flow models which have significant assumptions. Such assumptions
are subject to variability from year to year and are directly impacted by
global market conditions. We completed our annual impairment testing
as of July 1, 2018 and determined that no significant adjustments to
the carrying value of goodwill or indefinite lived intangible assets were
necessary. Although these assets are not currently impaired, there can
be no assurance that future impairments will not occur. See Note 2 to
the Consolidated Financial Statements for further discussion.
Contingent Liabilities. Our operating units include businesses
which sell products and services and conduct operations throughout
the world. As described in Note 18 to the Consolidated Financial
Statements, contractual, regulatory and other matters, including
asbestos claims, in the normal course of business may arise that subject
us to claims or litigation. Of note, the design, development, production
and support of new aerospace technologies is inherently complex and
subject to risk. Since the PurePower PW1000G Geared Turbofan engine
entered into service in 2016, technical issues have been identified and
experienced with the engine, which is typical for new engines and new
aerospace technologies. Pratt & Whitney has addressed these issues
through various improvements and modifications. These issues have
resulted in financial impacts, including increased warranty provisions,
customer contract settlements, and reductions in contract performance
estimates. Additional technical issues may also arise in the normal
course, which may result in financial impacts that could be material to
the Company’s financial position, results of operations and cash flows.
29
United Technologies Corporation Management’s Discussion and Analysis
Additionally, we have significant contracts with the U.S.
Government, subject to government oversight and audit, which may
require significant adjustment of contract prices. We accrue for liabilities
associated with these matters when it is probable that a liability has
been incurred and the amount can be reasonably estimated. The most
likely cost to be incurred is accrued based on an evaluation of then
currently available facts with respect to each matter. When no amount
within a range of estimates is more likely, the minimum is accrued. The
inherent uncertainty related to the outcome of these matters can result
in amounts materially different from any provisions made with respect to
their resolution.
Employee Benefit Plans. We sponsor domestic and foreign
defined benefit pension and other postretirement plans. Major
assumptions used in the accounting for these employee benefit plans
include the discount rate, expected return on plan assets, rate of
increase in employee compensation levels, mortality rates, and health
care cost increase projections. Assumptions are determined based on
company data and appropriate market indicators, and are evaluated
each year at December 31. A change in any of these assumptions
would have an effect on net periodic pension and postretirement benefit
costs reported in the Consolidated Financial Statements.
In the following table, we show the sensitivity of our pension and
other postretirement benefit plan liabilities and net periodic cost to a
25 basis point change in the discount rates for benefit obligations,
interest cost and service cost as of December 31, 2018:
(DOLLARS IN MILLIONS)
Pension plans
Increase in
Discount Rate
of 25 bps
Decrease in
Discount Rate
of 25 bps
Projected benefit obligation
$ (1,006)
$ 1,056
Net periodic pension (benefit) cost
Other postretirement benefit plans 1
Accumulated postretirement benefit obligation
(39)
(13)
41
14
1 The impact on net periodic postretirement (benefit) cost is less than $1M.
These estimates assume no change in the shape or steepness
of the company-specific yield curve used to plot the individual spot
rates that will be applied to the future cash outflows for future benefit
payments in order to calculate interest and service cost. A flattening of
the yield curve, from a narrowing of the spread between interest and
obligation discount rates, would increase our net periodic pension cost.
Conversely, a steepening of the yield curve, from an increase in the
spread between interest and obligation discount rates, would decrease
our net periodic pension cost.
Pension expense is also sensitive to changes in the expected long-
term rate of asset return. An increase or decrease of 25 basis points in
the expected long-term rate of asset return would have decreased or
increased 2018 pension expense by approximately $87 million.
The weighted-average discount rates used to measure pension
liabilities and costs are set by reference to UTC-specific analyses using
each plan’s specific cash flows and are then compared to high-quality
bond indices for reasonableness. For our significant plans, we utilize
a full yield curve approach in the estimation of the service cost and
interest cost components by applying the specific spot rates along the
yield curve used in determination of the benefit obligation to the relevant
30
projected cash flows. Global market interest rates have increased in
2018 as compared with 2017 and, as a result, the weighted-average
discount rate used to measure pension liabilities increased from 3.4%
in 2017 to 4.0% in 2018. The weighted-average discount rates used to
measure service cost and interest cost were 3.3% and 3.0% in 2018,
respectively. In December 2009, we amended the salaried retirement
plans (qualified and non-qualified) to change the retirement formula
effective January 1, 2015. The formula changed from a final average
earnings (FAE) and credited service formula to the existing cash balance
formula that was adopted in 2003 for newly hired non-union employees
and for other non-union employees who made a one-time voluntary
election to have future benefit accruals determined under this formula.
Employees hired after 2009 are not eligible for any defined benefit
pension plan and will instead receive an enhanced benefit under the
UTC Savings Plan. As of July 26, 2012 the same amendment was
applied to legacy Goodrich salaried employees. Across our global
pension plans, higher discount rates for pension obligations and the
acquisition of Rockwell Collins, partially offset by higher discount
rates for interest cost and 2018 actual returns on plan assets, will
result in a net periodic pension benefit in 2019 that is expected to be
approximately $100 million favorable relative to 2018 amounts.
See Note 12 to the Consolidated Financial Statements for
further discussion.
OFF-BALANCE SHEET ARRANGEMENTS AND
CONTRACTUAL OBLIGATIONS
We extend a variety of financial guarantees to third parties in support
of unconsolidated affiliates and for potential financing requirements of
commercial aerospace customers. We also have obligations arising
from sales of certain businesses and assets, including indemnities for
representations and warranties and environmental, health and safety,
tax and employment matters. Circumstances that could cause the
contingent obligations and liabilities arising from these arrangements
to come to fruition include changes in an underlying transaction (e.g.,
hazardous waste discoveries, etc.), nonperformance under a contract,
customer requests for financing, or deterioration in the financial
condition of the guaranteed party.
A summary of our consolidated contractual obligations and
commitments as of December 31, 2018 is as follows:
(DOLLARS IN MILLIONS)
Long-term debt—
principal
Long-term debt—
future interest
Operating leases
Purchase obligations
Other long-term liabilities
Total contractual
obligations
Payments Due by Period
Total
2019
2020-2021
2022-2023
Thereafter
$ 44,416
$ 2,876
$ 7,587
$ 7,433
$ 26,520
18,394
1,515
2,735
2,336
11,808
2,916
13,948
3,832
683
9,926
1,017
951
3,693
1,192
536
289
541
746
40
1,082
$ 83,506
$ 16,017
$ 16,158
$ 11,135
$ 40,196
Purchase obligations include amounts committed for the purchase
of goods and services under legally enforceable contracts or purchase
orders. Where it is not practically feasible to determine the legally
enforceable portion of our obligation under certain of our long-term
purchase agreements, we include additional expected purchase
obligations beyond what is legally enforceable. Approximately 18%
2018 Annual Report of the purchase obligations disclosed above represent purchase
orders for products to be delivered under firm contracts with the U.S.
Government for which we have full recourse under customary contract
termination clauses.
Other long-term liabilities primarily include those amounts on our
December 31, 2018 balance sheet representing obligations under
product service and warranty policies, performance and operating
cost guarantees, estimated environmental remediation costs and
expected contributions under employee benefit programs. The timing of
expected cash flows associated with these obligations is based upon
management’s estimates over the terms of these agreements and is
largely based upon historical experience.
In connection with the acquisition of Rockwell Collins in 2018 and
Goodrich in 2012, we recorded assumed liabilities of approximately
$970 million and $2.2 billion, respectively related to customer
contractual obligations on certain programs with terms less favorable
than could be realized in market transactions as of the acquisition date.
These liabilities are being liquidated in accordance with the underlying
pattern of obligations, as reflected by the net cash outflows incurred on
the contracts. Total consumption of the contractual obligations for the
year ended December 31, 2018 was approximately $252 million. Total
future consumption of the contractual obligations is expected to be as
follows: $381 million in 2019, $295 million in 2020, $217 million in 2021,
$163 million in 2022, $134 million in 2023 and $500 million thereafter.
These amounts are not included in the table above.
The above table also does not reflect unrecognized tax benefits of
$1,619 million, the timing of which is uncertain, except for approximately
$30 million that may become payable during 2019. Refer to Note 11
to the Consolidated Financial Statements for additional discussion on
unrecognized tax benefits.
COMMERCIAL COMMITMENTS
The following table summarizes our commercial commitments
outstanding as of December 31, 2018:
( DOLLARS IN MILLIONS )
Commercial aerospace
financing commitments
Other commercial
aerospace commitments
Commercial aerospace
financing arrangements
Credit facilities and debt
obligations (expire 2019
to 2028)
Performance guarantees
Total commercial
commitments
Amount of Commitment Expiration per Period
Committed
2019
2020-2021
2022-2023
Thereafter
$ 4,556
$
862
$ 1,710
$ 1,513
$
471
10,914
815
1,379
1,293
7,427
348
—
116
55
101
7
21
—
—
5
322
—
39
15
9
$ 15,989
$ 1,785
$ 3,110
$ 2,850
$ 8,244
In connection with our 2012 agreement to acquire Rolls-Royce’s
ownership and collaboration interests in IAE, additional payments are
due to Rolls-Royce contingent upon each hour flown through June
2027 by the V2500-powered aircraft in service as of the acquisition
date. These flight hour payments, included in “Other commercial
aerospace commitments” in the table above, are being capitalized as
collaboration intangible assets. The collaboration intangible assets are
amortized based upon the pattern of economic benefit as represented
by the underlying cash flows.
Management’s Discussion and Analysis
We also have other contractual commitments, including
commitments to secure certain contractual rights to provide product
on new aircraft platforms, which are included in “Other commercial
aerospace commitments” in the table above. Such payments are
capitalized when distinct rights are obtained and there are sufficient
incremental cash flows to support the recoverability of the assets
established. Otherwise, the applicable portion of the payments
are expensed. Capitalized payments made on these contractual
commitments are included in intangible assets and are amortized over
the term of underlying economic benefit.
Refer to Notes 1, 5 and 17 to the Consolidated Financial
Statements for additional discussion on contractual and
commercial commitments.
MARKET RISK AND RISK MANAGEMENT
We are exposed to fluctuations in foreign currency exchange rates,
interest rates and commodity prices. To manage certain of those
exposures, we use derivative instruments, including swaps, forward
contracts and options. Derivative instruments utilized by us in our
hedging activities are viewed as risk management tools, involve relatively
little complexity and are not used for trading or speculative purposes.
We diversify the counterparties used and monitor the concentration of
risk to limit our counterparty exposure.
We have evaluated our exposure to changes in foreign currency
exchange rates, interest rates and commodity prices in our market risk
sensitive instruments, which are primarily cash, debt, and derivative
instruments, using a value at risk analysis. Based on a 95% confidence
level and a one-day holding period, at December 31, 2018, the potential
loss in fair value on our market risk sensitive instruments was not
material in relation to our financial position, results of operations or cash
flows. Our calculated value at risk exposure represents an estimate of
reasonably possible net losses based on volatilities and correlations and
is not necessarily indicative of actual results. Refer to Notes 1, 9 and 14
to the Consolidated Financial Statements for additional discussion of
foreign currency exchange, interest rates and financial instruments.
Foreign Currency Exposures. We have a large volume of foreign
currency exposures that result from our international sales, purchases,
investments, borrowings and other international transactions. International
segment sales, excluding U.S. export sales, averaged approximately
$26 billion over the last three years. We actively manage foreign currency
exposures that are associated with committed foreign currency purchases
and sales, and other assets and liabilities created in the normal course of
business at the operating unit level. More than insignificant exposures that
cannot be naturally offset within an operating unit are hedged with foreign
currency derivatives. We also have a significant amount of foreign currency
net asset exposures. As discussed in Note 9 to the Consolidated Financial
Statements, at December 31, 2018 we have approximately €4.95 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
December 31, 2018, the net investment hedge is deemed to be effective.
Currently, we do not hold any derivative contracts that hedge our foreign
currency net asset exposures but may consider such strategies in the future.
31
United Technologies Corporation Management’s Discussion and Analysis
Within aerospace, our sales are typically denominated in U.S.
Dollars under accepted industry convention. However, for our non-U.S.
based entities, such as P&WC, a substantial portion of their costs are
incurred in local currencies. Consequently, there is a foreign currency
exchange impact and risk to operational results as U.S. Dollars must be
converted to local currencies such as the Canadian Dollar in order to
meet local currency cost obligations. Additionally, we transact business
in various foreign currencies which exposes our cash flows and earnings
to changes in foreign currency exchange rates. In order to minimize
the exposure that exists from changes in the exchange rate of the
U.S. Dollar against these other currencies, we hedge a certain portion
of sales to secure the rates at which U.S. Dollars will be converted.
The majority of this hedging activity occurs at P&WC and Collins
Aerospace Systems, and hedging activity also occurs to a lesser extent
at the remainder of Pratt & Whitney. At P&WC and Collins Aerospace
Systems, firm and forecasted sales for both original equipment and
spare parts are hedged at varying amounts for up to 49 months on the
U.S. Dollar sales exposure as represented by the excess of U.S. Dollar
sales over U.S. Dollar denominated purchases. Hedging gains and
losses resulting from movements in foreign currency exchange rates
are partially offset by the foreign currency translation impacts that are
generated on the translation of local currency operating results into
U.S. Dollars for reporting purposes. While the objective of the hedging
program is to minimize the foreign currency exchange impact on
operating results, there are typically variances between the hedging
gains or losses and the translational impact due to the length of hedging
contracts, changes in the sales profile, volatility in the exchange rates
and other such operational considerations.
Interest Rate Exposures. Our long-term debt portfolio consists
mostly of fixed-rate instruments. From time to time, we may hedge to
floating rates using interest rate swaps. The hedges are designated as
fair value hedges and the gains and losses on the swaps are reported in
interest expense, reflecting that portion of interest expense at a variable
rate. We issue commercial paper, which exposes us to changes in
interest rates. Currently, we do not hold any derivative contracts that
hedge our interest exposures, but may consider such strategies in
the future.
Commodity Price Exposures. We are exposed to volatility in the
prices of raw materials used in some of our products and from time to
time we may use forward contracts in limited circumstances to manage
some of those exposures. In the future, if hedges are used, gains and
losses may affect earnings. There were no significant outstanding
commodity hedges as of December 31, 2018.
ENVIRONMENTAL MATTERS
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 a result, we have
established, and continually update, policies relating to environmental
standards of performance for our operations worldwide. We believe
that expenditures necessary to comply with the present regulations
governing environmental protection will not have a material effect
upon our competitive position, results of operations, cash flows or
financial condition.
We have identified 741 locations, mostly in the United States, at
which we may have some liability for remediating contamination. We
have resolved our liability at 352 of these locations. We do not believe
that any individual location’s exposure will have a material effect on our
results of operations. Sites in the investigation, remediation or operation
and maintenance stage represent approximately 93% of our accrued
environmental remediation reserve.
We have been identified as a potentially responsible party under the
Comprehensive Environmental Response Compensation and Liability
Act (CERCLA or Superfund) at 128 sites. The number of Superfund
sites, in and of itself, does not represent a relevant measure of liability
because the nature and extent of environmental concerns vary from
site to site and our share of responsibility varies from sole responsibility
to very little responsibility. In estimating our liability for remediation, we
consider our likely proportionate share of the anticipated remediation
expense and the ability of other potentially responsible parties to fulfill
their obligations.
At December 31, 2018 and 2017, we had $830 million reserved for
environmental remediation. Cash outflows for environmental remediation
were $48 million in 2018, $42 million in 2017 and $44 million in 2016.
We estimate that ongoing environmental remediation expenditures in
each of the next two years will not exceed approximately $100 million.
ASBESTOS MATTERS
As a result of the definitization of the insurance coverage for existing
and potential future asbestos claims through the negotiation and
establishment of settlement agreements during 2015, as well as the
stabilization of company and industry experience, we established a
reserve for our potential asbestos exposure, recording a noncash pretax
charge to earnings of $237 million in the fourth quarter of 2015.
Our estimated total liability to resolve all pending and unasserted
potential future asbestos claims through 2059 is approximately
$335 million and is principally recorded in Other long-term liabilities on
our Consolidated Balance Sheet as of December 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 $155 million, which is included primarily in Other
assets on our Consolidated Balance Sheet as of December 31, 2018.
See Note 18 “Contingent Liabilities” of our Consolidated Financial
Statements for further discussion of this matter.
GOVERNMENT MATTERS
As described in “Critical Accounting Estimates—Contingent Liabilities,”
our contracts with the U.S. Government are subject to audits. Such
audits may recommend that certain contract prices should be reduced
to comply with various government regulations, or that certain payments
be delayed or withheld. We are also the subject of one or more
investigations and legal proceedings initiated by the U.S. Government
with respect to government contract matters. See “Legal Proceedings”
in Item 1 to this Form 10-K, and Note 11 “Income Taxes” and Note 18
“Contingent Liabilities” of our Consolidated Financial Statements for
further discussion of these and other government matters.
32
2018 Annual Report Cautionary Note Concerning Factors That May Affect Future Results
This 2018 Annual Report to Shareowners (2018 Annual Report)
contains statements which, to the extent they are not statements of
historical or present fact, constitute “forward-looking statements” under
the securities laws. From time to time, oral or written forward-looking
statements may also be included in other information released to the
public. These forward-looking statements are intended to provide
management’s current expectations or plans for our future operating
and financial performance, based on assumptions currently believed
to be valid. Forward-looking statements can be identified by the
use of words such as “believe,” “expect,” “expectations,” “plans,”
“strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “will,”
“should,” “see,” “guidance,” “outlook”, “confident” and other words of
similar meaning in connection with a discussion of future operating or
financial performance or the separation transactions. Forward-looking
statements may include, among other things, statements relating
to future sales, earnings, cash flow, results of operations, uses of
cash, share repurchases, tax rates and other measures of financial
performance or potential future plans, strategies or transactions of
United Technologies or the independent companies following United
Technologies’ expected separation into three independent companies,
the anticipated benefits of the acquisition of Rockwell Collins or of the
separation transactions, including estimated synergies resulting from
the Rockwell Collins transaction, the expected timing of completion
of the separation transactions, estimated costs associated with such
transactions and other statements that are not historical facts. All
forward-looking statements involve risks, uncertainties and other factors
that may cause actual results to differ materially from those expressed
or implied in the forward-looking statements. For those statements, we
claim the protection of the safe harbor for forward-looking statements
contained in the U.S. Private Securities Litigation Reform Act of 1995.
Such risks, uncertainties and other factors include, without limitation:
• the effect of economic conditions in the industries and markets
in which we operate in the U.S. and globally and any changes
therein, including financial market conditions, fluctuations in
commodity prices, interest rates and foreign currency exchange
rates, levels of end market demand in construction and in both
the commercial and defense segments of the aerospace industry,
levels of air travel, financial condition of commercial airlines,
the impact of weather conditions and natural disasters and the
financial condition of our customers and suppliers;
• challenges in the development, production, delivery, support,
performance and realization of the anticipated benefits (including
expected returns under customer contracts) of advanced
technologies and new products and services;
• the scope, nature, impact or timing of the expected separation
transactions and other acquisition and divestiture activity,
including among other things integration of acquired businesses
into UTC’s existing businesses and realization of synergies and
opportunities for growth and innovation and incurrence of related
costs and expenses;
• future levels of indebtedness, including indebtedness that may be
incurred in connection with the expected separation transactions,
and capital spending and research and development spending;
• future availability of credit and factors that may affect such
availability, including credit market conditions and our
capital structure;
• the timing and scope of future repurchases of our common stock,
which may be suspended at any time due to various factors,
including market conditions and the level of other investing
activities and uses of cash;
• delays and disruption in delivery of materials and services
from suppliers;
• company and customer-directed cost reduction efforts and
restructuring costs and savings and other consequences thereof;
• new business and investment opportunities;
• our ability to realize the intended benefits of
organizational changes;
• the anticipated benefits of diversification and balance of
operations across product lines, regions and industries;
• the outcome of legal proceedings, investigations and
other contingencies;
• pension plan assumptions and future contributions;
• the impact of the negotiation of collective bargaining agreements
and labor disputes;
• the effect of changes in political conditions in the U.S. and other
countries in which we operate, including the effect of changes
in U.S. trade policies or the U.K.’s pending withdrawal from
the European Union, on general market conditions, global
trade policies and currency exchange rates in the near term
and beyond;
• the effect of changes in tax (including the U.S. tax reform enacted
on December 22, 2017 and is commonly referred to as the Tax
Cuts and Jobs Act of 2017 (TCJA)), environmental, regulatory
(including among other things import/export) and other laws and
regulations in the U.S. and other countries in which we operate;
• negative effects of the Rockwell Collins acquisition or of the
announcement or pendency of the separation transactions
on the market price of UTC’s common stock and on its
financial performance;
• risks relating to the integration of Rockwell Collins, including the
risk that the integration may be more difficult, time-consuming
or costly than expected or may not result in the achievement of
estimated synergies within the contemplated time frame or at all;
• our ability to retain and hire key personnel;
• the expected benefits and timing of the separation transactions,
and the risk that conditions to the separation transactions will
not be satisfied and/or that the separation transactions will not
be completed within the expected time frame, on the expected
terms or at all;
• the expected qualification of the separation transactions as
tax-free transactions for U.S. federal income tax purposes;
• the possibility that any consents or approvals required in
connection with the expected separation transactions will not
be received or obtained within the expected time frame, on the
expected terms or at all;
33
United Technologies Corporation Cautionary Note Concerning Factors That May Affect Future Results
• expected financing transactions undertaken in connection
with the separation transactions and risks associated with
additional indebtedness;
• the risk that dissynergy costs, costs of restructuring transactions
and other costs incurred in connection with the expected
separation transactions will exceed our estimates; and
• the impact of the expected separation transactions on our
businesses and the risk that the separation transactions may
be more difficult, time-consuming or costly than expected,
including the impact on our resources, systems, procedures and
controls, diversion of management’s attention and the impact
on relationships with customers, suppliers, employees and other
business counterparties.
In addition, our Annual Report on Form 10-K for 2018 includes
important information as to risks, uncertainties and other factors that
may cause actual results to differ materially from those expressed
or implied in the forward-looking statements. See the “Notes to
Consolidated Financial Statements” under the heading “Note 18:
Contingent Liabilities,” the section titled “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” under
the headings “Business Overview,” “Results of Operations,” “Liquidity
and Financial Condition,” and “Critical Accounting Estimates,” and
the section titled “Risk Factors.” Our Annual Report on Form 10-K
for 2018 also includes important information as to these factors in
the “Business” section under the headings “General,” “Description of
Business by Segment” and “Other Matters Relating to Our Business as
a Whole,” and in the “Legal Proceedings” section. Additional important
information as to these factors is included in this 2018 Annual Report in
the section titled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” under the headings “Restructuring
Costs,” “Environmental Matters” and “Governmental Matters.” The
forward-looking statements speak only as of the date of this report or,
in the case of any document incorporated by reference, the date of that
document. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by applicable law.
Additional information as to factors that may cause actual results to
differ materially from those expressed or implied in the forward-looking
statements is disclosed from time to time in our other filings with
the SEC.
34
2018 Annual Report Management’s Report on Internal Control over Financial Reporting
The management of UTC is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control
over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with accounting principles generally accepted in the United
States of America. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements.
On November 26, 2018, the Company completed its merger of
Rockwell Collins. Accordingly, the acquired assets and liabilities of
Rockwell Collins are included in our consolidated balance sheet as of
December 31, 2018 and the results of its operations and cash flows
are reported in our consolidated statements of operations and cash
flows from November 26, 2018 through December 31, 2018. We
have elected to exclude Rockwell Collins from the scope of our report
on internal control over financial reporting as of December 31, 2018.
Rockwell Collins is a wholly-owned subsidiary whose total assets
and total revenues excluded from the scope of our report represent 5
percent and 1 percent, respectively of the related consolidated financial
statement amounts as of and for the year ended December 31, 2018.
Management has assessed the effectiveness of UTC’s internal
control over financial reporting as of December 31, 2018. In making
its assessment, management has utilized the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
in its Internal Control—Integrated Framework, released in 2013.
Management concluded that based on its assessment, UTC’s internal
control over financial reporting was effective as of December 31, 2018.
The effectiveness of UTC’s internal control over financial reporting, as
of December 31, 2018, has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their
report which is included herein.
Gregory J. Hayes
Chairman, President and Chief Executive Officer
Akhil Johri
Executive Vice President & Chief Financial Officer
Robert J. Bailey
Corporate Vice President, Controller
35
United Technologies Corporation Report of Independent Registered Public Accounting Firm
TO THE SHAREOWNERS AND BOARD OF DIRECTORS OF UNITED
TECHNOLOGIES CORPORATION
Opinions on the Financial Statements and Internal Control over
Financial Reporting
We have audited the accompanying consolidated balance sheets of
United Technologies Corporation and its subsidiaries (the “Corporation”)
as of December 31, 2018 and 2017, and the related consolidated
statements of operations, of comprehensive income, of changes
in equity and of cash flows for each of the three years in the period
ended December 31, 2018, including the related notes (collectively
referred to as the “consolidated financial statements”). We also have
audited the Corporation’s internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the
Corporation as of December 31, 2018 and 2017, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 2018 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion,
the Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Change in Accounting Principles
As discussed in Notes 3 and 12 to the consolidated financial
statements, the Corporation changed the manner in which it accounts
for revenue from contracts with customers and the manner in which it
accounts for net periodic benefit cost in 2018.
Basis for Opinions
The Corporation’s management is responsible for these consolidated
financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express opinions on the Corporation’s consolidated financial statements
and on the Corporation’s internal control over financial reporting based
on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Corporation in accordance
with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or
fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included
performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
36
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements.
Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over
Financial Reporting, management has excluded Rockwell Collins,
Inc. from its assessment of internal control over financial reporting as
of December 31, 2018 because it was acquired by the Corporation
in a purchase business combination during 2018. We have also
excluded Rockwell Collins, Inc. from our audit of internal control over
financial reporting. Rockwell Collins, Inc. is a wholly-owned subsidiary
whose total assets and total revenues excluded from management’s
assessment and our audit of internal control over financial reporting
represent 5% and 1%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over
Financial Reporting
A corporation’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
A corporation’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the corporation; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of
the corporation are being made only in accordance with authorizations
of management and directors of the corporation; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the corporation’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
PricewaterhouseCoopers LLP
Hartford, Connecticut
February 7, 2019
We have served as the Corporation’s auditor since 1947.
2018 Annual Report Consolidated Statement of Operations
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS; SHARES IN MILLIONS)
2018
2017
2016
Net Sales:
Product sales
Service sales
Costs and Expenses:
Cost of products sold
Cost of services sold
Research and development
Selling, general and administrative
Other income, net
Operating profit
Non-service pension (benefit) cost
Interest expense, net
Income from continuing operations before income taxes
Income tax expense
Net income from continuing operations
Less: Noncontrolling interest in subsidiaries’ earnings from continuing operations
Income from continuing operations attributable to common shareowners
Discontinued operations:
Income from operations
Gain on disposal
Income tax expense
Net loss from discontinued operations
Net income attributable to common shareowners
Earnings Per Share of Common Stock—Basic:
Net income from continuing operations attributable to common shareowners
Net income attributable to common shareowners
Earnings Per Share of Common Stock—Diluted:
Net income from continuing operations attributable to common shareowners
Net income attributable to common shareowners
Weighted average number of shares outstanding:
Basic shares
Diluted shares
See accompanying Notes to Consolidated Financial Statements
$ 45,434
21,067
66,501
$ 41,361
18,476
59,837
$ 40,735
16,509
57,244
36,754
13,231
2,462
7,066
59,513
1,565
8,553
(765)
1,038
8,280
2,626
5,654
385
5,269
31,224
12,977
2,427
6,429
53,057
1,358
8,138
(534)
909
7,763
2,843
4,920
368
4,552
30,304
11,167
2,376
5,958
49,805
782
8,221
49
1,039
7,133
1,697
5,436
371
5,065
—
—
—
—
$ 5,269
—
—
—
—
$ 4,552
1
13
(24)
(10)
$ 5,055
$
$
$
$
6.58
6.58
6.50
6.50
$
$
$
$
5.76
5.76
5.70
5.70
$
$
$
$
6.19
6.18
6.13
6.12
800.4
810.1
790.0
799.1
818.2
826.1
37
United Technologies Corporation 2018
2017
2016
$ 5,654
—
5,654
$ 4,920
—
4,920
$ 5,436
(10)
5,426
(516)
620
(1,089)
(2)
(518)
(4)
(522)
(1,819)
(22)
344
105
(1,392)
326
(1,066)
—
—
(5)
(5)
—
(5)
(10)
610
—
610
241
2
529
(116)
656
(263)
393
5
(566)
—
(561)
213
(348)
—
(1,089)
—
(1,089)
(785)
(13)
535
542
279
(189)
90
190
(94)
—
96
(36)
60
(307)
(16)
(323)
78
(245)
(1,838)
3,816
(355)
$ 3,461
347
(39)
308
(74)
234
889
5,809
(448)
$ 5,361
75
171
246
(69)
177
(762)
4,664
(324)
$ 4,340
Consolidated Statement of Comprehensive Income
(DOLLARS IN MILLIONS)
Net income from continuing operations
Net loss from discontinued operations
Net income
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustments
Foreign currency translation adjustments arising during period
Less: Reclassification adjustments for gain on sale of an investment in a
foreign entity recognized in Other income, net
Tax (expense)
Pension and postretirement benefit plans
Net actuarial (loss) gain arising during period
Prior service (cost) credit arising during period
Amortization of actuarial loss and prior service cost
Other
Tax benefit (expense)
Unrealized (loss) gain on available-for-sale securities
Unrealized holding gain arising during period
Reclassification adjustments for gain included in Other income, net
ASU 2016-01 adoption impact (Note 10)
Tax benefit (expense)
Change in unrealized cash flow hedging
Unrealized cash flow hedging (loss) gain arising during period
(Gain) loss reclassified into Product sales
Tax benefit (expense)
Other comprehensive (loss) income, net of tax
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to common shareowners
See accompanying Notes to Consolidated Financial Statements
38
2018 Annual Report Consolidated Balance Sheet
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS; SHARES IN THOUSANDS)
2018
2017
Assets
Cash and cash equivalents
Accounts receivable (net of allowance for doubtful accounts of $488 and $456)
Contract assets, current
Inventories and contracts in progress, net
Other assets, current
Total Current Assets
Customer financing assets
Future income tax benefits
Fixed assets, net
Goodwill
Intangible assets, net
Other assets
Total Assets
Liabilities and Equity
Short-term borrowings
Accounts payable
Accrued liabilities
Contract liabilities, current
Long-term debt currently due
Total Current Liabilities
Long-term debt
Future pension and postretirement benefit obligations
Other long-term liabilities
Total Liabilities
Commitments and contingent liabilities (Notes 5 and 18)
Redeemable noncontrolling interest
Shareowners’ Equity:
Capital Stock:
Preferred Stock, $1 par value; 250,000 shares authorized; None issued or outstanding
Common Stock, $1 par value; 4,000,000 shares authorized; 1,446,961 and 1,444,187 shares issued
Treasury Stock— 585,479 and 645,057 common shares at average cost
Retained earnings
Unearned ESOP shares
Total Accumulated other comprehensive loss
Total Shareowners’ Equity
Noncontrolling interest
Total Equity
Total Liabilities and Equity
See accompanying Notes to Consolidated Financial Statements
$
6,152
14,271
3,486
10,083
1,511
35,503
3,023
1,646
12,297
48,112
26,424
7,206
$ 134,211
$
1,469
11,080
10,223
5,720
2,876
31,368
41,192
4,018
16,914
93,492
$
8,985
12,595
—
9,881
1,397
32,858
2,372
1,723
10,186
27,910
15,883
5,988
$ 96,920
$
392
9,579
12,316
—
2,104
24,391
24,989
3,036
12,952
65,368
109
131
—
22,514
(32,482)
57,823
(76)
(9,333)
38,446
2,164
40,610
$ 134,211
—
17,574
(35,596)
55,242
(85)
(7,525)
29,610
1,811
31,421
$ 96,920
39
United Technologies Corporation Consolidated Statement of Cash Flows
(DOLLARS IN MILLIONS)
Operating Activities of Continuing Operations:
Net income from continuing operations
Adjustments to reconcile income from continuing operations to net cash flows provided by operating activities of
continuing operations:
2018
2017
2016
$
5,654
$ 4,920
$ 5,436
Depreciation and amortization
Deferred income tax provision
Stock compensation cost
Gain on sale of Taylor Company
Change in:
Accounts receivable
Contract assets, current
Inventories and contracts in progress
Other current assets
Accounts payable and accrued liabilities
Contract liabilities, current
Global pension contributions
Canadian government settlement
Other operating activities, net
Net cash flows provided by operating activities of continuing operations
Investing Activities of Continuing Operations:
Capital expenditures
Increase in customer financing assets
Decrease in customer financing assets
Investments in businesses (Note 2)
Dispositions of businesses (Note 2)
Proceeds from sale of investments in Watsco, Inc.
Increase in collaboration intangible assets
Receipts (payments) from settlements of derivative contracts
Other investing activities, net
Net cash flows used in investing activities of continuing operations
Financing Activities of Continuing Operations:
Issuance of long-term debt
Repayment of long-term debt
Decrease in short-term borrowings, net
Proceeds from Common Stock issued under employee stock plans
Dividends paid on Common Stock
Repurchase of Common Stock
Other financing activities, net
Net cash flows provided by (used in) financing activities of continuing operations
Discontinued Operations:
Net cash used in operating activities
Net cash provided by investing activities
Net cash flows used in discontinued operations
Effect of foreign exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
Less: Restricted cash, included in Other assets
Cash and cash equivalents of continuing operations, end of year
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of amounts capitalized
Income taxes paid, net of refunds
See accompanying Notes to Consolidated Financial Statements
40
2,433
735
251
(799)
(2,426)
(604)
(537)
161
2,446
205
(147)
(429)
(621)
6,322
(1,902)
(988)
606
(15,398)
1,105
—
(400)
143
(139)
(16,973)
13,455
(2,520)
(356)
36
(2,170)
(325)
(155)
7,965
—
—
—
(120)
(2,806)
9,018
6,212
60
6,152
2,140
62
192
—
(448)
—
(1,074)
(101)
1,571
—
(2,112)
(285)
766
5,631
(2,014)
(1,197)
222
(231)
70
596
(380)
(317)
232
(3,019)
4,954
(1,604)
(271)
31
(2,074)
(1,453)
(576)
(993)
1,962
398
152
—
(941)
—
(719)
49
450
—
(303)
(237)
165
6,412
(1,699)
(438)
217
(710)
211
—
(388)
249
49
(2,509)
6,469
(2,452)
(331)
13
(2,069)
(2,254)
(564)
(1,188)
—
—
—
210
1,829
7,189
9,018
33
$ 8,985
(2,532)
6
(2,526)
(120)
69
7,120
7,189
32
$ 7,157
1,027
1,714
$
974
$ 1,326
$ 1,157
$ 4,096
$
$
$
2018 Annual Report Consolidated Statement of Changes in Equity
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS; SHARES IN THOUSANDS)
Equity at January 1
Common Stock
Balance at January 1
Common Stock issued under employee plans
Common Stock repurchased
Common Stock issued for Rockwell Collins outstanding common stock & equity awards
(Purchase) sale of subsidiary shares from noncontrolling interest, net
Redeemable noncontrolling interest fair value adjustment
Balance at December 31
Treasury Stock
Balance at January 1
Common Stock issued under employee plans
Common Stock repurchased
Common Stock issued for Rockwell Collins outstanding common stock & equity awards
Balance at December 31
Retained Earnings
Balance at January 1
Net Income
Dividends on Common Stock
Dividends on ESOP Common Stock
Redeemable noncontrolling interest fair value adjustment
New Revenue Standard adoption impact
Other
Balance at December 31
Unearned ESOP Shares
Balance at January 1
Common Stock issued under employee plans
Balance at December 31
Accumulated Other Comprehensive (Loss) Income
Balance at January 1
Other comprehensive (loss) income, net of tax
Balance at December 31
Noncontrolling Interest
Balance at January 1
Net Income
Redeemable noncontrolling interest in subsidiaries’ earnings
Other comprehensive (loss) income, net of tax
Dividends attributable to noncontrolling interest
(Purchase) sale of subsidiary shares from noncontrolling interest, net
(Disposition) acquisition of noncontrolling interest, net
Redeemable noncontrolling interest reclassification to noncontrolling interest
Capital contributions
Other
Balance at December 31
Equity at December 31
Supplemental share information
Shares of Common Stock issued under employee plans
Shares of Common Stock repurchased
Dividends per share of Common Stock
See accompanying Notes to Consolidated Financial Statements
2018
2017
2016
$ 31,421
$ 29,169
$ 28,844
17,574
423
—
4,523
(6)
—
22,514
(35,596)
6
(329)
3,437
(32,482)
55,242
5,269
(2,170)
(71)
7
(480)
26
57,823
(85)
9
(76)
17,285
331
1
—
4
(47)
17,574
(34,150)
7
(1,453)
—
(35,596)
52,873
4,552
(2,074)
(72)
(42)
—
5
55,242
(95)
10
(85)
(7,525)
(1,808)
(9,333)
(8,334)
809
(7,525)
16,033
262
998
—
(8)
—
17,285
(30,907)
9
(3,252)
—
(34,150)
49,956
5,055
(2,069)
(74)
(1)
—
6
52,873
(105)
10
(95)
(7,619)
(715)
(8,334)
1,811
385
(4)
(30)
(315)
(23)
(8)
—
342
6
2,164
$ 40,610
1,590
368
(17)
56
(336)
—
14
—
135
1
1,811
$ 31,421
1,486
371
(6)
(27)
(345)
24
98
(12)
—
1
1,590
$ 29,169
2,775
2,727
2.84
3,205
12,900
2.72
$
2,485
32,300
2.62
$
$
41
United Technologies Corporation NOTE 1: SUMMARY OF ACCOUNTING PRINCIPLES
In January 2016, the FASB issued ASU 2016-01, Financial
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates. Certain reclassifications have been made to the prior year
amounts to conform to the current year presentation.
Consolidation. The Consolidated Financial Statements include the
accounts of United Technologies Corporation (UTC) and its controlled
subsidiaries. Intercompany transactions have been eliminated.
Cash and Cash Equivalents. Cash and cash equivalents includes
cash on hand, demand deposits and short-term cash investments that are
highly liquid in nature and have original maturities of three months or less.
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. As
discussed in Note 10, 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.
On occasion, we are required to maintain cash deposits with certain
Inventories and Contracts in Progress. Inventories and
banks with respect to contractual obligations related to acquisitions or
divestitures or other legal obligations. As of December 31, 2018 and
2017, the amount of such restricted cash was approximately $60 million
and $33 million, respectively.
Accounts Receivable. Current and long-term accounts
receivable as of December 31, 2018 includes retainage of $116 million
and unbilled receivables of $678 million, which primarily includes unbilled
receivables with commercial aerospace customers. Current and long-
term accounts receivable as of December 31, 2017 include retainage of
$118 million and unbilled receivables of $2,770 million, which includes
approximately $1,109 million of unbilled receivables under commercial
aerospace long-term aftermarket contracts. See Note 5 for discussion
of commercial aerospace industry assets and commitments.
Retainage represents amounts that, pursuant to the applicable
contract, are not due until project completion and acceptance by the
customer. Unbilled receivables represent revenues that are not currently
billable to the customer under the terms of the contract. These items are
expected to be billed and collected in the normal course of business.
Upon adoption of Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers, and its related amendments
(collectively, the New Revenue Standard) on January 1, 2018, the
majority of unbilled receivables have been reclassified to contract
assets as described below. Unbilled receivables where we have an
unconditional right to payment are included in Accounts receivable as of
December 31, 2018.
Contract Assets and Liabilities. Contract assets and liabilities
represent the difference in the timing of revenue recognition from receipt
of cash from our customers. Contract assets reflect revenue recognized
and performance obligations satisfied in advance of customer billing.
Performance obligations partially satisfied in advance of customer
billings are included in contract assets; prior to the New Revenue
Standard, these amounts were included as unbilled receivables in
Accounts receivable.
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. See
Note 3 for further discussion of contract assets and liabilities.
Marketable Equity Securities. Equity securities that have a
readily determinable fair value and that we do not intend to trade are
classified as available-for-sale and carried at fair value.
contracts in progress are stated at the lower of cost or estimated
realizable value and are primarily based on first-in, first-out (FIFO) or
average cost methods; however, certain Collins Aerospace Systems and
Carrier entities use the last-in, first-out (LIFO) method. If inventories that
were valued using the LIFO method had been valued under the FIFO
method, they would have been higher by $119 million and $106 million
at December 31, 2018 and 2017, respectively.
Valuation reserves for excess, obsolete, and slow-moving inventory
are estimated by comparing the inventory levels of individual parts to
both future sales forecasts or production requirements and historical
usage rates in order to identify inventory where the resale value or
replacement value is less than inventoriable cost. Other factors that
management considers in determining the adequacy of these reserves
include whether individual inventory parts meet current specifications
and cannot be substituted for a part currently being sold or used as a
service part, overall market conditions, and other inventory management
initiatives. Manufacturing costs are allocated to current production and
firm contracts. Under prior accounting within commercial aerospace,
the unit of accounting for certain contracts 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. As described in the “Revenue Recognition” section
of Note 1 below, these costs were eliminated through retained earnings
on January 1, 2018 and will not be amortized into future earnings based
on the adoption of Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers.
Equity Method Investments. Investments in which we have
the ability to exercise significant influence, but do not control, are
accounted for under the equity method of accounting and are included
in Other assets on the Consolidated Balance Sheet. Under this method
of accounting, our share of the net earnings or losses of the investee
is included in Other income, net on the Consolidated Statement of
Operations since the activities of the investee are closely aligned with
the operations of the business segment holding the investment. We
evaluate our equity method investments whenever events or changes
in circumstance indicate that the carrying amounts of such investments
may be impaired. If a decline in the value of an equity method
investment is determined to be other than temporary, a loss is recorded
in earnings in the current period.
42
2018 Annual ReportNotes to Consolidated Financial Statements
Business Combinations. We account for transactions that are
classified as business combinations in accordance with FASB ASC
Topic 805, “Business Combinations”. Once a business is acquired, the
fair value of the identifiable assets acquired and liabilities assumed is
determined with the excess cost recorded to goodwill. As required, a
preliminary fair value is determined once a business is acquired, with the
final determination of the fair value being completed within the one year
measurement period from the date of acquisition.
Goodwill and Intangible Assets. Goodwill represents costs in
excess of fair values assigned to the underlying net assets of acquired
businesses. Goodwill and intangible assets deemed to have indefinite
lives are not amortized. Goodwill and indefinite-lived intangible assets
are subject to annual impairment testing or when a triggering event
occurs using the guidance and criteria described in the Intangibles -
Goodwill and Other Topic of the FASB ASC. This testing compares
carrying values to fair values and, when appropriate, the carrying value
of these assets is reduced to fair value.
Intangible assets consist of service portfolios, patents,
trademarks/tradenames, customer relationships and other intangible
assets including a collaboration asset, as discussed further in Note 2.
Acquired intangible assets are recognized at fair value in purchase
accounting and then amortized to cost of sales and selling, general &
administrative expenses over the applicable useful lives. Also included
within other intangible assets are commercial aerospace payments
made to secure certain contractual rights to provide product on new
aircraft platforms. We classify amortization of such payments as a
reduction of sales. Such payments are capitalized when there are
distinct rights obtained and there are sufficient incremental cash flows
to support the recoverability of the assets established. Otherwise,
the applicable portion of the payments are expensed. Consideration
paid on these contractual commitments is capitalized when it is no
longer conditional.
Useful lives of finite-lived intangible assets are estimated based
upon the nature of the intangible asset and the industry in which the
intangible asset is used. These intangible assets are amortized based
on the pattern in which the economic benefits of the intangible assets
are consumed. For both our commercial aerospace collaboration
assets and exclusivity arrangements, the pattern of economic benefit
generally results in lower amortization during the development period
with increasing amortization as programs enter full rate production and
aftermarket cycles. If a pattern of economic benefit cannot be reliably
determined or if straight-line amortization approximates the pattern of
economic benefit, a straight-line amortization method may be used. The
range of estimated useful lives is as follows:
Collaboration assets
Customer relationships and related programs
Purchased service contracts
Patents & trademarks
Exclusivity assets
30 years
1 to 50 years
5 to 25 years
4 to 40 years
5 to 25 years
Other Long-Lived Assets. We evaluate the potential impairment
of other long-lived assets whenever events or changes in circumstances
indicate that the related carrying amounts may not be recoverable. If the
carrying value of other long-lived assets held and used exceeds the sum
of the undiscounted expected future cash flows, the carrying value is
written down to fair value.
Long-Term Financing Receivables. Our long-term financing
receivables primarily represent balances related to the aerospace
businesses such as long-term trade accounts receivable, leases, and
notes receivable. We also have other long-term receivables in 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 in 2017, are principally
amounts arising from the sale of goods and services with a contractual
maturity date or realization period of greater than one year and are
recognized as “Other assets” in our 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 Consolidated Balance Sheet. The
following table summarizes the balance by class of aerospace business-
related long-term receivables as of December 31, 2018 and 2017:
(DOLLARS IN MILLIONS)
Long-term trade accounts receivable
Notes and leases receivable
Total long-term receivables
2018
$ 269
$
258
2017
973
424
$ 527
$ 1,397
We determine a receivable is impaired when, based on current
information and events, it is probable that we will be unable to collect
amounts due according to the contractual terms of the receivable
agreement. Factors considered in assessing collectability and risk
include, but are not limited to, examination of credit quality indicators
and other evaluation measures, underlying value of any collateral or
security interests, significant past due balances, historical losses, and
existing economic conditions.
We determine credit ratings for each customer in our portfolio
based upon public information and information obtained directly
from our customers. We conduct a review of customer credit ratings,
published historical credit default rates for different rating categories,
and multiple third-party aircraft value publications as a basis to validate
the reasonableness of the allowance for losses on these balances
quarterly or when events and circumstances warrant. 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 $150 million and $170 million of our long-term receivables
were considered to bear high credit risk as of December 31, 2018 and
2017, respectively. See Note 5 for further discussion of commercial
aerospace industry assets and commitments.
43
United Technologies CorporationNotes to Consolidated Financial Statements
Reserves for credit losses on receivables relate to specifically
identified receivables that are evaluated individually for impairment.
For notes and leases receivable, we determine a specific reserve
for exposure based on the difference between the carrying value of
the receivable and the estimated fair value of the related collateral
in connection with the evaluation of credit risk and collectability. 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 $16 million and $17 million as of December 31, 2018 and
2017, respectively, are individually evaluated for impairment. At both
December 31, 2018 and 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 considered to be impaired.
Income Taxes. 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. For
those tax positions where it is more-likely-than-not that a tax benefit will
be sustained, we have recorded the largest amount of tax benefit with
a greater than 50% likelihood of being realized upon ultimate settlement
with a taxing authority that has full knowledge of all relevant information.
For those income tax positions where it is not more-likely-than-not that
a tax benefit will be sustained, no tax benefit has been recognized in
the financial statements. Where applicable, associated interest expense
has also been recognized. We recognize accrued interest related to
unrecognized tax benefits in interest expense. Penalties, if incurred,
would be recognized as a component of income tax expense.
On December 22, 2017 the TCJA was enacted. The TCJA
contains a new law that subjects the Company to a tax on Global
Intangible Low-Taxed Income (GILTI), beginning in 2018. GILTI is a tax
on foreign income in excess of a deemed return on tangible assets of
foreign corporations. The FASB has provided that companies subject to
GILTI have the option to account for the GILTI tax as a period cost if and
when incurred, or to recognize deferred taxes for temporary differences,
including outside basis differences, expected to reverse as GILTI. We
have elected to account for GILTI as a period cost, if incurred.
Revenue Recognition. ASU 2014-09 and its related amendments
are effective for reporting periods beginning after December 15, 2017.
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. See Note 3 for a discussion of the
effect of the New Revenue Standard on our statements of financial
position and results of operations.
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 others contain multiple performance obligations most
commonly when a contract spans 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, unfunded contract value under U.S.
Government contracts, and other sources of variable consideration,
when determining the transaction price of each contract. We include
variable consideration in the 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 also 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, engines, and spare parts. 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. 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.
44
2018 Annual ReportNotes to Consolidated Financial Statements
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
spare parts and product maintenance and aftermarket services. These
arrangements include the sale of spare parts with integral services
to our customers, and are generally classified as Service sales, with
the corresponding costs classified in Cost of services sold, within
the statement of operations. Revenue is primarily recognized in
proportion to cost as sufficient historical evidence indicates that the
cost of performing services under the contract is 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 performance obligations
are satisfied. 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 performance obligations are satisfied. Capitalized contract
fulfillment costs are recognized in “Other assets” in our Consolidated
Balance Sheet. 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 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 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.
catch-up method. Operating profits included net unfavorable changes
in aerospace contract estimates of approximately $50 million, $110
million, and $157 million in 2018, 2017 and 2016, respectively, primarily
the result of unexpected increases in estimated costs related to Pratt &
Whitney long term aftermarket contracts.
Collaborations: Sales generated from engine programs, spare
parts sales, and aftermarket business under collaboration arrangements
are recorded consistent with our revenue recognition policies in
our consolidated financial statements. Amounts attributable to our
collaborators for their share of sales are recorded as cost of sales in
our consolidated financial statements based upon the terms and nature
of the arrangement. Costs associated with engine programs under
collaborative arrangements are expensed as incurred. Under these
arrangements, collaborators contribute their program share of engine
parts, incur their own production costs and make certain payments to
Pratt & Whitney for shared or joint program costs. The reimbursement of
a collaborator’s share of program costs is recorded as a reduction of the
related expense item at that time.
Cash Payments to Customers: Carrier customarily offers its
customers incentives to purchase products to ensure an adequate
supply of its products in the distribution channels. The principal
incentive program provides reimbursements to distributors for offering
promotional pricing for our products. We account for incentive
payments made as a reduction in sales. In our aerospace businesses,
we may make participation payments to certain customers to secure
certain contractual rights. To the extent these rights are incremental
and are supported by the incremental cash flows obtained, they are
capitalized as intangible assets. Otherwise, such payments are recorded
as a reduction in sales. We classify the subsequent amortization of
the capitalized acquired intangible assets from our customers as a
reduction in sales. Contractually stated prices in arrangements with our
customers that include the acquisition of intangible rights within the
scope of the Intangibles - Goodwill and Other Topic of the FASB ASC
and deliverables within the scope of the Revenue Recognition Topic of
the FASB ASC are not presumed to be representative of fair value for
determining the amounts to allocate to each element of an arrangement.
Research and Development. Research and development costs
not specifically covered by contracts and those related to the company
sponsored share of research and development activity in connection
with cost-sharing arrangements are charged to expense as incurred.
Government research and development support, not associated
with specific contracts, is recorded as a reduction to research and
development expense in the period earned.
Research and development costs incurred under contracts
with customers are included as a contract cost and reported as
a component of cost of products sold when revenue from such
contracts is recognized. Research and development costs in excess of
contractual consideration are expensed as incurred.
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
Foreign Exchange. We conduct business in many different
currencies and, accordingly, are subject to the inherent risks associated
with foreign exchange rate movements. The financial position and
results of operations of substantially all of our foreign subsidiaries are
45
United Technologies CorporationNotes to Consolidated Financial Statements
measured using the local currency as the functional currency. Foreign
currency denominated assets and liabilities are translated into U.S.
Dollars at the exchange rates existing at the respective balance sheet
dates, and income and expense items are translated at the average
exchange rates during the respective periods. The aggregate effects of
translating the balance sheets of these subsidiaries are deferred as a
separate component of shareowners’ equity.
Derivatives and Hedging Activity. We have used derivative
instruments, including swaps, forward contracts and options, to help
manage certain foreign currency, interest rate and commodity price
exposures. Derivative instruments are viewed as risk management
tools by us and are not used for trading or speculative purposes. By
their nature, all financial instruments involve market and credit risks.
We enter into derivative and other financial instruments with major
investment grade financial institutions and have policies to monitor the
credit risk of those counterparties. We limit counterparty exposure and
concentration of risk by diversifying counterparties. While there can be
no assurance, we do not anticipate any material non-performance by
any of these counterparties. We enter into transactions that are subject
to enforceable master netting arrangements or similar agreements with
various counterparties. However, we have not elected to offset multiple
contracts with a single counterparty and, as a result, the fair value of the
derivative instruments in a loss position is not offset against the fair value
of derivative instruments in a gain position.
Derivatives used for hedging purposes may be designated and
effective as a hedge of the identified risk exposure at the inception of the
contract. All derivative instruments are recorded on the balance sheet
at fair value. Derivatives used to hedge foreign currency denominated
balance sheet items are reported directly in earnings along with
offsetting transaction gains and losses on the items being hedged.
Derivatives used to hedge forecasted cash flows associated with
foreign currency commitments or forecasted commodity purchases
may be accounted for as cash flow hedges, as deemed appropriate.
Gains and losses on derivatives designated as cash flow hedges are
recorded in other comprehensive income and reclassified to earnings
as a component of product sales or expenses, as applicable, when
the hedged transaction occurs. Gains and losses on derivatives
designated as cash flow hedges are recorded in Other operating
activities, net within the Consolidated Statement of Cash Flows. To
the extent that a previously designated hedging transaction is no
longer an effective hedge, any ineffectiveness measured in the hedging
relationship is recorded currently in earnings in the period it occurs. As
discussed in Note 14, at December 31, 2018 we have approximately
€4.95 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.
To the extent the hedge accounting criteria are not met, the
foreign currency forward contracts are utilized as economic hedges
and changes in the fair value of these contracts are recorded currently
in earnings in the period in which they occur. Additional information
pertaining to foreign currency forward contracts and net investment
hedging is included in Note 14.
Environmental. Environmental investigatory, remediation,
operating and maintenance costs are accrued when it is probable
that a liability has been incurred and the amount can be reasonably
estimated. The most likely cost to be incurred is accrued based on an
evaluation of currently available facts with respect to each individual
site, including existing technology, current laws and regulations and
prior remediation experience. Where no amount within a range of
estimates is more likely, the minimum is accrued. For sites with multiple
responsible parties, we consider our likely proportionate share of the
anticipated remediation costs and the ability of the other parties to fulfill
their obligations in establishing a provision for those costs. Liabilities
with fixed or reliably determinable future cash payments are discounted.
Accrued environmental liabilities are not reduced by potential insurance
reimbursements. See Note 18 for additional details on the environmental
remediation activities.
Pension and Postretirement Obligations. Guidance under the
Compensation - Retirement Benefits Topic of the FASB ASC requires
balance sheet recognition of the overfunded or underfunded status
of pension and postretirement benefit plans. Under this guidance,
actuarial gains and losses, prior service costs or credits, and any
remaining transition assets or obligations that have not been recognized
under previous accounting standards must be recognized in other
comprehensive income, net of tax effects, until they are amortized as a
component of net periodic benefit cost.
Product Performance Obligations. We extend performance
and operating cost guarantees beyond our normal service and warranty
policies for extended periods on some of our products, particularly
commercial aircraft engines. Liability under such guarantees is based
upon future product performance and durability. We accrue for such
costs that are probable and can be reasonably estimated. In addition,
we incur discretionary costs to service our products in connection with
product performance issues. The costs associated with these product
performance and operating cost guarantees require estimates over
the full terms of the agreements, and require management to consider
factors such as the extent of future maintenance requirements and the
future cost of material and labor to perform the services. These cost
estimates are largely based upon historical experience. See Note 17 for
further discussion.
Collaborative Arrangements. In view of the risks and costs
associated with developing new engines, Pratt & Whitney has entered
into certain collaboration arrangements in which sales, costs and risks
are shared. Sales generated from engine programs, spare parts, and
aftermarket business under collaboration arrangements are recognized
in our financial statements when earned. Amounts attributable to
our collaborators for their share of sales are recorded as an expense
in our financial statements based upon the terms and nature of
the arrangement. Costs associated with engine programs under
collaborative arrangements are expensed as incurred. Under these
arrangements, collaborators contribute their program share of engine
46
2018 Annual ReportNotes to Consolidated Financial Statements
parts, incur their own production costs and make certain payments to
Pratt & Whitney for shared or joint program costs. The reimbursement
of the collaborators’ share of program costs is recorded as a reduction
of the related expense item at that time. As of December 31, 2018,
the collaborators’ interests in all commercial engine programs ranged
from 13% to 50%, inclusive of a portion of Pratt & Whitney’s interests
held by other participants. Pratt & Whitney is the principal participant
in all existing collaborative arrangements, with the exception of the
Engine Alliance (EA), a joint venture with GE Aviation, which markets
and manufactures the GP7000 engine for the Airbus A380 aircraft.
There are no individually significant collaborative arrangements and
none of the collaborators individually exceed a 31% share in an
individual program. The following table illustrates the income statement
classification and amounts attributable to transactions arising from
the collaborative arrangements between participants for each period
presented. Selling, general and administrative amounts for 2016 have
been revised to present these amounts on a basis consistent with 2017
and 2018 presentation.
(DOLLARS IN MILLIONS)
Collaborator share of sales:
Cost of products sold
Cost of services sold
Collaborator share of program costs
(reimbursement of expenses incurred):
Cost of products sold
Research and development
Selling, general and administrative
2018
2017
2016
$ 1,688 $ 1,789 $ 1,700
1,765
929
675
(209)
(225)
(87)
(143)
(190)
(74)
(108)
(184)
(57)
Accounting Pronouncements. In October 2016, the FASB
issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers
of Assets Other Than Inventory. This ASU requires the income tax
consequences of an intra-entity transfer of an asset, other than
inventory, to be recognized when the transfer occurs. Two common
examples of assets included in the scope of this update are intellectual
property and property, plant, and equipment. The provisions of this
ASU are effective for years beginning after December 15, 2017, with
early adoption permitted. We adopted the new standard effective
January 1, 2018.
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic 842). In 2018, the FASB continued to issue various updates to
ASU 2016-02 as follows:
• ASU 2018-10, Codification Improvements to Topic 842, Leases -
makes various targeted enhancements and clarifications to the
leasing standard
• ASU 2018-11, Leases (Topic 842): Targeted Improvements -
allows entities to initially apply the new leases standard at the
adoption date and recognize a cumulative-effect adjustment to
the opening balance of retained earnings in the period of adoption
ASU 2016-02 and its related updates (collectively, the New Lease
Accounting Standard) are effective for reporting periods beginning after
December 15, 2018, 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
prospective adoption election with the cumulative effect of adopting
recognized through retained earnings at the date of adoption. We
are preparing to adopt the New Lease Accounting Standard effective
January 1, 2019 and will use the prospective method of adoption with
the cumulative effect of adoption recognized through retained earnings
at the date of adoption.
The New Lease Accounting 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
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.
We plan to elect all of the practical expedients available under the
New Lease Accounting Standard upon adoption. Although we continue
to evaluate the impact of the New Lease Accounting Standard on our
statement of financial position, we do not expect that the standard will
have a material effect on our cash flows or results of operations. Upon
adoption we will record a ROU asset and lease liability, representing our
obligation to make lease payments for operating leases, measured on a
discounted basis. The ROU asset and lease liability will also reflect future
payments under certain information technology service contracts, which
we have determined contain embedded leases, which require balance
sheet presentation under the New Lease Accounting Standard. We
expect the ROU asset and lease liability recorded will be less than 5%
of our total assets. In preparation for the adoption, we are implementing
new software solutions and designing new business processes and
controls over the financial reporting of leases, which will facilitate our
reporting under the New Lease Accounting Standard in the first quarter
of 2019.
In January 2017, the FASB issued ASU 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a Business.
This ASU provides a new framework that will assist in the evaluation
of whether business combination transactions should be accounted
for as an acquisition of a business or as a group of assets, and
specifies the minimum required inputs and processes necessary
to be a business. The provisions of this ASU are effective for years
beginning after December 15, 2017, with early adoption permitted.
We adopted the new standard effective January 1, 2018. Refer to
Note 2: Business Acquisitions.
In May 2017, the FASB issued ASU 2017-09, Compensation—
Stock Compensation (Topic 718): Scope of Modification Accounting.
This ASU provides that an entity should account for the effects of a
modification unless the fair value, the vesting conditions of the modified
award and the classification of the modified award (equity or liability
instrument) are the same as the original award immediately before
47
United Technologies CorporationNotes to Consolidated Financial Statements
the modification. The provisions of this ASU are effective for years
beginning after December 15, 2017, with early adoption permitted. We
adopted the new standard effective January 1, 2018. The adoption
of this standard did not have a material impact on the consolidated
financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and
Hedging (Topic 815): Targeted Improvements to Accounting for Hedging
Activities. This ASU will make more financial and nonfinancial hedging
strategies eligible for hedge accounting. It also amends the presentation
and disclosure requirements and changes how companies assess
effectiveness. It is intended to more closely align hedge accounting
with a company’s risk management strategies, simplify the application
of hedge accounting, and increase transparency as to the scope and
results of hedging programs. The provisions of this ASU are effective for
years beginning after December 15, 2018, with early adoption permitted
for any interim period after issuance of the ASU. We adopted the new
standard effective January 1, 2018. The adoption of this standard did
not have a material impact on the consolidated financial statements.
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 U.S. Tax Cuts
and Jobs Act (TCJA). 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 will elect to
reclassify the income tax effects of TCJA from AOCI to retained earnings
effective January 1, 2019. We are still evaluating the impact of our
pending adoption of the new standard on our consolidated financial
statements. We do not expect this ASU to have a material impact on
our cash flows and results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value
Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement. The new standard
removes the disclosure requirements for the amount of and reasons for
transfers between Level 1 and Level 2 of the fair value hierarchy. The
provisions of this ASU are effective for years beginning after December
15, 2019, with early adoption permitted. We do not expect this ASU to
have a significant impact on our consolidated financial statements, as it
only includes changes to disclosure requirements.
In August 2018, the FASB issued ASU 2018-14, Compensation—
Retirement Benefits—Defined Benefit Plans—General (Subtopic
715-20): Disclosure Framework—Changes to the Disclosure
Requirements for Defined Benefit Plans. The new standard includes
updates to the disclosure requirements for defined benefit plans
including several additions, deletions and modifications to the disclosure
requirements. The provisions of this ASU are effective for years
beginning after December 15, 2020, with early adoption permitted. We
are currently evaluating the impact of this ASU.
In August 2018, the FASB issued ASU 2018-15, Intangibles—
Goodwill and Other—Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a
Cloud Computing Arrangement That Is a Service Contract. The new
standard provides updated guidance surrounding implementation
costs associated with cloud computing arrangements that are service
contracts. The provisions of this ASU are effective for years beginning
after December 15, 2020, with early adoption permitted. We are
currently evaluating the impact of this ASU.
In August 2018, the SEC issued the final rule under SEC Release
No. 33-10532, “Disclosure Update and Simplification,” that amends
certain of its disclosure requirements that have become redundant,
duplicative, overlapping, outdated or superseded. The amendments
include removing the requirement to disclose the historical and pro forma
ratio of earnings to fixed charges (Exhibit 12) and replacing the requirement
to disclose the high and low trading prices of entity’s ordinary shares with
a requirement to disclose the ticker symbol of its shares. Additionally, the
final rule extends to interim periods the annual disclosure requirement
of presenting changes in each caption of stockholders’ equity and the
amount of dividends per share. These disclosures are required to be
provided for the current and comparative year-to-date interim periods.
The final rule is effective for all filings on or after November 5, 2018. The
Company has adopted all relevant disclosure requirements for its annual
report on Form 10-K for the year ended December 31, 2018.
In October 2018, the FASB issued ASU 2018-17, Consolidation
(Topic 810): Targeted Improvements to Related Party Guidance
for Variable Interest Entities. The amendments in this Update for
determining whether a decision-making fee is a variable interest require
reporting entities to consider indirect interests held through related
parties under common control on a proportional basis rather than as
the equivalent of a direct interest in its entirety (as currently required in
GAAP). Therefore, these amendments likely will result in more decision
makers not having a variable interest through their decision-making
arrangements. These amendments also will create alignment between
determining whether a decision making fee is a variable interest and
determining whether a reporting entity within a related party group
is the primary beneficiary of a VIE. If fewer decision-making fees
are considered variable interests, the focus on determining which
party within a related party group under common control may have
a controlling financial interest will be shifted to the variable interest
holders in the group with more significant economic interests. This will
significantly reduce the risk that decision makers with insignificant direct
and indirect interests could be deemed the primary beneficiary of a
VIE. The provisions of this ASU are effective for years beginning after
December 15, 2019, with early adoption permitted. We are currently
evaluating the impact of this ASU.
In November 2018, the FASB issued ASU 2018-18, Collaborative
Arrangements (Topic 808): Clarifying the Interaction between Topic
808 and Topic 606. The amendments in this Update make targeted
improvements to generally accepted accounting principles (GAAP) for
collaborative arrangements as follows: clarify that certain transactions
between collaborative arrangement participants should be accounted
for as revenue under Topic 606 when the collaborative arrangement
participant is a customer in the context of a unit of account. In those
situations, all the guidance in Topic 606 should be applied, including
48
2018 Annual ReportNotes to Consolidated Financial Statements
recognition, measurement, presentation, and disclosure requirements;
add unit-of-account guidance in Topic 808 to align with the guidance in
Topic 606 (that is, a distinct good or service) when an entity is assessing
whether the collaborative arrangement or a part of the arrangement
is within the scope of Topic 606; and require that in a transaction with
a collaborative arrangement participant that is not directly related
to sales to third parties, presenting the transaction together with
revenue recognized under Topic 606 is precluded if the collaborative
arrangement participant is not a customer. The provisions of this ASU
are effective for years beginning after December 15, 2019, with early
adoption permitted. We are currently evaluating the impact of this ASU.
NOTE 2: BUSINESS ACQUISITIONS, DISPOSITIONS, GOODWILL AND
INTANGIBLE ASSETS
Business Acquisitions. Our investments in businesses net of cash
acquired in 2018, 2017 and 2016 totaled $31,142 million (including
debt assumed of $7,784 million and stock issued of $7,960 million),
$231 million and $712 million (including debt assumed of $2 million),
respectively. Our investments in businesses in 2018 primarily consisted
of the acquisition of Rockwell Collins, Inc. (Rockwell Collins). Our
investments in businesses in 2017 consisted of a number of small
acquisitions, primarily in our commercial businesses. Our investments
in businesses in 2016 consisted of the acquisition of a majority interest
in an Italian heating products and services company by Carrier, the
acquisition of a Japanese services company by Otis and a number of
small acquisitions, primarily in our commercial businesses.
On November 26, 2018, we completed the acquisition of Rockwell
Collins, a leader in aviation and high-integrity solutions for commercial
and military customers as well as leading-edge avionics, flight controls,
aircraft interior and data connectivity solutions. Under the terms of the
merger agreement, each share of common stock, par value $0.01 per
share, of Rockwell Collins issued and outstanding immediately prior
to the effective time of the Merger (other than shares held by Rockwell
Collins, the Company, Merger Sub or any of their respective wholly
owned subsidiaries) was converted into the right to receive (1) $93.33 in
cash, without interest, and (2) 0.37525 of a share of Company common
stock, par value $1.00 per share, and cash in lieu of fractional shares
(together, the “Merger Consideration”), less any applicable withholding
taxes. The total aggregate consideration payable in the Merger was
$15.5 billion in cash ($14.9 billion net of cash acquired) and 62.2 million
shares of Company common stock. In addition, $7.8 billion of Rockwell
Collins debt was outstanding at the time of the Merger. This equated
to a total enterprise value of $30.6 billion, including the $7.8 billion of
Rockwell Collins’ outstanding debt.
The cash consideration utilized for the Rockwell Collins acquisition
was partially financed through the previously disclosed issuance of
$11 billion aggregate principal notes on August 16, 2018 for net
proceeds of $10.9 billion. For the remainder of the cash consideration,
we utilized repatriated cash and cash equivalents and cash flow
generated from operating activities.
Preliminary Allocation of Consideration Transferred to Net
Assets Acquired:
The following amounts represent the preliminary determination of the
fair value of identifiable assets acquired and liabilities assumed from
the Rockwell Collins acquisition. The final determination of the fair
value of certain assets and liabilities will be completed up to a one year
measurement period from the date of acquisition as required by FASB
ASC Topic 805, “Business Combinations”. As of December 31, 2018,
the valuation studies necessary to determine the fair market value of the
assets acquired and liabilities assumed are preliminary, including the
validation of the underlying cash flows used to determine the fair value
of the identified intangible assets. The size and breadth of the Rockwell
Collins acquisition necessitates use of the one year measurement
period to adequately analyze all the factors used in establishing the
asset and liability fair values as of the acquisition date, including, but not
limited to, intangible assets, inventory, real property, leases, deferred
tax liabilities related to the unremitted earnings of foreign subsidiaries,
certain reserves and the related tax impacts of any changes made.
Any potential adjustments made could be material in relation to the
preliminary values presented below:
(DOLLARS IN MILLIONS)
Cash and cash equivalents
Accounts receivable, net
Inventory, net
Contract assets, current
Other assets, current
Future income tax benefits
Fixed assets, net
Intangible assets:
Customer relationships
Tradenames/trademarks
Developed technology
Other assets
Total identifiable assets acquired
Short-term borrowings
Accounts payable
Accrued liabilities
Contract liabilities, current
Long-term debt
( DOLLARS IN MILLIONS )
Cash consideration paid for Rockwell Collins outstanding
common stock & equity awards 1
Fair value of UTC common stock issued for Rockwell Collins
outstanding common stock & equity awards
Total consideration transferred
Future pension and postretirement benefit obligation
$ 15,533
7,960
$ 23,493
Other long-term liabilities
Noncontrolling interest
Total liabilities acquired
Total identifiable net assets
1 Cash consideration paid for Rockwell Collins net of cash acquired is $14.9 billion.
Goodwill
Total consideration transferred
$
640
1,660
1,527
302
297
41
1,691
8,320
1,870
600
192
17,140
2,254
378
1,679
301
5,530
502
3,465
6
14,115
3,025
20,468
$ 23,493
49
United Technologies CorporationNotes to Consolidated Financial Statements
In order to allocate the consideration transferred for Rockwell
Collins, the fair values of all identifiable assets and liabilities were
established. For accounting and financial reporting purposes, fair value
is defined under FASB ASC Topic 820, “Fair Value Measurements and
Disclosures” as the price that would be received upon sale of an asset
or the amount paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Market participants are
assumed to be buyers and sellers in the principal (most advantageous)
market for the asset or liability. Additionally, fair value measurements
for an asset assume the highest and best use of that asset by market
participants. Use of different estimates and judgments could yield
different results. Fair value adjustments to Rockwell Collins’ identified
assets and liabilities resulted in an increase in inventory and fixed assets
of $282 million and $269 million, respectively. In determining the fair
value of identifiable assets acquired and liabilities assumed, a review
was conducted for any significant contingent assets or liabilities existing
as of the acquisition date. The preliminary assessment did not note any
significant contingencies related to existing legal or government action.
The fair values of the customer relationship and related program
intangible assets, which include the related aerospace program OEM and
aftermarket cash flows, were determined by using an “income approach.”
Under this approach, the net earnings attributable to the asset or liability
being measured are isolated using the discounted projected net cash flows.
These projected cash flows are isolated from the projected cash flows of
the combined asset group over the remaining economic life of the intangible
asset or liability being measured. Both the amount and the duration of
the cash flows are considered from a market participant perspective. Our
estimates of market participant net cash flows considered historical and
projected pricing, remaining developmental effort, operational performance
including company specific synergies, aftermarket retention, product life
cycles, material and labor pricing, and other relevant customer, contractual
and market factors. Where appropriate, the net cash flows are probability-
adjusted to reflect the uncertainties associated with the underlying
assumptions, as well as the risk profile of the net cash flows utilized in the
valuation. The probability-adjusted future cash flows are then discounted to
present value using an appropriate discount rate. The customer relationship
and related program intangible assets are being amortized on a straight-
line basis (which approximates the economic pattern of benefits) over the
estimated economic life of the underlying programs of 10 to 20 years. The
developed technology intangible asset is being amortized over the economic
pattern of benefit. The fair value of the tradename intangible assets were
determined utilizing the relief from royalty method which is a form of the
income approach. Under this method, a royalty rate based on observed
market royalties is applied to projected revenue supporting the tradename
and discounted to present value using an appropriate discount rate. The
tradename intangible assets have been determined to have an indefinite life.
The Intangible assets included above consist of the following:
We also identified customer contractual obligations on certain
programs with terms less favorable than could be realized in market
transactions as of the acquisition date. We measured these liabilities
under the measurement provisions of FASB ASC Topic 820, “Fair
Value Measurements and Disclosures,” which is based on the price to
transfer the obligation to a market participant at the measurement date,
assuming that the liability will remain outstanding in the marketplace.
Based on the estimated net cash outflows of the programs plus a
reasonable contracting profit margin required to transfer the contracts
to market participants, we recorded assumed liabilities of approximately
$970 million. These liabilities will be liquidated in accordance with the
underlying pattern of obligations, as reflected by the expenses incurred
on the contracts. Total consumption of the contractual obligation for
the next five years is expected to be as follows: $148 million in 2019,
$138 million in 2020, $130 million in 2021, $125 million in 2022, and
$116 million in 2023.
Acquisition-Related Costs:
Acquisition-related costs have been expensed as incurred. In 2018
and 2017, approximately $112 million and $39 million, respectively,
of transaction and integration costs have been incurred. These costs
were recorded in Selling, general and administrative expenses within the
Consolidated Statement of Operations. In connection with the financing
of the Rockwell Collins acquisition, approximately $46 million of net
interest costs (interest expense of $114 million and interest income of
$68 million) have been recorded in 2018.
Supplemental Pro-Forma Data:
Rockwell Collins’ results of operations have been included in UTC’s
financial statements for the period subsequent to the completion of the
acquisition on November 26, 2018. Rockwell Collins contributed sales
of approximately $778 million and operating profit of approximately
$11 million for the period from the completion of the acquisition through
December 31, 2018. The following unaudited supplemental pro-forma
data presents consolidated information as if the acquisition had been
completed on January 1, 2017. The pro-forma results were calculated
by combining the results of UTC with the stand-alone results of
Rockwell Collins for the pre-acquisition periods, which were adjusted to
account for certain costs which would have been incurred during this
pre-acquisition period:
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS; SHARES IN MILLIONS)
Net sales
Net income attributable to common shareowners from
continuing operations
Basic earnings per share of common stock from
continuing operations
Diluted earnings per share of common stock from
continuing operations
Year Ended December 31,
2018
2017
$ 74,136
$ 68,033
$ 6,064
$ 4,662
$
$
6.82
6.76
$
$
5.45
5.39
(DOLLARS IN MILLIONS)
Acquired customer relationships
Acquired tradenames/trademarks
Acquired developed technology
50
Estimated
Fair Value
Estimated
Life
$ 8,320 10-20 years
1,870
indefinite
600
15 years
$ 10,790
2018 Annual ReportNotes to Consolidated Financial Statements
The unaudited supplemental pro-forma data above includes the
following significant adjustments made to account for certain costs
which would have been incurred if the acquisition had been completed
on January 1, 2017, as adjusted for the applicable tax impact. As our
acquisition of Rockwell Collins was completed on November 26, 2018,
the pro-forma adjustments in the table below only include the required
adjustments through November 26, 2018:
(DOLLARS IN MILLIONS)
Amortization of inventory and fixed
asset fair value adjustment 1
Amortization of acquired Rockwell Collins
intangible assets, net 2
Utilization of contractual customer obligation 3
UTC/Rockwell fees for advisory, legal, accounting services 4
Interest expense incurred on acquisition financing, net 5
Elimination of capitalized pre-production
engineering amortization 6
Adjustment to net periodic pension cost 7
Adjustment to reflect the adoption of ASC 606 8
Elimination of entities held for sale 9
Inclusion of B/E Aerospace 10
Year Ended December 31,
2018
2017
$
58
$ (192)
(193)
16
212
(199)
63
42
106
(47)
—
58
$
(202)
116
(212)
(234)
42
34
—
(35)
(51)
$ (734)
1 Reflects the amortization expense on the Rockwell Collins inventory step up which
would be completed within the first two quarters of 2017 and eliminated the inventory
step-up amortization recorded by UTC in 2018. Additionally, this adjustment reflects the
amortization of the fixed asset fair value adjustment as of the acquisition date.
2 Reflects the additional amortization of the acquired Rockwell Collins intangible assets
recognized at fair value in purchase accounting and eliminates the historical Rockwell
Collins intangible asset amortization expense.
3 Reflects the additional amortization of liabilities recognized for acquired contracts with
terms less favorable than could be realized in market transactions as of the acquisition
date and eliminates Rockwell Collins historical amortization of these liabilities.
4 Reflects the elimination of transaction-related fees incurred by UTC and Rockwell Collins
in connection with the acquisition and assumes all of the fees were incurred during the first
quarter of 2017.
5 Reflects the additional interest expense incurred on debt to finance our acquisition of
Rockwell Collins and reduces interest expense for the debt fair value adjustment which
would have been amortized.
6 Reflects the elimination of capitalized pre-production engineering amortization to conform
to UTC policy.
7 Reflects adjustments for the elimination of amortization of prior service cost and actuarial
loss amortization, which was recorded by Rockwell Collins, as a result of fair value
purchase accounting, net of the impact of the revised pension and post-retirement benefit
(expense) as determined under UTC’s plan assumptions.
8 Reflects adjustments to Rockwell Collins revenue recognition as if they adopted the
New Revenue Standard as of January 1, 2018 and primarily relates to deferral of
revenue recognized on OEM product engineering and development, partially offset by
changes in timing of sales recognition for contracts requiring an over time method of
revenue recognition.
9 Reflects the elimination of entities required to be sold for regulatory approvals.
10 Reflects adjustments to include the results and related adjustments for B/E Aerospace as
if it had been acquired by Rockwell Collins on January 1, 2017.
The unaudited supplemental pro-forma financial information
does not reflect the potential realization of cost savings relating to the
integration of the two companies. Further, the pro-forma data should
not be considered indicative of the results that would have occurred
if the acquisition and related financing had been consummated on
January 1, 2017, nor are they indicative of future results.
Dispositions. On June 21, 2018, Carrier completed its sale of
Taylor Company for proceeds of $1.0 billion resulting in a pre-tax gain of
$799 million ($591 million after tax).
In accordance with conditions imposed for regulatory approval
of the Rockwell Collins acquisition, Rockwell Collins must dispose of
certain businesses. These businesses have been held separate from
UTC’s and Rockwell Collins’ ongoing businesses pursuant to regulatory
requirements. Definitive agreements to sell each of the businesses were
entered into prior to the completion of UTC’s acquisition of Rockwell
Collins. The related assets and liabilities of these businesses have
been accounted for as held for sale at fair value less cost to sell. As of
December 31, 2018, assets of $175 million are included within Other
assets, current and liabilities of $40 million are included within Accrued
liabilities on the Consolidated Balance Sheet. The major classes of
assets and liabilities primarily include net Inventory of $51 million and
net Fixed assets of $37 million. On January 18, 2019, Rockwell Collins
completed the sale of one of the businesses which was held for sale
as of December 31, 2018 for approximately $20 million. The remaining
two businesses are expected in 2019 and are subject to regulatory
approvals and other customary closing conditions.
On November 26, 2018, the Company announced its intention to
separate into three independent companies. Following the separations,
the Company will operate as an aerospace company comprised of
Collins Aerospace Systems and the Pratt & Whitney businesses, and
Otis and Carrier are each expected to become independent companies.
The proposed separations are expected to be effected through spin-offs
of Otis and Carrier that are intended to be tax-free for the Company’s
shareowners for U.S. federal income tax purposes, and are expected
to be completed by mid-year 2020. Separation of Otis and Carrier
from UTC via spin-off transactions will be subject to the satisfaction
of customary conditions, including, among others, final approval by
the Company’s Board of Directors, receipt of tax rulings in certain
jurisdictions and/or a tax opinion from external counsel (as applicable),
the filing with the Securities and Exchange Commission (SEC) and
effectiveness of Form 10 registration statements, and satisfactory
completion of financing.
Goodwill. Changes in our goodwill balances for the year ended in
2018 were as follows:
( DOLLARS IN MILLIONS )
Otis
Carrier
Pratt & Whitney
Collins Aerospace
Systems
Total Segments
Eliminations and other
Balance as of
January 1,
2018
Goodwill
resulting from
business
combinations
Foreign
currency
translation
and other
Balance as of
December 31,
2018
$ 1,737
$
10,009
1,511
14,650
27,907
3
7
194
58
20,468
20,727
18
$ (56)
$ 1,688
(368)
(2)
(117)
(543)
—
9,835
1,567
35,001
48,091
21
Total
$ 27,910
$ 20,745
$ (543)
$ 48,112
51
United Technologies CorporationNotes to Consolidated Financial Statements
Collins Aerospace Systems goodwill increased $20.4 billion principally
as a result of the Rockwell Collins acquisition. The goodwill results from
the workforce acquired with the business as well as the significant
synergies that are expected to be realized through the consolidation of
manufacturing facilities and overhead functions. No amount of this goodwill
is deductible for tax purposes. The goodwill acquired will be allocated to
the six reporting units within the Collins Aerospace Systems segment.
The $543 million net reduction in goodwill within Foreign Currency
Translation and Other includes a $151 million reduction of goodwill
attributable to Carrier’s sale of Taylor Company. The $18 million increase
in goodwill within Eliminations and other is due to an acquisition of a
digital analytics company.
Intangible Assets. Identifiable intangible assets are comprised of
the following:
( DOLLARS IN MILLIONS )
Amortized:
2018
2017
Gross
Amount
Accumulated
Amortization
Gross
Amount
Accumulated
Amortization
Service portfolios
$ 2,164
$ (1,608)
$ 2,178
$ (1,534)
Patents and trademarks
361
(236)
399
Collaboration intangible
assets
Customer relationships
and other
Unamortized:
4,509
(649)
4,109
22,525
29,559
(4,560)
(7,053)
13,352
20,038
(233)
(384)
(4,100)
(6,251)
Trademarks and other
3,918
—
2,096
—
Total
$ 33,477
$ (7,053)
$ 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 is 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
may be used. We classify amortization of such payments as a reduction
of sales. The acquired intangible assets related to Rockwell Collins are
primarily being amortized on a straight-line basis which approximates
the pattern of economic benefit. Amortization of intangible assets was
$976 million, $834 million and $778 million in 2018, 2017 and 2016,
respectively. The collaboration intangible assets are amortized based upon
the pattern of economic benefits as represented by the underlying cash
flows. The following is the expected amortization of total intangible assets
for 2019 through 2023, which reflects the pattern of expected economic
benefit on certain aerospace intangible assets:
( DOLLARS IN MILLIONS )
2019
2020
2021
2022
2023
Amortization expense
$ 1,476
$ 1,438
$ 1,456
$ 1,464
$ 1,670
NOTE 3: REVENUE RECOGNITION
ASU 2014-09 and its related amendments (collectively, the New
Revenue Standard) are effective for reporting periods beginning after
December 15, 2017. 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.
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
an over-time basis using an input method for repair contracts within
Otis and Carrier; certain U.S. Government and commercial aerospace
equipment contracts; and aerospace aftermarket service work. We
measure progress toward completion for these contracts using costs
incurred to date relative to total estimated costs at completion. Incurred
costs represent work performed, which corresponds with and best
depicts the transfer of control to the customer. 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 an over-time 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; revenue and cost 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.
52
2018 Annual ReportNotes to Consolidated Financial Statements
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. Engineering and development costs which do not qualify for
capitalization as contract fulfillment costs are expensed as incurred.
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 through retained earnings 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.
The New Revenue Standard also requires disclosure of remaining
performance obligations, which is a concept that is similar to that of
backlog. Beginning in 2018, we replaced our definition of backlog with
that of remaining performance obligations under the New Revenue
Standard. We have historically included in backlog engine orders from
airlines for which such purchase orders have not yet been received
from the aircraft manufacturer. Effective with the adoption of the
New Revenue Standard, we will no longer include in backlog airline
engine orders for which we have not yet received the associated firm
manufacturing purchase order.
The New Revenue Standard had 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 19 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 schedules quantify the impact of the New
Revenue Standard on the statement of operations for the year ended
December 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 )
Net Sales:
Product sales
Service sales
Costs and Expenses:
Cost of products sold
Cost of services sold
Research and development
Selling, general and administrative
Other income, net
Operating profit
Non-service pension (benefit)
Interest expense, net
Income from operations before
income taxes
Income tax expense
Net income from operations
Less: Noncontrolling interest in
subsidiaries’ earnings from operations
Net income attributable to common
shareowners
Year Ended
December 31,
2018, under
previous
standard 1
Effect of the
New Revenue
Standard
Year Ended
December 31,
2018 as
reported
$ 45,128
$ 306
$ 45,434
20,821
65,949
36,481
13,068
2,549
7,066
59,164
1,573
8,358
(765)
1,038
8,085
2,577
5,508
380
246
552
273
163
(87)
—
349
(8)
195
—
—
195
49
146
5
21,067
66,501
36,754
13,231
2,462
7,066
59,513
1,565
8,553
(765)
1,038
8,280
2,626
5,654
385
$
5,128
$ 141
$
5,269
1 Includes the as reported results of Rockwell Collins. Because Rockwell Collins adopted the
New Revenue Standard prior to the merger, its reported results have been excluded from
the quantification of the effect of the New Revenue Standard shown above for the period
from November 26, 2018 through December 31, 2018.
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 an over-time revenue model for certain U.S Government
and commercial aerospace equipment contracts, and aerospace
aftermarket service work at Pratt & Whitney and Collins Aerospace
Systems. The New Revenue Standard also resulted in an increase in
Cost of products sold primarily related to the timing of manufacturing
cost recognition on early-contract OEM units sold, 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 to the
extent recoverable.
53
United Technologies CorporationNotes to Consolidated Financial Statements
The following schedule quantifies the impact of the New Revenue
Standard on our balance sheet as of December 31, 2018.
(DOLLARS IN MILLIONS)
Assets
December 31, 2018
under previous
standard 1
Effect of the New
Revenue Standard
December 31, 2018
as reported
(DOLLARS IN MILLIONS)
Contract assets, current
receive payments from customers based on the terms established
in our contracts. Total contract assets and contract liabilities as of
December 31, 2018 are as follows:
Accounts receivable, net
$ 15,636
$ (1,365)
$ 14,271
Contract assets, noncurrent (included within Other assets)
331
12,169
1,519
1,614
26,495
6,056
3,155
(2,086)
(8)
32
(71)
1,150
3,486
10,083
1,511
1,646
26,424
7,206
Total contract assets
Contract liabilities, current
Contract liabilities, noncurrent (included within Other
long-term liabilities)
Total contract liabilities
Net contract liabilities
December 31, 2018
$
3,486
1,142
4,628
(5,720)
(5,069)
(10,789)
$ (6,161)
Contract assets, current
Inventories
Other assets, current
Future income tax benefits
Intangible assets, net
Other assets
Liabilities and Equity
Accrued liabilities
Contract liabilities, current
Other long term liabilities
Noncontrolling interest
Retained earnings
$ 15,522
$ (5,299)
$ 10,223
345
15,841
2,158
58,162
5,375
1,073
6
(339)
5,720
16,914
2,164
57,823
1 Includes the as reported balance sheet amounts of Rockwell Collins. Because Rockwell
Collins adopted the New Revenue Standard prior to the merger, its reported balance sheet
amounts have been excluded from the quantification of the effect of the New Revenue
Standard shown above.
The decrease in Retained earnings of $339 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 and $141 million higher reported net income under the New
Revenue Standard during 2018. 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. Capitalized net contract fulfillment costs as of
December 31, 2018 are $914 million.
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
54
We established contract assets of $3,609 million in connection
with our adoption of the New Revenue Standard on January 1, 2018.
Contract assets increased $1,019 million from January 1, 2018 to
December 31, 2018 as a result of the acquisition of Rockwell Collins
($308 million) and due to revenue recognition in excess of customer
billings, primarily on Pratt & Whitney commercial aftermarket and military
engines contracts.
We established contract liabilities of $9,974 million in connection
with our adoption of the New Revenue Standard. Contract liabilities
increased $815 million from January 1, 2018 through December 31,
2018, as a result of the acquisition of Rockwell Collins ($313 million) and
due to customer billings in excess of revenue on Otis new equipment
contracts and on Pratt & Whitney commercial aftermarket contracts. We
recognized revenue of $4,211 million related to contract liabilities as of
January 1, 2018.
Remaining performance obligations (“RPO”) are the aggregate
amount of total contract transaction price that is unsatisfied or partially
unsatisfied. As of December 31, 2018, our total RPO is approximately
$115.5 billion. Of this total, we expect approximately 46% will be
recognized as sales over the following 24 months.
NOTE 4: EARNINGS PER SHARE
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS; SHARES
IN MILLIONS)
Net income attributable to common shareowners:
2018
2017
2016
Net income from continuing operations
$ 5,269
$ 4,552
$ 5,065
Net loss from discontinued operations
—
—
(10)
Net income attributable to common shareowners
$ 5,269
$ 4,552
$ 5,055
Basic weighted average number of
shares outstanding
800.4
790.0
818.2
Stock awards and equity units (share equivalent)
9.7
9.1
7.9
Diluted weighted average number of
shares outstanding
Earnings Per Share of Common Stock—Basic:
810.1
799.1
826.1
Net income from continuing operations
$ 6.58
$ 5.76
$ 6.19
Net loss from discontinued operations
Net income attributable to common shareowners
Earnings Per Share of Common Stock—Diluted:
—
6.58
—
5.76
(0.01)
6.18
Net income from continuing operations
$ 6.50
$ 5.70
$ 6.13
Net loss from discontinued operations
Net income attributable to common shareowners
—
6.50
—
5.70
(0.01)
6.12
2018 Annual ReportNotes to Consolidated Financial Statements
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. In addition,
the computation of diluted earnings per share excludes the effect of
the potential exercise of stock awards when the awards' assumed
proceeds exceed the average market price of the common shares
during the period. For 2018, 2017 and 2016, there were 5.1 million,
5.9 million and 14.5 million anti-dilutive stock awards excluded from the
computation, respectively.
NOTE 5: COMMERCIAL AEROSPACE INDUSTRY ASSETS AND
COMMITMENTS
We have receivables and other financing assets with commercial
aerospace industry customers totaling $11,695 million and
$9,477 million at December 31, 2018 and 2017, respectively. These
include customer financing assets related to commercial aerospace
industry customers, consisting of products under lease of $2,736 million
and $1,913 million, and notes and leases receivable of $299 million and
$652 million, at December 31, 2018 and 2017, respectively.
Aircraft financing commitments, in the form of debt or lease
financing, are provided to commercial aerospace customers. The extent
to which the financing commitments will be utilized is not currently
known, since customers may be able to obtain more favorable terms
from other financing sources. We may also arrange for third-party
investors to assume a portion of these commitments. If financing
commitments are exercised, debt financing is generally secured by
assets with fair market values equal to or exceeding the financed
amounts consistent with market terms and conditions. We may also
lease aircraft and subsequently sublease the aircraft to customers under
long-term non-cancelable operating leases. Our financing commitments
with customers are contingent upon maintenance of certain levels of
financial condition by the customers.
We have also made residual value and other guarantees related
to various commercial aerospace customer financing arrangements.
The estimated fair market values of the guaranteed assets equal or
exceed the value of the related guarantees, net of existing reserves.
We have residual value and other guarantees of $348 million as of
December 31, 2018. Refer to Note 17 to the Consolidated Financial
Statements for additional discussion on guarantees.
We also have other contractual commitments, including
commitments to secure certain contractual rights to provide product
on new aircraft platforms, which are included in “Other commercial
aerospace commitments” in the table below. Payments made on these
contractual commitments are included within other intangible assets and
are to be amortized over the term of underlying economic benefit. Our
commercial aerospace financing and other contractual commitments
as of December 31, 2018 were approximately $15.5 billion. We have
entered into certain collaboration arrangements, which may include
participation by our collaboration partners in these commitments.
The following is the expected maturity of commercial aerospace
industry assets and commitments as of December 31, 2018:
(DOLLARS IN MILLIONS)
Notes and leases receivable
Commercial aerospace financing commitments
Other commercial aerospace commitments
Collaboration partners’ share
Total commercial commitments
Committed
$
$
299
4,556
$
$
10,914
(5,261)
2019
25
862
815
(468)
2020
$
97
$
2021
53
$ 709
$ 1,001
$
$
706
(448)
673
(562)
2022
22
873
708
(513)
2023
Thereafter
$
23
$ 640
$
$
79
471
585
(412)
7,427
(2,858)
$ 10,209
$ 1,209
$ 967
$ 1,112
$ 1,068
$ 813
$ 5,040
In connection with our 2012 agreement to acquire Rolls-Royce's
ownership and collaboration interests in IAE, additional payments are
due to Rolls-Royce contingent upon each hour flown through June
2027 by the V2500-powered aircraft in service as of the acquisition
date. These flight hour payments, included in “Other commercial
aerospace commitments” in the table above, are being capitalized as
collaboration intangible assets.
We have long-term aftermarket maintenance contracts with
commercial aerospace industry customers for which revenue is
recognized over-time in proportion to actual costs incurred relative
to total expected costs to be incurred over the respective contract
periods. Billings, however, are typically based on factors such as aircraft
or engine flight hours. The timing differences between the billings and
the maintenance costs incurred generates both Contract assets and
Contract liabilities, previously referred to as unbilled receivables and
deferred revenue. Additionally, we have other contracts with commercial
aerospace industry customers which can result in the generation of
Contract assets and Contract liabilities. Contract assets related to
long-term aftermarket and other contracts totaled $2,247 million at
December 31, 2018 and are included in “Contract assets, current”
and “Other assets” in the accompanying Consolidated Balance Sheet.
Unbilled receivables totaled $1,109 million at December 31, 2017
and are included in “Accounts receivable” and “Other Assets” in the
accompanying Consolidated Balance Sheet.
Contract liabilities totaled $7,083 million and are included in
“Contract liabilities, current” and “Other long-term liabilities” in the
accompanying Consolidated Balance Sheet. Deferred revenue totaled
$5,048 million at December 31, 2017 and are included in “Accrued
liabilities” and “Other long-term liabilities” in the accompanying
Consolidated Balance Sheet.
In connection with the adoption of the New Revenue Standard,
costs for engineering and development of aerospace products have
been capitalized as contract fulfillment costs to the extent recoverable.
Contract fulfillment costs related to commercial aerospace industry
customers is $830 million as of December 31, 2018 and is included in
“Other assets” in the accompanying Consolidated Balance Sheet.
55
United Technologies CorporationNotes to Consolidated Financial Statements
Reserves related to aerospace receivables and financing assets
Our sales contracts in many cases are long-term contracts
were $245 million and $175 million at December 31, 2018 and
2017, respectively. Reserves related to financing commitments and
guarantees were $15 million and $23 million at December 31, 2018 and
2017, respectively.
In addition, in connection with the acquisition of Rockwell Collins
in 2018 and Goodrich in 2012, we recorded assumed liabilities of
approximately $970 million and $2.2 billion, respectively related to
customer contractual obligations on certain programs with terms
less favorable than could be realized in market transactions as of the
acquisition date. These liabilities are being liquidated in accordance
with the underlying pattern of obligations, as reflected by the net cash
outflows incurred on the contracts. Total consumption of the contractual
obligations for the years ended December 31, 2018 and 2017 was
approximately $252 million and $217 million, respectively. The balance
of the contractual obligations at December 31, 2018 was $1,690 million,
with future consumption expected to be as follows: $381 million in
2019, $295 million in 2020, $217 million in 2021, $163 million in 2022,
$134 million in 2023 and $500 million thereafter.
NOTE 6: INVENTORIES & CONTRACTS IN PROGRESS, NET
(DOLLARS IN MILLIONS)
Raw materials
Work-in-process
Finished goods
Contracts in progress
Less:
Progress payments, secured by lien, on U.S.
Government contracts
Billings on contracts in progress
2018
2017
$ 3,052 $ 2,038
2,673
4,358
3,366
3,845
— 10,205
10,083
19,454
—
—
(236)
(9,337)
Raw materials, work-in-process and finished goods are net
of valuation reserves of $1,270 million and $1,107 million as of
December 31, 2018 and 2017, respectively. Contracts in progress
principally relate to elevator and escalator contracts and include costs
of manufactured components, accumulated installation costs and
estimated earnings on incomplete contracts. Upon adoption of the New
Revenue Standard, Contracts in progress have been reclassified to
Contract assets.
Inventories as of December 31, 2017 included capitalized contract
development costs of $127 million related to certain aerospace
programs at Collins Aerospace Systems. Upon adoption of the New
Revenue Standard, these costs are recorded as contract fulfillment
costs included in Other assets. Under prior accounting within
commercial aerospace, the unit of accounting for certain contracts
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. As of
December 31, 2017, inventory included $438 million of such capitalized
amounts. As described in the “Revenue Recognition” section of Note 1,
upon adoption of the New Revenue Standard, these amounts are no
longer included in inventory.
56
expected to be performed over periods exceeding 12 months.
At December 31, 2018 and 2017, approximately 32% and 63%
respectively, of total inventories and contracts in progress have
been acquired or manufactured under such long-term contracts,
with approximately 28% and 38% scheduled for delivery within the
succeeding 12 months for 2018 and 2017, respectively. The decline in
percentages above is due to the reclassification of Contracts in progress
to Contract assets upon adoption of the New Revenue Standard.
NOTE 7: FIXED ASSETS
(DOLLARS IN MILLIONS)
Land
Buildings and improvements
Machinery, tools and equipment
Other, including assets under construction
Estimated
Useful Lives
12-40 years
3-20 years
Accumulated depreciation
$
2018
425
6,486
15,119
2,054
24,084
$
2017
412
5,727
13,476
1,749
21,364
(11,787)
(11,178)
$ 12,297
$ 10,186
The increase in fixed assets is primarily driven by the acquisition of
Rockwell Collins as described in Note 2 to the Consolidated Financial
Statements. Depreciation expense was $1,240 million in 2018, $1,178
million in 2017 and $1,105 million in 2016.
NOTE 8: ACCRUED LIABILITIES
( DOLLARS IN MILLIONS )
2018
2017
Advances on sales contracts and service billings
$
—
$ 4,547
Accrued salaries, wages and employee benefits
2,074
1,741
$ 10,083 $ 9,881
Interest payable
Service and warranty accruals
Litigation and contract matters
Income taxes payable
Accrued property, sales and use taxes
Canadian government settlement - current portion
Accrued restructuring costs
Accrued workers compensation
Liabilities held for sale
Other
754
637
461
460
277
34
249
142
40
629
439
435
285
258
217
212
204
—
5,095
3,349
$ 10,223
$ 12,316
The decline in advances on sales contracts and service billings is
due to reclassification of amounts to Contract liabilities, current upon
adoption of the New Revenue Standard.
On December 30, 2015, P&WC and federal and provincial
Canadian government agencies entered into amendments of certain
government research and development support arrangements. Under
the amendments, P&WC agreed to make four annual payments of
approximately CAD 327 million (approximately $243 million at December
2018), commencing in the first quarter of 2016, to fully settle and
terminate P&WC's future contractual obligations to pay royalties to
these agencies that had previously been contingent upon future engine
deliveries and P&WC sales; to maintain its commitments to perform
2018 Annual ReportNotes to Consolidated Financial Statements
certain assembly, test and manufacturing operations in Canada; and to
provide support of innovation and research and development through
initiatives with post-secondary institutions and key industry associations
in Canada over a 14 year period. As a result of the amendments to
these contractual arrangements, Pratt & Whitney recorded a charge
and related discounted obligation of $867 million in the fourth quarter
of 2015.
The current portion of the Canadian government settlement
included in the table above represents the final payment under this
agreement to be paid in 2019. There were no Other long-term liabilities
related to this settlement in the accompanying Consolidated Balance
Sheet as of December 31, 2018 and approximately $256 million as of
December 31, 2017.
NOTE 9: BORROWINGS AND LINES OF CREDIT
( DOLLARS IN MILLIONS )
Short-term borrowings:
Commercial paper
Other borrowings
Total short-term borrowings
2018
2017
$ 1,257
$ 300
212
92
$ 1,469
$ 392
At December 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. Additionally, on November 26, 2018, we entered into a $1.5
billion revolving credit agreement, which will mature on May 25, 2019.
As of December 31, 2018, there were no borrowings on any 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 December 31, 2018, our maximum commercial
paper borrowing limit was $4.35 billion. Commercial paper borrowings
at December 31, 2018 include approximately €750 million ($858 million)
of euro-denominated commercial paper. We use our commercial paper
borrowings for general corporate purposes, including the funding of
potential acquisitions, 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.
At December 31, 2018, approximately $2.2 billion was available
under short-term lines of credit with local banks at our various
domestic and international subsidiaries. The weighted-average interest
expense rates applicable to short-term borrowings and total debt were
as follows:
2018
2017
Long-term debt consisted of the following as of December 31:
(DOLLARS IN MILLIONS)
6.800% notes due 2018
EURIBOR plus 0.80% floating rate notes due 2018
(€750 million principal value) 2
1.778% junior subordinated notes due 2018
LIBOR plus 0.350% floating rate notes due 2019 3
1.500% notes due 2019 1
1.950% notes due 2019 4
EURIBOR plus 0.15% floating rate notes due 2019
(€750 million principal value) 2
5.250% notes due 2019 4
8.875% notes due 2019
4.875% notes due 2020 1
4.500% notes due 2020 1
1.900% notes due 2020 1
EURIBOR plus 0.20% floating rate notes due 2020
(€750 million principal value) 2
8.750% notes due 2021
3.100% notes due 2021 4
3.350% notes due 2021 1
LIBOR plus 0.650% floating rate notes due 20211, 3
1.950% notes due 2021 1
1.125% notes due 2021 (€950 million principal value) 1
2.300% notes due 2022 1
2.800% notes due 2022 4
3.100% notes due 2022 1
1.250% notes due 2023 (€750 million principal value) 1
3.650% notes due 2023 1
3.700% notes due 2023 4
2.800% notes due 2024 1
3.200% notes due 2024 4
1.150% notes due 2024 (€750 million principal value) 1
3.950% notes due 2025 1
1.875% notes due 2026 (€500 million principal value) 1
2.650% notes due 2026 1
3.125% notes due 2027 1
3.500% notes due 2027 4
7.100% notes due 2027
6.700% notes due 2028
4.125% notes due 2028 1
7.500% notes due 2029 1
2.150% notes due 2030 (€500 million principal value) 1
5.400% notes due 2035 1
6.050% notes due 2036 1
6.800% notes due 2036 1
7.000% notes due 2038
6.125% notes due 2038 1
4.450% notes due 2038 1
5.700% notes due 2040 1
4.500% notes due 2042 1
4.800% notes due 2043 4
4.150% notes due 2045 1
3.750% notes due 2046 1
4.050% notes due 2047 1
4.350% notes due 2047 4
4.625% notes due 2048 1
Project financing obligations
Other (including capitalized leases)
Total principal long-term debt
Other (fair market value adjustments, discounts and debt
issuance costs)
Total long-term debt
Less: current portion
Long-term debt, net of current portion
2018
$
— $
—
—
350
650
300
858
300
271
171
1,250
1,000
858
250
250
1,000
750
750
1,088
500
1,100
2,300
858
2,250
400
800
950
858
1,500
573
1,150
1,100
1,300
141
400
3,000
550
573
600
600
134
159
1,000
750
1,000
3,500
400
850
1,100
600
1,000
1,750
287
287
44,416
2017
99
890
1,100
350
650
—
890
—
271
171
1,250
1,000
—
250
—
—
—
750
1,127
500
—
2,300
890
—
—
800
—
—
—
593
1,150
1,100
—
141
400
—
550
—
600
600
134
159
1,000
—
1,000
3,500
—
850
1,100
600
—
—
158
195
27,118
(348)
44,068
2,876
(25)
27,093
2,104
$ 41,192 $ 24,989
Average interest expense rate - average
outstanding borrowings during the year:
Short-term borrowings
Total debt
Average interest expense rate -
outstanding borrowings as of December 31:
Short-term borrowings
Total debt
1 We may redeem these notes at our option pursuant to their terms.
1.5% 1.1%
3.5% 3.5%
2 The three-month EURIBOR rate as of December 31, 2018 was approximately -0.309%.
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 December 31, 2018 was approximately 2.808%.
4 Rockwell Collins debt which remained outstanding following the Merger.
1.2% 2.3%
3.5% 3.5%
57
United Technologies CorporationNotes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
The project financing obligations included in the table above are
We made the following repayments of debt in 2018 and 2017:
associated with the sale of rights to unbilled revenues related to the
ongoing activity of an entity owned by Carrier.
(DOLLARS IN MILLIONS)
We had the following issuances of debt in 2018 and 2017:
Repayment Date
Description of Notes
Aggregate Principal
Balance
(DOLLARS IN MILLIONS)
Issuance Date
Description of Notes
August 16, 2018:
3.350% notes due 2021 1
Aggregate Principal
Balance
$ 1,000
December 14, 2018:
Variable-rate term loan due 2020
(1 month LIBOR plus 1.25%) 1
$
482
May 4, 2018:
1.778% junior subordinated notes
$ 1,100
3.650% notes due 2023 1
3.950% notes due 2025 1
4.125% notes due 2028 1
4.450% notes due 2038 1
4.625% notes due 2048 2
LIBOR plus 0.65% floating rate
notes due 2021 1
May 18, 2018:
1.150% notes due 2024 3
€
2.150% notes due 2030 3
EURIBOR plus 0.20% floating rate
notes due 2020 3
2,250
1,500
3,000
750
1,750
750
750
500
750
November 13, 2017:
EURIBOR plus 0.15% floating rate
notes due 2019 2
May 4, 2017:
1.900% notes due 2020 4
2.300% notes due 2022 4
2.800% notes due 2024 4
3.125% notes due 2027 4
4.050% notes due 2047 4
€
750
$ 1,000
500
800
1,100
600
1 The net proceeds received from these debt issuances were used to partially finance the
cash consideration portion of the purchase price for Rockwell Collins and fees, expenses
and other amounts related to the acquisition of Rockwell Collins.
2 The net proceeds from these debt issuances were used to fund the repayment of
commercial paper and for other general corporate purposes.
3 The net proceeds received from these debt issuances were used for general corporate
purposes.
4 The net proceeds received from these debt issuances were used to fund the repayment
at maturity of our 1.800% notes due 2017, representing $1.5 billion in aggregate principal
and other general corporate purposes.
February 22, 2018:
EURIBOR plus 0.80%
floating rate notes
February 1, 2018:
6.80% notes
June 1, 2017:
1.800% notes
€
750
$
99
$ 1,500
1 This term loan was assumed in connection with the Rockwell Collins acquisition and
subsequently repaid.
The percentage of total short-term borrowings and long-term debt
at variable interest rates was 10% and 9% at December 31, 2018 and
2017, respectively. Interest rates on our commercial paper borrowings
are considered variable due to their short-term duration and high-
frequency of turnover.
The average maturity of our long-term debt at December 31, 2018
is approximately 11 years. The schedule of principal payments required
on long-term debt for the next five years and thereafter is:
(DOLLARS IN MILLIONS)
2019
2020
2021
2022
2023
Thereafter
Total
$ 2,876
3,436
4,151
3,910
3,523
26,520
$ 44,416
We have an existing universal shelf registration statement filed with
the SEC for an indeterminate amount of debt and equity securities for
future issuance, subject to our internal limitations on the amount of debt
to be issued under this shelf registration statement.
NOTE 10: EQUITY
A summary of the changes in each component of Accumulated other comprehensive (loss) income, net of tax for the years ended December 31,
2018 and 2017 is provided below:
(DOLLARS IN MILLIONS)
Balance at December 31, 2016
Other comprehensive income before reclassifications, net
Amounts reclassified, pre-tax
Tax (expense) benefit reclassified
Balance at December 31, 2017
Other comprehensive loss before reclassifications, net
Amounts reclassified, pre-tax
Tax (expense) benefit reclassified
ASU 2016-01 adoption impact
Balance at December 31, 2018
58
Foreign
Currency
Translation
Defined Benefit
Pension and
Postretirement
Plans
Unrealized Gains
(Losses) on
Available-for-
Sale Securities
Unrealized
Hedging
(Losses)
Gains
Accumulated
Other
Comprehensive
(Loss) Income
$ (3,480)
$ (5,045)
$ 353
$ (162)
$ (8,334)
540
(10)
—
78
529
(214)
$ (2,950)
$ (4,652)
$
(486)
(1,736)
(2)
(4)
—
344
326
—
3
(566)
215
5
—
—
—
(5)
$
264
(39)
9
72
(307)
(16)
78
—
885
(86)
10
$ (7,525)
(2,529)
326
400
(5)
$ (3,442)
$ (5,718)
$ —
$ (173)
$ (9,333)
2018 Annual Report 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 12 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 2017,
including Carrier’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 Consolidated
Balance Sheet, between liabilities and equity, at the greater of
redemption value or initial carrying value.
NOTE 11: INCOME TAXES
Income Before Income Taxes. The sources of income from
continuing operations before income taxes are:
(DOLLARS IN MILLIONS)
United States
Foreign
2018
2017
2016
$ 3,630 $ 2,990 $ 2,534
4,650
4,773
4,599
$ 8,280 $ 7,763 $ 7,133
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 2018, the Company recorded a $744 million charge,
representing TCJA related adjustments. The amounts primarily relate
to non-U.S. taxes that will become due when previously reinvested
earnings of certain international subsidiaries are remitted. The Company
has completed its accounting for the TCJA as described in Staff
Accounting Bulletin (SAB 118). In 2019, the Company will continue to
review and incorporate, as necessary, updates related to forthcoming
U.S. Treasury Regulations, other interpretive guidance, and the
finalization of the deemed inclusions to be reported on the Company’s
U.S. federal income tax returns.
The Company no longer intends to reinvest certain undistributed
earnings of its international subsidiaries that have been previously
taxed in the U.S. As such, in the fourth quarter, it has recorded the
Notes to Consolidated Financial Statements
taxes associated therewith. For the remainder of the Company’s
undistributed international earnings, unless tax effective to repatriate,
UTC will continue to permanently reinvest these earnings. As of
December 31, 2018, such undistributed earnings were approximately
$18 billion, excluding other comprehensive income amounts. It is not
practicable to estimate the amount of tax that might be payable on the
remaining amounts.
Provision for Income Taxes. The income tax expense (benefit)
for the years ended December 31, 2018, 2017 and 2016 consisted of
the following components:
(DOLLARS IN MILLIONS)
Current:
United States:
Federal
State
Foreign
Future:
United States:
Federal
State
Foreign
2018
2017
2016
$
442 $ 1,577 $
211
1,238
1,891
64
1,140
2,781
30
(21)
1,290
1,299
57
62
616
735
(27)
84
5
62
318
134
(54)
398
Income tax expense
$ 2,626 $ 2,843 $ 1,697
Attributable to items credited (charged) to equity
$
501 $ (128) $ (299)
Reconciliation of Effective Income Tax Rate. Differences
between effective income tax rates and the statutory U.S. federal
income tax rate are as follows:
Statutory U.S. federal income tax rate
Tax on international activities
Tax audit settlements
U.S. tax reform
Other
Effective income tax rate
2018
2017
2016
21.0% 35.0 % 35.0 %
0.9% (6.4)% (8.1)%
—% (0.7)% (2.9)%
9.0% 8.9 %
—
0.8% (0.2)% (0.2)%
31.7% 36.6 % 23.8 %
The 2018 effective tax rate reflects a net tax charge of $744 million
for TCJA related adjustments. The amount primarily relates to non-
U.S. taxes that will become due when previously reinvested earnings
of certain international subsidiaries are remitted. As noted above, the
Company has completed its accounting related to these items as
described in Staff Accounting Bulletin (SAB 118). The 2018 effective
tax rate reconciliation reflects the corporate rate reduction enacted
by the TCJA. The decrease in international activities is primarily
related to higher international tax costs compared to the U.S. federal
statutory rate.
The 2017 effective tax rate reflects a net tax charge of $690 million,
as described above, attributable to the passage of the TCJA. These
2017 provisional amounts, recorded as described in SAB 118, relate
to U.S. income tax attributable to previously undistributed earnings of
UTC’s international subsidiaries and equity investments, net of foreign
tax credits, and the revaluation of U.S. deferred income taxes.
59
United Technologies Corporation Notes to Consolidated Financial Statements
The decrease in the tax audit settlement represents a $55 million
Tax Credit and Loss Carryforwards. At December 31, 2018,
favorable adjustment in 2017 related to the expiration of certain statute
of limitations offset by the absence of the favorable audit settlements
in 2016 described below. The decrease in the benefit associated with
international activities is related to international earnings taxed at lower
statutory rates offset by the absence of certain credits included in 2016.
On December 7, 2017, the province of Quebec enacted a retroactive
tax law change resulting in a cost of $48 million offset by the 2016
French law changes described below.
The 2016 effective tax rate reflects $206 million of favorable
adjustments related to the conclusion of the review by the Examination
Division of the Internal Revenue Service of the UTC 2011 and 2012 tax
years and the Goodrich Corporation 2011 and 2012 tax years through
the date of its acquisition. In addition, at the end of 2016, France
enacted a tax law change reducing its corporate income tax rate, which
resulted in a tax benefit of $25 million.
Deferred Tax Assets and Liabilities. Future income taxes
represent the tax effects of transactions which are reported in different
periods for tax and financial reporting purposes. These amounts
consist of the tax effects of temporary differences between the tax and
financial reporting balance sheets and tax carryforwards. Future income
tax benefits and payables within the same tax paying component of
a particular jurisdiction are offset for presentation in the Consolidated
Balance Sheet. The amounts have been adjusted for the impact of
the TCJA.
The tax effects of temporary differences and tax carryforwards
which gave rise to future income tax benefits and payables at
December 31, 2018 and 2017 are as follows:
(DOLLARS IN MILLIONS)
Future income tax benefits:
Insurance and employee benefits
Other asset basis differences
Other liability basis differences
Tax loss carryforwards
Tax credit carryforwards
Valuation allowances
Future income taxes payable:
Intangible assets
Other asset basis differences
Other items, net
2018
2017
$ 1,154 $
1,013
1,482
583
1,050
928
798
1,158
544
948
(605)
(582)
$ 4,677 $ 3,794
$ 4,462 $ 2,100
2,159
1,315
123
411
$ 6,744 $ 3,826
Valuation allowances have been established primarily for tax credit
carryforwards, tax loss carryforwards, and certain foreign temporary
differences to reduce the future income tax benefits to expected
realizable amounts.
tax credit carryforwards, principally state and foreign, and tax loss
carryforwards, principally state and foreign, were as follows:
(DOLLARS IN MILLIONS)
Expiration period:
2019-2023
2024-2028
2029-2038
Indefinite
Total
Tax Credit
Carryforwards
Tax Loss
Carryforwards
$
32
33
354
631
$ 1,050
$
286
189
559
1,931
$ 2,965
Unrecognized Tax Benefits. At December 31, 2018, we had
gross tax-effected unrecognized tax benefits of $1,619 million, of which
$1,609 million, if recognized, would impact the effective tax rate. A
reconciliation of the beginning and ending amounts of unrecognized tax
benefits and interest expense related to unrecognized tax benefits for
the years ended December 31, 2018, 2017 and 2016 is as follows:
(DOLLARS IN MILLIONS)
Balance at January 1
Additions for tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Balance at December 31
2018
2017
2016
$ 1,189
$ 1,086
$ 1,169
192
344
(91)
(15)
192
73
(91)
(71)
69
167
(61)
(258)
$ 1,619
$ 1,189
$ 1,086
Gross interest expense related to unrecognized tax
benefits
Total accrued interest balance at December 31
$
$
37
255
$
$
34
215
$
$
41
185
The 2018 amounts above include amounts related to the
acquisition of Rockwell Collins.
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 2008.
During the quarter ended September 30, 2017, the Company
recognized a noncash gain of approximately $64 million, including a
pre-tax interest adjustment of $9 million, as a result of federal, state and
non-U.S. tax year closures related to audit resolutions and the expiration
of applicable statutes of limitation, including expiration of the U.S.
federal income tax statute of limitations for UTC’s 2013 tax year.
60
2018 Annual Report During the quarter ended December 31, 2016, the Company
recognized a noncash gain of approximately $172 million, including a
pre-tax interest adjustment of $22 million, as a result of the closure of
the audit by the Examination Division of the Internal Revenue Service
(IRS) of UTC tax years 2011 and 2012.
During the quarter ended September 30, 2016, the Company
recognized a noncash gain of approximately $58 million, primarily tax,
as a result of the closure of the audit by the Examination Division of the
IRS of Goodrich Corporation tax years 2011 and 2012 through the date
of acquisition by UTC.
As of December 31, 2018, UTC’s tax years 2014, 2015 and 2016
were under audit by the Examination Division of the Internal Revenue
Service (IRS) and the audit is expected to conclude during 2019. The
Examination Division of the IRS is also auditing the 2014 tax year of a
subsidiary acquired as part of UTC’s acquisition of Rockwell Collins and
the audit is expected to conclude during 2019. Another subsidiary of
the Company is engaged in litigation in Italy which is currently pending
before the Italian Supreme Court following favorable lower court
decisions. The Italian Tax Authority recently announced an amnesty
program; the Company expects to make a decision whether to take part
in the first or second quarter of 2019. If we participate, the Company
would expect to recognize a non-cash gain, primarily tax, in the range
of $90 million to $110 million before the end of the second quarter
of 2019.
It is reasonably possible that a net reduction within the range of
$470 million to $845 million of unrecognized tax benefits may occur
over the next 12 months 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 18 “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.
NOTE 12: EMPLOYEE BENEFIT PLANS
We sponsor numerous domestic and foreign employee benefit plans,
which are discussed below.
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(s) 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
Notes to Consolidated Financial Statements
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 consolidated statement of operations was
as follows:
(DOLLARS IN MILLIONS)
Cost of product sold
Cost of services sold
Research and development
Selling, general and administrative
Non-service pension (benefit)
2017
Previously
Reported
Effect of Change
Higher/(Lower)
$ 31,027
12,926
2,387
6,183
—
$ 197
51
40
246
(534)
2016
As Revised
$ 31,224
12,977
2,427
6,429
(534)
(DOLLARS IN MILLIONS)
Cost of product sold
Cost of services sold
Research and development
Selling, general and administrative
Other income
Non-service pension cost
Previously
Reported
Effect of Change
Higher/(Lower)
As Revised
$ 30,325
$ (21)
$ 30,304
11,135
2,337
6,060
785
—
32
39
(102)
(3)
49
11,167
2,376
5,958
782
49
Employee Savings Plans. We sponsor various employee savings
plans. Our contributions to employer sponsored defined contribution
plans were $403 million, $351 million and $318 million for 2018, 2017
and 2016, respectively.
Our non-union domestic employee savings plan uses an Employee
Stock Ownership Plan (ESOP) for employer matching contributions.
External borrowings were used by the ESOP to fund a portion of its
purchase of ESOP stock from us. The external borrowings have been
extinguished and only re-amortized loans remain between UTC and
the ESOP Trust. As ESOP debt service payments are made, common
stock is released from an unreleased shares account. ESOP debt may
be prepaid or re-amortized to either increase or decrease the number of
shares released so that the value of released shares equals the value of
plan benefit. We may also, at our option, contribute additional common
stock or cash to the ESOP.
Shares of common stock are allocated to employees’ ESOP
accounts at fair value on the date earned. Cash dividends on
common stock held by the ESOP are used for debt service payments.
Participants may choose to have their ESOP dividends reinvested or
distributed in cash. Common stock allocated to ESOP participants is
included in the average number of common shares outstanding for
both basic and diluted earnings per share. At December 31, 2018,
24.7 million common shares had been allocated to employees, leaving
9.4 million unallocated common shares in the ESOP Trust, with an
approximate fair value of $1.0 billion.
61
United Technologies Corporation Notes to Consolidated Financial Statements
Pension Plans. We sponsor both funded and unfunded
domestic and foreign defined benefit pension plans that cover a large
number of our employees. Our largest plans are generally closed to
new participants. Our plans use a December 31 measurement date
consistent with our fiscal year.
(DOLLARS IN MILLIONS)
Change in Benefit Obligation:
Beginning balance
Service cost
Interest cost
Actuarial (gain) loss
Total benefits paid
Net settlement, curtailment and special termination
benefits
Plan amendments
Business combinations
Other
Ending balance
Change in Plan Assets:
Beginning balance
Actual return on plan assets
Employer contributions
Benefits paid
Settlements
Business combinations
Other
Ending balance
Funded Status:
Fair value of plan assets
Benefit obligations
Funded status of plan
Amounts Recognized in the Consolidated
Balance Sheet Consist of:
Noncurrent assets
Current liability
Noncurrent liability
Net amount recognized
Amounts Recognized in Accumulated Other
Comprehensive Loss Consist of:
Net actuarial loss
Prior service cost
Net amount recognized
2018
2017
$ 36,999
$ 34,923
372
1,117
(2,048)
(1,932)
(38)
65
3,694
(434)
374
1,120
1,804
(1,782)
(49)
4
—
605
$ 37,795
$ 36,999
$ 35,689
$ 30,555
(1,667)
238
(1,932)
(38)
3,355
(392)
4,258
2,188
(1,782)
(41)
—
511
$ 35,253
$ 35,689
$ 35,253
$ 35,689
(37,795)
(36,999)
$ (2,542)
$ (1,310)
$
686
(88)
$
957
(70)
(3,140)
(2,197)
$ (2,542)
$ (1,310)
$
8,606
$
7,238
139
37
$
8,745
$
7,275
As part of our long-term strategy to de-risk our defined benefit
pension plans, we made discretionary contributions of approximately
$1.9 billion to our domestic defined benefit pension plans in the quarter
ended September 30, 2017. In 2016, we entered into an agreement
to purchase a group annuity contract to transfer approximately
$768 million of our outstanding pension benefit obligations related
to certain U.S. retirees or beneficiaries, which was finalized on
October 12, 2016. We also offered certain former U.S. employees or
beneficiaries (generally all former U.S. participants not yet in receipt of
their vested pension benefits) an option to take a one-time lump-sum
distribution in lieu of future monthly pension payments, which reduced
our pension benefit obligations by approximately $935 million. These
62
transactions reduced the assets of our defined benefit pension plans
by approximately $1.5 billion. As a result of these 2016 transactions,
we recognized a one-time pre-tax pension settlement charge of
approximately $423 million in the fourth quarter of 2016.
The amounts included in “Other” in the above table primarily reflect
the impact of foreign exchange translation, primarily for plans in the U.K.
and Canada.
As part of the Rockwell acquisition on November 26, 2018,
we assumed approximately $3.7 billion of pension projected benefit
obligations and $3.4 billion of plan assets.
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.
Qualified domestic pension plan benefits comprise approximately
75% of the projected benefit obligation. Benefits for union employees
are generally based on a stated amount for each year of service. For
non-union employees, benefits for service up to December 31, 2014 are
generally based on an employee's years of service and compensation
through December 31, 2014. Benefits for service after December 31,
2014 are based on the existing cash balance formula that was adopted
in 2003 for newly hired non-union employees and for other non-union
employees who made a one-time voluntary election to have future
benefit accruals determined under this formula. Certain foreign plans,
which comprise approximately 23% of the projected benefit obligation,
are considered defined benefit plans for accounting purposes.
Nonqualified domestic pension plans provide supplementary retirement
benefits to certain employees and are not a material component of the
projected benefit obligation.
We made no contributions to our domestic defined benefit pension
plans and made $147 million of cash contributions to our foreign
defined benefit pension plans in 2018. In 2017, we made $1.9 billion of
cash contributions to our domestic defined benefit pension plans and
made $212 million of cash contributions to our foreign defined benefit
pension plans.
Information for pension plans with accumulated benefit obligations
in excess of plan assets:
(DOLLARS IN MILLIONS)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2018
2017
$ 25,884 $ 22,360
25,455
22,803
22,159
20,438
Information for pension plans with projected benefit obligations in
excess of plan assets:
(DOLLARS IN MILLIONS)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2018
2017
$ 28,591 $ 27,211
27,968
25,362
26,560
24,944
2018 Annual Report The accumulated benefit obligation for all defined benefit pension
In determining the expected return on plan assets, we consider
Notes to Consolidated Financial Statements
plans was $37.0 billion and $36.2 billion at December 31, 2018 and
2017, respectively.
The components of the net periodic pension (benefit) cost are
as follows:
(DOLLARS IN MILLIONS)
Pension Benefits:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service credit
Recognized actuarial net loss
Net settlement, curtailment and special
termination benefits loss
2018
2017
2016
$
372
$
374
$
383
1,117
1,120
1,183
(2,255)
(2,215)
(2,202)
(41)
401
(36)
575
1
3
(33)
572
498
401
Net periodic pension (benefit) cost - employer
$
(405) $
(179) $
Other changes in plan assets and benefit obligations recognized in
other comprehensive loss in 2018 are as follows:
(DOLLARS IN MILLIONS)
Current year actuarial loss
Amortization of actuarial loss
Current year prior service cost
Amortization of prior service credit
Net settlement and curtailment loss
Other
Total recognized in other comprehensive loss
Net recognized in net periodic pension (benefit) cost and
other comprehensive loss
$ 1,871
(401)
65
41
2
(108)
$ 1,470
$ 1,065
The amount included in “Other” in the above table primarily reflects
the impact of foreign exchange translation, primarily for plans in the U.K.
and Canada.
The estimated amount that will be amortized from accumulated
other comprehensive loss into net periodic pension (benefit) cost in
2019 is as follows:
(DOLLARS IN MILLIONS)
Net actuarial loss
Prior service cost
$ 214
17
$ 231
Major assumptions used in determining the benefit obligation and
net cost for pension plans are presented in the following table as
weighted-averages:
Discount rate
PBO
Interest cost 1
Service cost 1
Salary scale
Expected return on
plan assets
Benefit Obligation
Net Cost
2018
2017
2018
2017
2016
4.0%
3.4%
—
—
—
—
4.2%
4.2%
3.4%
3.0%
3.3%
4.2%
3.8%
3.3%
3.6%
4.1%
4.1%
3.4%
3.8%
4.2%
—
—
6.8%
7.3%
7.3%
Note 1 The discount rates used to measure the service cost and interest cost applies to
our significant plans. The PBO discount rate is used for the service cost and interest
cost measurements for non-significant plans.
the relative weighting of plan assets, the historical performance of total
plan assets and individual asset classes, and economic and other
indicators of future performance. In addition, we may consult with and
consider the opinions of financial and other professionals in developing
appropriate capital market assumptions. Return projections are also
validated using a simulation model that incorporates yield curves, credit
spreads and risk premiums to project long-term prospective returns.
The plans' investment management objectives include providing
the liquidity and asset levels needed to meet current and future benefit
payments, while maintaining a prudent degree of portfolio diversification
considering interest rate risk and market volatility. Globally, investment
strategies target a mix of 50% to 55% of growth seeking assets and
45% to 50% of income generating and hedging assets using a wide
set of diversified asset types, fund strategies and investment managers.
The growth seeking allocation consists of global public equities in
developed and emerging countries, private equity, real estate and
multi-asset class strategies. Growth assets include an enhanced
alpha strategy that invests in publicly traded equity and fixed income
securities, derivatives and foreign currency. Investments in private equity
are primarily via limited partnership interests in buy-out strategies with
smaller allocations to distressed debt funds. The real estate strategy is
principally concentrated in directly held U.S. core investments with some
smaller investments in international, value-added and opportunistic
strategies. Within the income generating assets, the fixed income
portfolio consists of mainly government and broadly diversified high
quality corporate bonds.
The plans have continued their pension risk management
techniques designed to reduce their interest rate risk. Specifically,
the plans have incorporated liability hedging programs that include
the adoption of a risk reduction objective as part of the long-term
investment strategy. Under this objective the interest rate hedge
is dynamically increased as funded status improves. The hedging
programs incorporate a range of assets and investment tools, each with
varying interest rate sensitivities. As result of the improved funded status
of the plans due to favorable asset returns and funding of the plans, the
interest rate hedge increased significantly during 2017. The investment
portfolios are currently hedging approximately 60% to 65% of the
interest rate sensitivity of the pension plan liabilities.
As a result of the shift in the target asset mix in 2017 to higher
income generating and hedging assets and lower growth seeking
assets, we reduced the expected return on plan assets assumption for
2018 including the assumption of a 7% return on plan assets for our
qualified domestic pension plans, down from 7.6% in 2017.
63
United Technologies Corporation Notes to Consolidated Financial Statements
The fair values of pension plan assets at December 31, 2018 and 2017 by asset category are as follows:
(DOLLARS IN MILLIONS)
Asset Category:
Public Equities
Global Equities
Global Equity Commingled Funds 1
Enhanced Global Equities 2
Global Equity Funds at net asset value 8
Private Equities 3,8
Fixed Income Securities
Governments
Corporate Bonds
Fixed Income Securities 8
Real Estate 4,8
Other 5,8
Cash & Cash Equivalents 6,8
Subtotal
Other Assets & Liabilities 7
Total at December 31, 2018
Public Equities
Global Equities
Global Equity Commingled Funds 1
Enhanced Global Equities 2
Global Equity Funds at net asset value 8
Private Equities 3,8
Fixed Income Securities
Governments
Corporate Bonds
Fixed Income Securities 8
Real Estate 4,8
Other 5,8
Cash & Cash Equivalents 6,8
Subtotal
Other Assets & Liabilities 7
Total at December 31, 2017
Quoted Prices in
Active Markets
For Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Not Subject to
Leveling
Total
$ 2,917
185
79
—
—
1,789
—
—
—
—
—
$ 4,970
$ 3,129
—
213
—
—
1,445
—
—
—
—
—
$ 4,787
$
4
426
605
—
—
162
11,527
—
13
262
220
$ 13,219
$
3
1,084
819
—
—
69
10,929
—
15
287
79
$ 13,285
$ —
—
—
—
133
—
18
—
1,387
—
—
$ 1,538
$ —
—
—
—
46
—
—
—
1,446
—
—
$ 1,492
$
—
—
—
7,386
1,194
—
29
3,599
429
2,368
138
$ 15,143
$
—
—
—
7,599
1,170
—
—
3,519
396
2,509
498
$ 15,691
$ 2,921
611
684
7,386
1,327
1,951
11,574
3,599
1,829
2,630
358
34,870
383
$ 35,253
$ 3,132
1,084
1,032
7,599
1,216
1,514
10,929
3,519
1,857
2,796
577
35,255
434
$ 35,689
Note 1 Represents commingled funds that invest primarily in common stocks.
Note 2 Represents enhanced equity separate account and commingled fund portfolios. A portion of the portfolio may include long-short market neutral and relative
value strategies that invest in publicly traded, equity and fixed income securities, as well as derivatives of equity and fixed income securities and foreign
currency.
Note 3 Represents limited partner investments with general partners that primarily invest in debt and equity.
Note 4 Represents investments in real estate including commingled funds and directly held properties.
Note 5 Represents insurance contracts and global balanced risk commingled funds consisting mainly of equity, bonds and some commodities.
Note 6 Represents short-term commercial paper, bonds and other cash or cash-like instruments.
Note 7 Represents trust receivables and payables that are not leveled.
Note 8 In accordance with ASU 2015-07, Fair Value Measurement (Topic 820), certain investments that are measured at fair value using the net asset value per share
(or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit
reconciliation of the fair value hierarchy to the amounts presented for the total pension benefits plan assets.
64
2018 Annual Report Derivatives in the plan are primarily used to manage risk and
gain asset class exposure while still maintaining liquidity. Derivative
instruments mainly consist of equity futures, interest rate futures, interest
rate swaps and currency forward contracts.
Our common stock represents approximately less than 1% of
total plan assets at both December 31, 2018 and 2017. We review
our assets at least quarterly to ensure we are within the targeted asset
allocation ranges and, if necessary, asset balances are adjusted back
within target allocations. We employ a broadly diversified investment
manager structure that includes diversification by active and passive
management, style, capitalization, country, sector, industry and number
of investment managers.
The fair value measurement of plan assets using significant
unobservable inputs (Level 3) changed due to the following:
(DOLLARS IN MILLIONS)
Private
Equities
Corporate
Bonds
Real
Estate
Total
Balance, December 31, 2016
$ 122
$ —
$ 1,285
$ 1,407
Realized gains
Unrealized (losses) gains relating
to instruments still held in the
reporting period
Purchases, sales, and
settlements, net
Balance, December 31, 2017
Plan assets acquired
Realized (losses) gains
Unrealized gains relating
to instruments still held in
the reporting period
Purchases, sales, and settlements, net
61
(47)
(90)
46
—
—
—
87
Balance, December 31, 2018
$ 133
$
—
—
—
—
33
(1)
2
(16)
18
31
17
113
1,446
—
10
92
(30)
23
1,492
33
9
38
(107)
40
(36)
$ 1,387
$ 1,538
Quoted market prices are used to value investments when available.
Investments in securities traded on exchanges, including listed futures and
options, are valued at the last reported sale prices on the last business
day of the year or, if not available, the last reported bid prices. Fixed
income securities are primarily measured using a market approach pricing
methodology, where observable prices are obtained by market transactions
involving identical or comparable securities of issuers with similar credit
ratings. Mortgages have been valued on the basis of their future principal
and interest payments discounted at prevailing interest rates for similar
investments. Investment contracts are valued at fair value by discounting
the related cash flows based on current yields of similar instruments with
comparable durations. Real estate investments are valued on a quarterly
basis using discounted cash flow models which consider long-term lease
estimates, future rental receipts and estimated residual values. Valuation
estimates are supplemented by third-party appraisals on an annual basis.
Private equity limited partnerships are valued quarterly
using discounted cash flows, earnings multiples and market
multiples. Valuation adjustments reflect changes in operating results,
financial condition, or prospects of the applicable portfolio company.
Over-the-counter securities and government obligations are valued
at the bid prices or the average of the bid and ask prices on the last
business day of the year from published sources or, if not available, from
other sources considered reliable, generally broker quotes. Temporary
cash investments are stated at cost, which approximates fair value.
Notes to Consolidated Financial Statements
As a result of the $1.9 billion contribution in 2017, we are not
required to make additional contributions to our domestic defined
benefit pension plans through the end of 2024. We expect to make total
contributions of approximately $100 million to our global defined benefit
pension plans in 2019. Contributions do not reflect benefits to be paid
directly from corporate assets.
Benefit payments, including amounts to be paid from corporate
assets, and reflecting expected future service, as appropriate, are
expected to be paid as follows: $2,371 million in 2019, $2,195 million in
2020, $2,240 million in 2021, $2,292 million in 2022, $2,327 million in
2023, and $11,939 million from 2024 through 2028.
Postretirement Benefit Plans. We sponsor a number of
postretirement benefit plans that provide health and life benefits to
eligible retirees. Such benefits are provided primarily from domestic
plans, which comprise approximately 87% of the benefit obligation.
The postretirement plans are primarily unfunded. The assets are
invested in approximately 50% growth seeking assets and 50% income
generating assets.
(DOLLARS IN MILLIONS)
Change in Benefit Obligation:
Beginning balance
Service cost
Interest cost
Actuarial gain
Total benefits paid
Business combinations
Plan amendments
Other
Ending balance
Change in Plan Assets:
Beginning balance
Employer contributions
Benefits paid
Business combinations
Other
Ending balance
Funded Status:
Fair value of plan assets
Benefit obligations
Funded status of plan
Amounts Recognized in the Consolidated
Balance Sheet Consist of:
Current liability
Noncurrent liability
Net amount recognized
Amounts Recognized in Accumulated Other
Comprehensive Loss Consist of:
Net actuarial gain
Prior service credit
Net amount recognized
2018
2017
$ 767
$ 805
2
26
(52)
(70)
186
(43)
(6)
2
29
(4)
(87)
—
(6)
28
$ 810
$ 767
$ — $ —
69
(70)
20
1
71
(87)
—
16
$
20
$ —
$
20
$ —
(810)
(767)
$ (790)
$ (767)
$ (61)
$ (72)
(729)
(695)
$ (790)
$ (767)
$ (184)
$ (143)
(47)
(10)
$ (231)
$ (153)
65
United Technologies Corporation Notes to Consolidated Financial Statements
As part of our acquisition of Rockwell on November 26, 2018,
Assumed health care cost trend rates are as follows:
we assumed approximately $186 million of postretirement benefit
obligations and $20 million of plan assets.
We modified the postretirement medical benefits provided to
legacy Rockwell employees by eliminating any company subsidy from
retirements that occur after December 31, 2019. This resulted in a $43
million reduction in the benefit obligation as of November 26, 2018.
The components of net periodic benefit cost are as follows:
(DOLLARS IN MILLIONS)
Other Postretirement Benefits:
Service cost
Interest cost
Amortization of prior service credit
Recognized actuarial net gain
2018
2017
2016
$
2
$ 2
$ 3
26
(6)
(10)
29
(1)
(9)
34
—
(4)
Net periodic other postretirement benefit cost
$ 12
$ 21
$ 33
Other changes in plan assets and benefit obligations recognized in
other comprehensive loss in 2018 are as follows:
(DOLLARS IN MILLIONS)
Current year actuarial gain
Current year prior service credit
Amortization of prior service credit
Amortization of actuarial net gain
Other
Total recognized in other comprehensive loss
Net recognized in net periodic other postretirement
benefit cost and other comprehensive loss
$ (52)
(43)
6
10
1
$ (78)
$ (66)
The estimated amounts that will be amortized from accumulated
other comprehensive loss into net periodic benefit cost in 2019 include
actuarial net gains of $12 million and prior service credits of $42 million.
Major assumptions used in determining the benefit obligation and
net cost for postretirement plans are presented in the following table
as weighted-averages:
Discount rate
Expected return on assets
Benefit Obligation
Net Cost
2018
4.1%
—
2017
3.4%
—
2018
3.4%
7.0%
2017
3.8%
N/A
2016
4.0%
N/A
Health care cost trend rate assumed for next year
Rate that the cost trend rate gradually declines to
Year that the rate reaches the rate it is assumed to remain at
2018
7.0%
5.0%
2026
2017
7.0%
5.0%
2026
Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. A one-percentage-
point change in assumed health care cost trend rates would have the
following effects:
(DOLLARS IN MILLIONS)
Effect on total service and interest cost
Effect on postretirement benefit obligation
2018
One-Percentage-Point
Increase Decrease
$ 1
32
$ (1)
(28)
Benefit payments, including net amounts to be paid from corporate
assets and reflecting expected future service, as appropriate, are
expected to be paid as follows: $81 million in 2019, $75 million in
2020, $72 million in 2021, $67 million in 2022, $61 million in 2023, and
$253 million from 2024 through 2028.
Multiemployer Benefit Plans. We contribute to various
domestic and foreign multiemployer defined benefit pension plans. The
risks of participating in these multiemployer plans are different from
single-employer plans in that assets contributed are pooled and may be
used to provide benefits to employees of other participating employers.
If a participating employer stops contributing to the plan, the unfunded
obligations of the plan may be borne by the remaining participating
employers. Lastly, if we choose to stop participating in some of
our multiemployer plans, we may be required to pay those plans a
withdrawal liability based on the underfunded status of the plan.
Our participation in these plans for the annual periods ended
December 31 is outlined in the table below. Unless otherwise noted, the
most recent Pension Protection Act (PPA) zone status available in 2018
and 2017 is for the plan’s year-end at June 30, 2017, and June 30, 2016,
respectively. The zone status is based on information that we received
from the plan and is certified by the plan’s actuary. Our significant plan
is in the green zone which represents a plan that is at least 80% funded
and does not require a financial improvement plan (FIP) or a rehabilitation
plan (RP). An extended amortization provision of ten years is utilized to
recognize investment gains or losses for our significant plan.
(DOLLARS IN MILLIONS)
Pension Fund
National Elevator Industry
Pension Plan
Other funds
Pension Protection
Act Zone Status
EIN/Pension
Plan Number
2018
2017
FIP/
RP Status
Pending/
Implemented
Contributions
2018
2017
2016
Surcharge
Imposed
Expiration
Date of
Collective-
Bargaining
Agreement
23-2694291
Green
Green
No
$ 120
31
$ 151
$ 114
31
$ 145
$ 100
31
$ 131
No
July 8, 2022
66
2018 Annual Report
Notes to Consolidated Financial Statements
For the plan years ended June 30, 2017 and 2016, respectively,
we were listed in the National Elevator Industry Pension Plan’s Forms
5500 as providing more than 5% of the total contributions for the plan.
At the date these financial statements were issued, Forms 5500 were
not available for the plan year ending June 30, 2018.
In addition, we participate in several multiemployer arrangements
that provide postretirement benefits other than pensions, with
the National Elevator Industry Health Benefit Plan being the most
significant. These arrangements generally provide medical and life
benefits for eligible active employees and retirees and their dependents.
Contributions to multiemployer plans that provide postretirement
benefits other than pensions were $20 million, $19 million and
$17 million for 2018, 2017 and 2016, respectively.
Stock-based Compensation. UTC’s long-term incentive plans
authorize various types of market and performance based incentive
awards that may be granted to officers and employees. The UTC
2018 Long-Term Incentive Plan (the “2018 LTIP”) was approved by
shareholders on April 30, 2018 and its predecessor plan (the “Legacy
LTIP”), was last amended on February 5, 2016. A total of 184 million
shares have been authorized for issuance pursuant to awards under
these Plans. There are no equity-based compensation awards granted
under any other plan. As of December 31, 2018, approximately
58 million shares remain available for awards under the 2018 LTIP. No
shares remain available for future awards under the Legacy LTIP. Neither
plan contains an aggregate annual award limit, however, each Plan
sets an annual award limit per participant. We expect that the shares
awarded on an annual basis will range from 1.0% to 1.5% of shares
outstanding. The 2018 LTIP will expire after all authorized shares have
been awarded or April 30, 2028, whichever is sooner.
Under both Plans, the exercise price of awards is set on the grant
date and may not be less than the fair market value per share on that
date. Generally, stock appreciation rights and stock options have a
term of ten years and a three-year vesting period, subject to limited
exceptions. In the event of retirement, annual stock appreciation rights,
stock options, and restricted stock units held for more than one year
may become vested and exercisable, subject to certain terms and
conditions. LTIP awards with performance-based vesting generally
have a minimum three-year vesting period and vest based on actual
performance against pre-established metrics. In the event of retirement,
performance-based awards held for more than one year, remain
eligible to vest based on actual performance relative to target metrics.
We have historically repurchased shares of our common stock in an
amount at least equal to the number of shares issued under our equity
compensation arrangements and will continue to evaluate this policy in
conjunction with our overall share repurchase program.
We measure the cost of all share-based payments, including stock
options, at fair value on the grant date and recognize this cost in the
Consolidated Statement of Operations as follows:
(DOLLARS IN MILLIONS)
Continuing operations
Discontinued operations
2018
$ 251
—
2017
$ 192
—
2016
$ 152
1
Total compensation cost recognized
$ 251
$ 192
$ 153
The associated future income tax benefit recognized was
$42 million, $38 million and $49 million for the years ended
December 31, 2018, 2017 and 2016, respectively. The amounts have
been adjusted for the impact of the TCJA. Please refer to Note 11 for
additional detail.
For the years ended December 31, 2018, 2017 and 2016, the
amount of cash received from the exercise of stock options was
$36 million, $29 million and $17 million, respectively, with an associated
tax benefit realized of $59 million, $100 million and $69 million,
respectively. In addition, for the years ended December 31, 2018,
2017 and 2016, the associated tax benefit realized from the vesting of
performance share units and other restricted awards was $13 million,
$12 million and $17 million, respectively. The 2018 amount was
computed using current US Federal and State tax rates.
At December 31, 2018, there was $240 million of total
unrecognized compensation cost related to non-vested equity awards
granted under long-term incentive plans, of which $50 million relates to
Rockwell Collins awards. This cost is expected to be recognized ratably
over a weighted-average period of 2.6 years.
A summary of the transactions under all long-term incentive plans
for the year ended December 31, 2018 follows:
(SHARES AND UNITS IN THOUSANDS)
Outstanding at:
December 31, 2017
Granted 1
Exercised / earned
Cancelled
Other - Rockwell Collins 2
December 31, 2018
* weighted-average exercise price
** weighted-average grant stock price
Stock Options
Stock Appreciation Rights
Performance Share Units
Shares
Average
Price *
Shares
Average
Price *
Units
Average
Price **
Other
Incentive
Shares/Units
1,745
$
94.35
32,722
$
92.54
1,876
$ 106.38
2,182
255
(389)
(8)
126.94
92.52
111.87
4,579
(4,781)
(454)
127.37
74.47
110.50
598
(181)
(487)
128.20
115.08
114.99
— $
—
— $
—
— $
—
992
(406)
(72)
351
1,603
$
99.89
32,066
$
99.95
1,806
$ 110.41
3,047
1 Other Incentive Shares include 193 thousand of units granted post-acquisition to specific Rockwell Collins executives
2 Represents Rockwell Collins awards converted to UTC RSU shares in accordance with merger acquisition
67
United Technologies Corporation Notes to Consolidated Financial Statements
The weighted-average grant date fair value of stock options and
stock appreciation rights granted during 2018, 2017 and 2016 was
$20.24, $17.22 and $14.02, respectively. The weighted-average grant
date fair value of performance share units, which vest upon achieving
certain performance metrics, granted during 2018, 2017 and 2016
was $131.55, $111.00 and $91.63, respectively. The total fair value
of awards vested during the years ended December 31, 2018, 2017
and 2016 was $149 million, $138 million and $165 million, respectively.
The total intrinsic value (which is the amount by which the stock price
exceeded the exercise price on the date of exercise) of stock options
and stock appreciation rights exercised during the years ended
December 31, 2018, 2017 and 2016 was $283 million, $320 million and
$214 million, respectively. The total intrinsic value (which is the stock
price at vesting) of performance share units and other restricted awards
vested was $74 million, $49 million and $61 million during the years
ended December 31, 2018, 2017 and 2016, respectively.
The following table summarizes information about equity awards outstanding that are vested and expected to vest and equity awards
outstanding that are exercisable at December 31, 2018:
(SHARES IN THOUSANDS; AGGREGATE INTRINSIC VALUE IN MILLIONS)
Stock Options/Stock Appreciation Rights
Performance Share Units/Restricted Stock 1
* weighted-average exercise price per share
** weighted-average contractual remaining term in years
Equity Awards Vested and Expected to Vest
Equity Awards That Are Exercisable
Awards
33,059
4,821
Average
Price *
$ 98.97
—
Aggregate
Intrinsic
Value
Remaining
Term **
$ 407
5.4 years
513
1.7 years
Awards
21,761
Average
Price *
$ 92.08
Aggregate
Intrinsic
Value
Remaining
Term **
$ 365
4.0 years
1 Restricted Stock values include Rockwell Collins awards totaling 507 thousand, for which aggregate intrinsic value is 54 million for the remaining term of 2.2 years
The fair value of each option award is estimated on the date
initiated during 2018 and 2017, and were recorded as follows:
of grant using a binomial lattice model. The following table indicates
the assumptions used in estimating fair value for the years ended
December 31, 2018, 2017 and 2016. Lattice-based option models
incorporate ranges of assumptions for inputs; those ranges are as follows:
2018
Expected volatility
17.5% - 21.1%
Weighted-average volatility
Expected term (in years)
Expected dividend yield
18%
6.5 - 6.6
2.2%
2017
19%
19%
6.5
2.4%
2016
20%
20%
6.5
2.7%
Risk-free rate
1.3% - 2.7%
0.5% - 2.5%
0.2% - 2.6%
Expected volatilities are based on the returns of our stock,
including implied volatilities from traded options on our stock for the
binomial lattice model. We use historical data to estimate equity award
exercise and employee termination behavior within the valuation model.
The expected term represents an estimate of the period of time equity
awards are expected to remain outstanding. The risk-free rate is based
on the term structure of interest rates at the time of equity award grant.
NOTE 13: RESTRUCTURING COSTS
During 2018, we recorded net pre-tax restructuring costs totaling
$307 million for new and ongoing restructuring actions. We recorded
charges in the segments as follows:
(DOLLARS IN MILLIONS)
Cost of sales
Selling, general & administrative
Non-service pension (benefit)
Total
$ 147
162
(2)
$ 307
2018 Actions. During 2018, we recorded net pre-tax restructuring
costs totaling $207 million for restructuring actions initiated in 2018,
consisting of $76 million in cost of sales, $133 million in selling, general
and administrative expenses and $(2) million in non-service pension
benefit. The 2018 actions relate to ongoing cost reduction efforts,
including workforce reductions and consolidation of field operations.
We are targeting to complete in 2019 and 2020 the majority of
the remaining workforce and all facility related cost reduction actions
initiated in 2018. No specific plans for significant other actions have
been finalized at this time. The following table summarizes the accrual
balances and utilization by cost type for the 2018 restructuring actions:
(DOLLARS IN MILLIONS)
Net pre-tax restructuring costs
Utilization, foreign exchange
and other costs
Balance at December 31, 2018
Severance
$ 191
(76)
$ 115
Facility Exit,
Lease Termination
& Other Costs
$ 16
7
$ 23
Total
$ 207
(69)
$ 138
(DOLLARS IN MILLIONS)
Otis
Carrier
Pratt & Whitney
Collins Aerospace Systems
Eliminations and other
Total
$ 69
80
(7)
160
5
$ 307
Restructuring charges incurred in 2018 primarily relate to actions
68
2018 Annual Report The following table summarizes expected, incurred and remaining
costs for the 2018 restructuring actions by segment:
(DOLLARS IN MILLIONS)
Expected Costs
Cost Incurred
During 2018
Remaining
Costs at
December 31, 2018
Otis
Carrier
Pratt & Whitney
Collins Aerospace Systems
Eliminations and other
$ 55
$ (48)
111
3
111
6
(64)
(3)
(87)
(5)
Total
$ 286
$ (207)
$ 7
47
—
24
1
$ 79
2017 Actions. During 2018, we recorded net pre-tax restructuring
costs totaling $94 million for restructuring actions initiated in 2017,
consisting of $72 million in cost of sales and $22 million in selling, general
and administrative expenses. The 2017 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 2017 restructuring actions:
Notes to Consolidated Financial Statements
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 $20.1 billion and $19.1 billion at December 31, 2018 and 2017,
respectively. Additional information pertaining to foreign exchange and
hedging activities is included in Note 1.
The following table summarizes the fair value and presentation
in the Consolidated Balance Sheets for derivative instruments as of
December 31, 2018 and 2017:
(DOLLARS IN MILLIONS)
Derivatives designated as
hedging instruments:
Foreign exchange
contracts
Balance Sheet Location
12/31/2018
12/31/2017
Asset Derivatives:
Other assets, current
Other assets
Total asset derivatives
Liability Derivatives:
Accrued liabilities
Other long-term liabilities
$
$
10
12
22
(83)
(111)
$ 77
101
$ 178
(10)
(8)
Total liability derivatives
$ (194)
$ (18)
(DOLLARS IN MILLIONS)
Severance
Facility Exit,
Lease
Termination
and Other
Costs
Restructuring accruals at January 1, 2018
$ 84
$
1
$
Net pre-tax restructuring costs
Utilization, foreign exchange and other costs
62
(89)
32
(37)
Total
85
94
(126)
Derivatives not
designated as hedging
instruments:
Balance at December 31, 2018
$ 57
$ (4)
$
53
Foreign exchange contracts
Asset Derivatives:
The following table summarizes expected, incurred and remaining
costs for the 2017 programs by segment:
(DOLLARS IN MILLIONS)
Otis
Carrier
Pratt & Whitney
Collins Aerospace
Systems
Eliminations and other
Expected
Costs
Costs
Incurred
During 2017
Costs
Incurred
During 2018
$ 66
$ (43)
$ (20)
77
7
204
7
(76)
(7)
(43)
(7)
—
—
(74)
—
Total
$ 361
$ (176)
$ (94)
Remaining
Costs at
December 31,
2018
$
$
3
1
—
87
—
91
2016 and Prior Actions. During 2018, we recorded net pre-tax
restructuring costs totaling $6 million for restructuring actions initiated
in 2016 and prior. As of December 31, 2018, we have approximately
$58 million of accrual balances remaining related to 2016 and prior actions.
NOTE 14: 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.
Other assets, current
Other assets
Total asset derivatives
$
Liability Derivatives:
Accrued liabilities
Other long-term liabilities
44
19
63
(89)
(3)
70
5
$ 75
(57)
(3)
Total liability derivatives
$ (92)
$ (60)
The effect of cash flow hedging relationships on accumulated other
comprehensive income for the years ended December 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.
(DOLLARS IN MILLIONS)
(Loss) Gain recorded in Accumulated other
comprehensive loss
Gain reclassified from Accumulated other
comprehensive loss into Product sales
Year Ended December 31,
2018
2017
$ (307)
$ 347
$ (16)
$ (39)
The table above reflects the effect of cash flow hedging
relationships on the Consolidated Statement of Operations for the years
ended December 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.
69
United Technologies Corporation Notes to Consolidated Financial Statements
We have approximately €4.95 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 December 31,
2018, the net investment hedge is deemed to be effective.
Assuming current market conditions continue, a $48 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
December 31, 2018, all derivative contracts accounted for as cash flow
hedges will mature by January 2023.
The effect of derivatives not designated as hedging instruments
within Other income, net, on the Consolidated Statement of Operations
was as follows:
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 Consolidated
Balance Sheet at December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
(DOLLARS IN MILLIONS)
Carrying
Amount
Fair
Value
Carrying
Amount
Long-term receivables
$
334
$
314
$
127
$
Customer financing
notes receivable
Short-term borrowings
Long-term debt
(excluding capitalized leases)
272
265
(1,469)
(1,469)
609
(392)
Long-term liabilities
(508)
(467)
(362)
(330)
(43,996)
(44,003)
(27,067)
(29,180)
Fair
Value
121
596
(392)
(DOLLARS IN MILLIONS)
Gain recognized in Other income, net
Year Ended December 31,
2018
$ 115
2017
$ 77
The following table provides the valuation hierarchy classification of
assets and liabilities that are not carried at fair value in our Consolidated
Balance Sheet as of December 31, 2018 and 2017:
NOTE 15: 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 Consolidated Balance Sheet as of December 31, 2018
and 2017:
(DOLLARS IN MILLIONS)
Recurring fair value measurements:
Available-for-sale securities
Derivative assets
Derivative liabilities
(DOLLARS IN MILLIONS)
Recurring fair value measurements:
December 31, 2018
Total
Level 1
Level 2
Level 3
$
51
85
(286)
$ 51
$ —
$ —
—
—
85
(286)
—
—
December 31, 2017
Total
Level 1
Level 2
Level 3
Available-for-sale securities
$ 64
$ 64
$ —
$ —
Derivative assets
Derivative liabilities
253
(78)
—
—
253
(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 December 31, 2018, there were no significant transfers in or out of
Level 1 and Level 2.
As of December 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
70
(DOLLARS IN MILLIONS)
Long-term receivables
Customer financing
notes receivable
Short-term borrowings
Long-term debt (excluding
capitalized leases)
Long-term liabilities
(DOLLARS IN MILLIONS)
Long-term receivables
$
Customer financing
notes receivable
Short-term borrowings
Long-term debt (excluding
capitalized leases)
Long-term liabilities
December 31, 2018
Total
314
$
Level 1
Level 2
$ — $
314
Level 3
$ —
265
(1,469)
(44,003)
(467)
Total
121
596
(392)
(29,180)
(330)
—
—
—
—
265
(1,258)
(43,620)
(467)
—
(211)
(383)
—
December 31, 2017
Level 1
Level 2
$ — $
121
Level 3
$ —
—
—
—
—
596
(300)
(28,970)
(330)
—
(92)
(210)
—
NOTE 16: VARIABLE INTEREST ENTITIES
Pratt & Whitney holds a net 61% interest in the 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 engine
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
2018 Annual Report 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 Consolidated Balance Sheet as of December 31, 2018 and 2017
are as follows:
(DOLLARS IN MILLIONS)
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
2018
2017
$ 4,732
$ 3,976
1,600
1,534
$ 6,332
$ 5,510
$ 4,946
$ 3,601
1,898
2,086
$ 6,844
$ 5,687
NOTE 17: GUARANTEES
We extend a variety of financial, market value and product performance
guarantees to third parties. As of December 31, 2018 and 2017, the
following financial guarantees were outstanding:
(DOLLARS IN MILLIONS)
Commercial aerospace financing
arrangements (see Note 5)
Credit facilities and debt obligations
(expire 2019 to 2028)
Performance guarantees
December 31, 2018
December 31, 2017
Maximum
Potential
Payment
Carrying
Amount of
Liability
Maximum
Potential
Payment
Carrying
Amount of
Liability
$ 348
$ 9
$ 336
$ 8
116
55
—
5
256
56
15
2
We also have obligations arising from sales of certain businesses
and assets, including those from representations and warranties
and related indemnities for environmental, health and safety, tax
and employment matters. The maximum potential payment related
to these obligations is not a specified amount as a number of the
obligations do not contain financial caps. The carrying amount of
liabilities related to these obligations was $175 million and $179 million
at December 31, 2018 and December 31, 2017, respectively. For
additional information regarding the environmental indemnifications,
see Note 18.
We accrue for costs associated with guarantees when it is
probable that a liability has been incurred and the amount can be
reasonably estimated. The most likely cost to be incurred is accrued
based on an evaluation of currently available facts, and where no
amount within a range of estimates is more likely, the minimum is
accrued. In accordance with the Guarantees Topic of the FASB ASC,
we record these liabilities at fair value.
We provide service and warranty policies on our products and
extend performance and operating cost guarantees beyond our normal
service and warranty policies on some of our products, particularly
commercial aircraft engines. In addition, we incur discretionary costs to
service our products in connection with specific product performance
issues. Liabilities for performance and operating cost guarantees are
Notes to Consolidated Financial Statements
based upon future product performance and durability, and are largely
estimated based upon historical experience. Adjustments are made to
accruals as claim data and historical experience warrant. The changes
in the carrying amount of service and product warranties and product
performance guarantees for the years ended December 31, 2018 and
2017 are as follows:
(DOLLARS IN MILLIONS)
Balance as of January 11
Warranties and performance guarantees issued
Settlements made
Other 2
Balance as of December 31
2018
2017
$ 1,146
$ 1,199
604
(493)
192
323
(207)
9
$ 1,449
$ 1,324
1 Change in beginning balance due to revenue recognition reclassification of extended
warranty to net contract asset/liability.
2 Increase in Other is driven by Rockwell Collins acquisition.
NOTE 18: CONTINGENT LIABILITIES
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.
Leases. We occupy space and use certain equipment and assets
under lease arrangements. Rental commitments of approximately $2.9
billion at December 31, 2018 under long-term non-cancelable operating
leases are payable as follows: $683 million in 2019, $544 million in
2020, $407 million in 2021, $301 million in 2022, $235 million in 2023
and $746 million thereafter. Rent expense was $422 million in 2018,
$411 million in 2017 and $386 million in 2016.
Additional information pertaining to commercial aerospace rental
commitments is included in Note 5 to the Consolidated Financial
Statements.
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, 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. As of December 31, 2018 and
2017, we had approximately $830 million reserved for environmental
remediation, respectively. Additional information pertaining to
environmental matters is included in Note 1 to the Consolidated
Financial Statements.
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
71
United Technologies Corporation Notes to Consolidated Financial Statements
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
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, in some cases, continue to negotiate and/
or litigate. 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 Claims: As
previously disclosed, in December 2013, a Divisional Administrative
Contracting Officer of the United States Defense Contract Management
Agency (DCMA) asserted a claim against Pratt & Whitney to recover
overpayments of approximately $177 million plus interest (approximately
$82.6 million through December 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 (ASBCA). We continue to believe that the claim is
without merit and the matter is currently scheduled for trial later this
year. On December 18, 2018, a Divisional Administrative Contracting
Officer of the DCMA issued a second claim against Pratt & Whitney that
similarly alleges that its method of determining the cost of collaborator
parts does not comply with the cost accounting standards for calendar
years 2013 through 2017. This second claim demands payment of
$269 million plus interest (approximately $38.9 million), which we also
believe is without merit and which Pratt & Whitney appealed to the
ASBCA on January 9, 2019.
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
$247 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
$135 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 appealed this decision to the German
Federal Tax Court (FTC). Following a hearing on July 24, 2018, the
FTC remanded the matter to the local German Tax Court for further
proceedings. 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.
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
$335 million and is principally recorded in Other long-term liabilities on
our Consolidated Balance Sheet as of December 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 $155 million, which is included primarily in Other assets
on our Consolidated Balance Sheet as of December 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
72
2018 Annual Report 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 the end of each year, the Company will evaluate all of
these factors and, with input from an outside actuarial expert, make any
necessary adjustments to both our estimated asbestos liabilities and
insurance recoveries.
Other. As described in Note 17 to the Consolidated Financial
Statements, 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.
Of note, the design, development, production and support of new
aerospace technologies is inherently complex and subject to risk.
Since the PurePower PW1000G Geared TurboFan engine entered into
service in 2016, technical issues have been identified and experienced
with the engine, which is usual for new engines and new aerospace
technologies. Pratt & Whitney has addressed these issues through
various improvements and modifications. These issues have resulted
in financial impacts, including increased warranty provisions, customer
contract settlements, and reductions in contract performance estimates.
Additional technical issues have been identified, for which a reasonable
estimate of the impact cannot currently be made, and such issues may
also arise in the normal course, which may result in financial impacts
that could be material to the Company’s financial position, results of
operations and cash flows.
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.
Notes to Consolidated Financial Statements
NOTE 19: SEGMENT FINANCIAL DATA
Our operations for the periods presented herein are classified into four
principal segments. The segments are generally determined 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.
Otis products include elevators, escalators, moving walkways
and service sold to customers in the commercial, residential and
infrastructure property sectors around the world.
Carrier products and related services include HVAC and
refrigeration systems, building controls and automation, fire and special
hazard suppression systems and equipment, security monitoring and
rapid response systems, provided to a diversified international customer
base principally in the industrial, commercial and residential property
and commercial transportation sectors.
Pratt & Whitney products include commercial, military,
business jet and general aviation aircraft engines, parts and services
sold to a diversified customer base, including international and
domestic commercial airlines and aircraft leasing companies, aircraft
manufacturers, and U.S. and foreign governments. Pratt & Whitney also
provides product support and a full range of overhaul, repair and fleet
management services.
Collins Aerospace Systems provides technologically advanced
aerospace products and aftermarket service solutions for aircraft
manufacturers, airlines, regional, business and general aviation markets,
military, space and undersea operations. Products include electric
power generation, power management and distribution systems, air
data and aircraft sensing systems, engine control systems, intelligence,
surveillance and reconnaissance systems, engine components,
environmental control systems, fire and ice detection and protection
systems, propeller systems, engine nacelle systems, including thrust
reversers and mounting pylons, interior and exterior aircraft lighting,
aircraft seating and cargo systems, actuation systems, landing systems,
including landing gear, wheels and brakes, and space products and
subsystems, integrated avionics systems, precision targeting, electronic
warfare and range and training systems, flight controls, communications
systems, navigation systems, oxygen systems, simulation and training
systems, food and beverage preparation, storage and galley systems,
lavatory and wastewater management systems. Aftermarket services
include spare parts, overhaul and repair, engineering and technical
support, training and fleet management solutions, and information
management services.
We have reported our financial and operational results for the
periods presented herein under the four principal segments noted
above, consistent with how we have reviewed our business operations
for decision-making purposes, resource allocation and performance
assessment during 2018.
73
United Technologies Corporation Notes to Consolidated Financial Statements
Segment Information. Total sales by segment include intersegment sales, which are generally made at prices approximating those that the
selling entity is able to obtain on external sales. Segment information for the years ended December 31 is as follows:
(DOLLARS IN MILLIONS)
Otis
Carrier
Pratt & Whitney
Collins Aerospace Systems
Total segment
Eliminations and other
General corporate expenses
Consolidated
(DOLLARS IN MILLIONS)
Otis
Carrier
Pratt & Whitney
Collins Aerospace Systems
Total segment
Eliminations and other
Consolidated
Net Sales
Operating Profits
2018
2017
2016
2018
2017
2016
$ 12,904
18,922
19,397
16,634
67,857
(1,356)
—
$ 66,501
$ 12,341
17,812
16,160
14,691
61,004
(1,167)
—
$ 59,837
$ 11,893
16,851
14,894
14,465
58,103
(859)
—
$ 57,244
$ 1,915
3,777
1,269
2,303
9,264
(236)
(475)
$ 8,553
$ 2,002
3,165
1,300
2,191
8,658
(81)
(439)
$ 8,138
$ 2,125
2,848
1,501
2,167
8,641
(18)
(402)
$ 8,221
Total Assets
Capital Expenditures
Depreciation & Amortization
2018
2017
2016
2018
2017
2016
2018
2017
2016
$
9,374
22,189
29,341
73,115
134,019
192
$ 134,211
$ 9,421
22,657
26,768
34,567
93,413
3,507
$ 96,920
$ 8,867
21,787
22,971
34,093
87,718
1,988
$ 89,706
$
172
263
866
515
1,816
86
$ 1,902
$
133
326
923
527
1,909
105
$ 2,014
$
94
340
725
452
1,611
88
$ 1,699
$
190
357
852
883
2,282
151
$ 2,433
$
177
372
672
823
2,044
96
$ 2,140
$
171
354
550
807
1,882
80
$ 1,962
Geographic External Sales and Operating Profit. Geographic external sales and operating profits are attributed to the geographic
regions based on their location of origin. U.S. external sales include export sales to commercial customers outside the U.S. and sales to the U.S.
Government, commercial and affiliated customers, which are known to be for resale to customers outside the U.S. Long-lived assets are net fixed
assets attributed to the specific geographic regions.
(DOLLARS IN MILLIONS)
United States Operations
International Operations
Europe
Asia Pacific
Other
Eliminations and other
Consolidated
External Net Sales
Operating Profits
Long-Lived Assets
2018
2017
2016
2018
2017
2016
2018
2017
2016
$ 39,481
$ 33,912
$ 32,335
$ 4,941
$ 4,126
$ 4,304
$ 7,111
$ 5,323
$ 4,822
12,857
8,847
6,672
(1,356)
$ 66,501
11,879
8,770
6,443
(1,167)
$ 59,837
11,151
8,260
6,357
(859)
$ 57,244
2,141
1,476
706
(711 )
$ 8,553
1,959
1,491
1,082
(520)
$ 8,138
1,826
1,486
1,025
(420)
$ 8,221
1,908
1,349
1,363
566
$ 12,297
1,817
1,113
1,389
544
$ 10,186
1,538
999
1,325
474
$ 9,158
Sales from U.S. operations include export sales as follows:
(DOLLARS IN MILLIONS)
Europe
Asia Pacific
Other
2018
2017
2016
$ 6,285
5,429
2,514
$ 14,228
$ 5,273
3,634
2,217
$ 11,124
$ 5,065
3,449
2,313
$ 10,827
74
2018 Annual Report Sales by primary geographical market for the year ended December 31, 2018 is as follows:
Notes to Consolidated Financial Statements
(DOLLARS IN MILLIONS)
Primary Geographical Markets
United States
Europe
Asia Pacific
Other
Total segment
Eliminations and other
Consolidated
Otis
Carrier
Pratt &
Whitney
Collins
Aerospace
Systems
$ 3,433
4,055
4,354
1,062
$ 12,904
$ 9,402
5,710
2,849
961
$ 18,922
$ 14,852
594
1,277
2,674
$ 19,397
$ 11,794
2,498
367
1,975
$ 16,634
Segment sales disaggregated by product type and product versus service for the year ended December 31, 2018 are as follows:
Otis
Carrier
Pratt &
Whitney
Collins
Aerospace
Systems
$ 12,904
—
—
$ 12,904
$ 18,922
—
—
$ 18,922
$
55
14,027
5,315
$ 19,397
$
60
12,564
4,010
$ 16,634
$ 5,636
7,268
$ 12,904
$ 15,682
3,240
$ 18,922
$ 11,410
7,987
$ 19,397
$ 13,915
2,719
$ 16,634
(DOLLARS IN MILLIONS)
Product Type
Commercial and industrial, non aerospace
Commercial aerospace
Military aerospace
Total segment
Eliminations and other
Consolidated
Sales Type
Product
Service
Total segment
Eliminations and other
Consolidated
Major Customers. Net Sales include sales under prime contracts
and subcontracts to the U.S. Government, primarily related to Pratt &
Whitney and Collins Aerospace Systems products, as follows:
(DOLLARS IN MILLIONS)
Pratt & Whitney
Collins Aerospace Systems
Other
2018
2017
2016
$ 4,489
2,779
175
$ 7,443
$ 3,347
2,299
152
$ 5,798
$ 3,187
2,301
138
$ 5,626
Net sales to Airbus, primarily related to Pratt & Whitney and Collins
Aerospace Systems products, were approximately $10,025 million,
$8,908 million and $7,688 million for the years ended December 31,
2018, 2017 and 2016, respectively.
Total
$ 39,481
12,857
8,847
6,672
67,857
(1,356)
$ 66,501
Total
$ 31,941
26,591
9,325
67,857
(1,356)
$ 66,501
$ 46,643
21,214
67,857
(1,356)
$ 66,501
75
United Technologies Corporation Selected Quarterly Financial Data (Unaudited)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net Sales
Gross margin
Net income attributable to common shareowners
Earnings per share of Common Stock:
2018 Quarters
2017 Quarters
First
Second
Third
Fourth
First
Second
Third
Fourth
$ 15,242
3,962
1,297
$ 16,705
4,283
2,048
$ 16,510
3,974
1,238
$ 18,044
4,297
686
$ 13,815
3,679
1,386
$ 15,280
4,116
1,439
$ 15,062
3,956
1,330
$ 15,680
3,885
397
Basic - net income
Diluted - net income
$
$
1.64
1.62
$
$
2.59
2.56
$
$
1.56
1.54
$
$
0.83
0.83
$
$
1.75
1.73
$
$
1.83
1.80
$
$
1.69
1.67
$
$
0.50
0.50
PERFORMANCE GRAPH (UNAUDITED)
The following graph presents the cumulative total shareholder return for the five years ending December 31, 2018 for our common stock, as
compared to the Standard & Poor’s 500 Stock Index and to the Dow Jones 30 Industrial Average. Our common stock price is a component of both
indices. These figures assume that all dividends paid over the five-year period were reinvested, and that the starting value of each index and the
investment in common stock was $100.00 on December 31, 2013.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
$250
$200
$150
$100
$50
$0
United Technologies
Corporation
S&P 500 Index
Dow Jones
Industrial Average
2013
2014
2015
2016
2017
2018
United Technologies Corporation
S&P 500 Index
Dow Jones Industrial Average
December
2013
2014
2015
2016
2017
2018
$ 100.00
$ 100.00
$ 103.19
$ 113.69
$ 88.32
$ 115.26
$ 103.37
$ 129.05
$ 123.08
$ 157.22
$ 105.03
$ 150.33
$ 100.00
$ 110.04
$ 110.28
$ 128.47
$ 164.58
$ 158.85
76
2018 Annual Report Reconciliation of Non-GAAP Measures to Corresponding GAAP Measures
RECONCILIATION OF NET SALES TO ADJUSTED NET SALES
(DOLLARS IN MILLIONS)
Net sales
Adjustments to net sales:
Pratt & Whitney - charge resulting from ongoing customer contract matters
UTC Aerospace Systems - charge resulting from customer contract matters
Adjusted net sales
2018
2017
2016
2015
2014
$ 66,501
$ 59,837
$ 57,244
$ 56,098
$ 57,900
—
—
385
—
184
—
142
210
—
—
$ 66,501
$ 60,222
$ 57,428
$ 56,450
$ 57,900
RECONCILIATION OF DILUTED EARNINGS PER SHARE TO ADJUSTED DILUTED EARNINGS PER SHARE
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2018
2017
2016
2015
2014
Net income from continuing operations attributable to common shareowners
$ 5,269
$ 4,552
$ 5,065
$ 3,996
$ 6,066
Adjustments to net income from continuing operations attributable to common shareowners:
Restructuring costs
Significant non-recurring and non-operational charges (gains)
Income tax benefit on restructuring costs and significant non-recurring and non-operational items
Significant non-recurring and non-operational (gains) charges recorded within income tax expense
Significant non-recurring and non-operational items - Noncontrolling interest
Total adjustments to net income from continuing operations attributable to common shareowners
Adjusted net income from continuing operations attributable to common shareowners
Weighted average diluted shares outstanding
Diluted earnings per share—Net income from continuing operations attributable to common shareowners
Impact of non-recurring and non-operational charges (gains) on diluted earnings per share
Adjusted diluted earnings per share—Net income from continuing operations attributable to
common shareowners
RECONCILIATION OF SEGMENT RESULTS TO ADJUSTED SEGMENT RESULTS
(DOLLARS IN MILLIONS)
2018 Segment operating profit
Adjustments to segment operating profit:
Restructuring costs
Gain on sale of Taylor Company
Charge resulting from customer contract matters
Asset impairment
Amortization of Rockwell Collins inventory fair value adjustment
Adjusted 2018 segment operating profit
307
(172)
(5)
773
(7)
896
253
(146)
(11)
667
—
763
290
690
(354)
(231)
—
395
$ 6,165
$
810
$ 6.50
1.11
$ 5,315
$
799
$ 5.70
0.95
$ 5,460
$
826
$ 6.13
0.48
396
1,446
(617)
342
—
1,567
$ 5,563
$
883
$ 4.53
354
(240)
(7)
(284)
—
(177)
$ 5,889
$ $912
$ 6.65
1.77
(0.19)
$ 7.61
$ 6.65
$ 6.61
$ 6.30
$ 6.46
Otis
Carrier
Pratt &
Whitney
Collins
Aerospace
Systems
$ 1,915
$ 3,777
$ 1,269
$ 2,303
71
—
—
—
—
80
(799)
—
—
—
(7)
—
300
—
—
160
—
—
48
102
$ 1,986
$ 3,058
$ 1,562
$ 2,613
RECONCILIATION OF NET CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS TO FREE CASH FLOW
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Net cash flows provided by operating activities of continuing operations
Less: Capital expenditures
Free Cash Flow
2018
$ 6,322
1,902
$ 4,420
Use and Definitions of Non-GAAP Financial Measures
United Technologies Corporation reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”). We supplement the reporting of our
financial information determined under GAAP with certain non-GAAP financial information. The non-GAAP information presented provides investors with additional useful information, but
should not be considered in isolation or as substitutes for the related GAAP measures. Moreover, other companies may define non-GAAP measures differently, which limits the usefulness of
these measures for comparisons with such other companies. We encourage investors to review our financial statements and publicly filed reports in their entirety and not to rely on any single
financial measure.
Adjusted net sales, organic sales, adjusted operating profit, and adjusted earnings per share (“EPS”) are non-GAAP financial measures. Adjusted net sales represents consolidated net sales
from continuing operations (a GAAP measure), excluding significant items of a non-recurring and/or nonoperational nature (hereinafter referred to as “other significant items”). Organic sales
represents consolidated net sales (a GAAP measure), excluding the impact of foreign currency translation, acquisitions and divestitures completed in the preceding twelve months and other
significant items. Adjusted operating profit represents income from continuing operations (a GAAP measure), excluding restructuring costs and other significant items. Adjusted EPS represents
diluted earnings per share from continuing operations (a GAAP measure), excluding restructuring costs and other significant items. For the business segments, when applicable, adjustments of
net sales and operating profit similarly reflect continuing operations, excluding restructuring and other significant items. Management believes that the non-GAAP measures just mentioned are
useful in providing period-to-period comparisons of the results of the Company’s ongoing operational performance.
Free cash flow is a non-GAAP financial measure that represents cash flow from operations (a GAAP measure) less capital expenditures. Management believes free cash flow is a useful measure
of liquidity and an additional basis for assessing UTC’s ability to fund its activities, including the financing of acquisitions, debt service, repurchases of UTC’s common stock and distribution of
earnings to shareowners.
A reconciliation of the non-GAAP measures to the corresponding amounts prepared in accordance with GAAP appears in the tables above. The tables above provide additional information as
to the items and amounts that have been excluded from the adjusted measures
77
United Technologies Corporation Marshall O. Larsen
Retired Chairman, President &
Chief Executive Officer
Goodrich Corporation
(Aerospace and Defense Systems
and Services)
Harold W. McGraw III
Chairman Emeritus
S&P Global Inc.
(formerly McGraw Hill Financial, Inc.)
(Ratings, Benchmarks and Analytics
for Financial Markets)
Margaret (Meghan) L. O’Sullivan
Professor
Harvard University Kennedy School
(Higher Education)
Denise L. Ramos
Retired Chief Executive Officer
ITT Inc.
(Diversified Manufacturer)
Fredric G. Reynolds
Retired Executive Vice President &
Chief Financial Officer
CBS Corporation
(Media)
Brian C. Rogers
Non-Executive Chairman
T. Rowe Price Group, Inc.
(Investment Management)
Christine Todd Whitman
President
The Whitman Strategy Group
(Environment and Public Policy Consulting)
Former EPA Administrator
Former Governor of New Jersey
COMMITTEES
Audit Committee
Fredric G. Reynolds, Chair
Lloyd J. Austin III
Diane M. Bryant
Christopher J. Kearney
Margaret (Meghan) L. O’Sullivan
Denise L. Ramos
Compensation Committee
Jean-Pierre Garnier, Chair
John V. Faraci
Ellen J. Kullman
Harold W. McGraw III
Denise L. Ramos
Brian C. Rogers
Committee on Governance
and Public Policy
Brian C. Rogers, Chair
Lloyd J. Austin III
Jean-Pierre Garnier
Marshall O. Larsen
Harold W. McGraw III
Margaret (Meghan) L. O’Sullivan
Christine Todd Whitman
Executive Committee
Gregory J. Hayes, Chair
John V. Faraci
Jean-Pierre Garnier
Ellen J. Kullman
Finance Committee
John V. Faraci, Chair
Diane M. Bryant
Gregory J. Hayes
Christopher J. Kearney
Ellen J. Kullman
Marshall O. Larsen
Fredric G. Reynolds
Christine Todd Whitman
Board of Directors
Lloyd J. Austin III
General, U.S. Army (Ret.)
and former Commander of
U.S. Central Command
(Military Leadership)
Diane M. Bryant
Technology Industry Executive
(Technology and Innovation)
John V. Faraci
Retired Chairman &
Chief Executive Officer
International Paper
(Paper, Packaging and Distribution)
Jean-Pierre Garnier
Chairman
Idorsia Pharmaceuticals Ltd.
(Biopharmaceuticals)
Gregory J. Hayes
Chairman & CEO
United Technologies Corp.
(Diversified Manufacturer)
Christopher J. Kearney
Retired Chairman
SPX FLOW, Inc.
(Industrial Equipment)
Ellen J. Kullman
Lead Director
Retired Chair & Chief Executive Officer
E. I. du Pont de Nemours and Company
(Diversified Chemicals and Materials)
78
2018 Annual Report Leadership
Gregory J. Hayes*
Chairman & CEO
Elizabeth B. Amato*
Executive Vice President &
Chief Human Resources Officer
Robert J. Bailey*
Corporate Vice President
Controller
Vincent M. Campisi
Senior Vice President &
Chief Digital Officer
Robin L. Diamonte
Corporate Vice President
Pension Investments
Michael R. Dumais*
Executive Vice President
Operations & Strategy
Paul Eremenko
Senior Vice President &
Chief Technology Officer
* Executive Officer
Charles D. Gill Jr.*
Executive Vice President &
General Counsel
David L. Gitlin*
President & Chief Operating Officer
Collins Aerospace Systems
Peter J. Graber-Lipperman
Corporate Vice President,
Secretary & Associate
General Counsel
Akhil Johri*
Executive Vice President &
Chief Financial Officer
George Ross Kearney
Corporate Vice President
Tax
Robert F. Leduc*
President
Pratt & Whitney
Susan Mackiewicz
Corporate Vice President
Internal Audit
Judith F. Marks*
President
Otis
Timothy J. McBride
Senior Vice President
Government Relations
Christopher McDavid
Corporate Vice President
Global Ethics & Compliances
Robert J. McDonough*
President
Carrier
Kelli Parsons
Senior Vice President &
Chief Communications Officer
Robert K. Ortberg*
Chief Executive Officer
Collins Aerospace Systems
David R. Whitehouse*
Corporate Vice President
Treasurer
79
United Technologies Corporation Shareowner Information
CORPORATE OFFICE
United Technologies Corporation
10 Farm Springs Road
Farmington, CT 06032
860.728.7000
www.utc.com
This report is made available to shareowners in advance of the annual
meeting of shareowners to be held at 8 a.m., April 29, 2019, in Palm
Beach Gardens, Florida. The proxy statement will be made available to
shareowners on or about March 18, 2019, at which time proxies for the
meeting will be requested.
STOCK LISTING
New York Stock Exchange (ticker symbol UTX)
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company, N.A., is the transfer agent, registrar
and dividend disbursing agent for UTC’s common stock. Questions and
communications from registered shareowners regarding transfer of
stock, replacement of lost certificates, dividends, address changes, and
the Stock Purchase and Dividend Reinvestment Plan administered by
Computershare should be directed to:
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
800.488.9281
781.575.2724 (outside U.S.)
800.952.9245 (TDD)
www.computershare.com/investor
DIVIDENDS
Dividends are usually paid on the 10th day of March, June, September
and December.
ELECTRONIC ACCESS OR DELIVERY OF SHAREOWNER
COMMUNICATIONS
Registered shareowners can help conserve natural resources and
reduce printing and mailing costs incurred by UTC by signing up for
electronic communications, including annual meeting materials,
stock plan statements and tax documents at:
www.computershare-na.com/green.
Beneficial shareowners may be able to request electronic access or
delivery by contacting their broker or bank, or Broadridge Financial
Solutions at: http://enroll.icsdelivery.com/utc.
2018 ANNUAL REPORT ON FORM 10-K
Copies of the UTC Annual Report on Form 10-K as filed with the
U.S. Securities and Exchange Commission can be accessed and
downloaded via our website at:
http://ir.utc.com/financial-information/sec-filings.
Copies can also be obtained, without charge, from:
UTC Corporate Secretary
United Technologies Corporation
10 Farm Springs Road
Farmington, CT 06032
860.728.7870
corpsec@corphq.utc.com
INVESTOR RELATIONS
United Technologies Corporation
10 Farm Springs Road
Farmington, CT 06032
860.728.7608
InvRelations@corphq.utc.com
ENVIRONMENTALLY FRIENDLY REPORT
This annual report is printed on recycled and recyclable paper.
www.utc.com
www.carrier.com
www.collinsaerospace.com
www.otis.com
www.pw.utc.com
80
2018 Annual Report Recognition
Institutional
Investor
All-American Executive Team:
Among most honored
companies in the aerospace
and defense electronics sector
Human Rights
Campaign
Foundation
Among the best places to
work for LGBTQ equality
Fortune
Among the most admired
aerospace and defense
companies
DiversityInc
Among notable companies
for diversity practices
Forbes
Among the best large
company employers
Among the best employers
for women
Latina Style 50
Among the best companies
for Latinas to work
Disability
Equality Index
Among the best places to work
for disability inclusion
CDP
Formerly known as the
Carbon Disclosure Project
Rated A- for our actions and
performance to reduce
greenhouse gas emissions
and mitigate climate change
This report and its associated web content at
www.utc.com provide detailed examples of
how our approach to integrating responsibility
into our operations fosters a culture of
innovation and delivers results.
United Technologies Corporation and its
subsidiaries’ names, abbreviations thereof,
logos, and product and service designators
are either the registered or unregistered
trademarks or trade names of United
Technologies Corporation and its subsidiaries.
Names of other companies, abbreviations
thereof, logos of other companies, and
product and service designators of other
companies are either the registered or
unregistered trademarks or trade names
of their respective owners.
This report is printed with vegetable-based
inks. All paper used in this report is certified
to the Forest Stewardship Council® (FSC®)
standards. The paper for the cover and
narrative section is Green-e Certified (produced
using 100 percent renewable electricity),
certified Carbon Neutral Plus and manufactured
with a minimum of 30 percent post-consumer
fiber. The financial section is printed on paper
that contains 10 percent post-consumer
recycled content and is manufactured in
facilities that use an average of 75 percent
renewable energy.
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10 Farm Springs Road
Farmington, CT 06032
USA
www.utc.com
Carrier
Collins Aerospace Systems
Otis
Pratt & Whitney