NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at
March 31, 2017
and for the
quarters ended March 31, 2017 and 2016
are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our Annual Report to Shareowners (
2016
Annual Report) incorporated by reference to our Annual Report on Form 10-K for calendar year
2016
(
2016
Form 10-K).
Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. As previously disclosed in our 2016 Form 10-K, in 2016 we early adopted Accounting Standards Update (ASU) 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,
ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
and ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. Amounts previously reported for the quarter ended March 31, 2016 have been restated as required upon adoption of these ASUs. These restatements had an immaterial impact to the Condensed Consolidated Financial Statements as of March 31, 2016 and for the quarter then ended.
Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets
Business Acquisitions and Dispositions.
During the quarter ended
March 31, 2017
, our investment in business acquisitions was
$95 million
, and consisted of a number of small acquisitions, primarily in our commercial businesses.
Goodwill.
Changes in our goodwill balances for the
quarter ended March 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Balance as of
January 1, 2017
|
|
Goodwill
Resulting from Business Combinations
|
|
Foreign Currency Translation and Other
|
|
Balance as of
March 31, 2017
|
Otis
|
$
|
1,575
|
|
|
$
|
(7
|
)
|
|
$
|
57
|
|
|
$
|
1,625
|
|
UTC Climate, Controls & Security
|
9,487
|
|
|
41
|
|
|
93
|
|
|
9,621
|
|
Pratt & Whitney
|
1,511
|
|
|
—
|
|
|
—
|
|
|
1,511
|
|
UTC Aerospace Systems
|
14,483
|
|
|
—
|
|
|
30
|
|
|
14,513
|
|
Total Segments
|
27,056
|
|
|
34
|
|
|
180
|
|
|
27,270
|
|
Eliminations and other
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Total
|
$
|
27,059
|
|
|
$
|
34
|
|
|
$
|
180
|
|
|
$
|
27,273
|
|
Intangible Assets.
Identifiable intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
(Dollars in millions)
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Gross Amount
|
|
Accumulated
Amortization
|
Amortized:
|
|
|
|
|
|
|
|
Service portfolios
|
$
|
2,073
|
|
|
$
|
(1,412
|
)
|
|
$
|
1,995
|
|
|
$
|
(1,344
|
)
|
Patents and trademarks
|
384
|
|
|
(208
|
)
|
|
378
|
|
|
(201
|
)
|
Collaboration intangible assets
|
3,825
|
|
|
(255
|
)
|
|
3,724
|
|
|
(211
|
)
|
Customer relationships and other
|
12,967
|
|
|
(3,640
|
)
|
|
12,798
|
|
|
(3,480
|
)
|
|
19,249
|
|
|
(5,515
|
)
|
|
18,895
|
|
|
(5,236
|
)
|
Unamortized:
|
|
|
|
|
|
|
|
Trademarks and other
|
2,046
|
|
|
—
|
|
|
2,025
|
|
|
—
|
|
Total
|
$
|
21,295
|
|
|
$
|
(5,515
|
)
|
|
$
|
20,920
|
|
|
$
|
(5,236
|
)
|
Customer relationship intangible assets include payments made to our customers to secure certain contractual rights. 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. 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 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. We classify amortization of such payments as a reduction of sales. The collaboration intangible assets are amortized based upon the pattern of economic benefits as represented by the underlying cash flows.
Amortization of intangible assets was
$205 million
and
$187 million
for the
quarters ended March 31, 2017 and 2016
, respectively. The following is the expected amortization of intangible assets for the years
2017
through
2022
, which reflects the pattern of expected economic benefit on certain aerospace intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Remaining 2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
Amortization expense
|
|
$
|
623
|
|
|
$
|
855
|
|
|
$
|
868
|
|
|
$
|
848
|
|
|
$
|
817
|
|
|
$
|
805
|
|
Note 2: Discontinued Operations
On November 6, 2015, we completed the sale of Sikorsky to Lockheed Martin Corp.
In the quarter ended
March 31, 2016
, we recognized approximately
$18 million
of additional Gain on disposal of discontinued operations including settlement of working capital adjustments, and net cash outflows from discontinued operations of approximately
$2.2 billion
, primarily related to the payment of Federal taxes related to the 2015 gain realized on the sale of Sikorsky.
Note 3: Earnings Per Share
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(Dollars in millions, except per share amounts; shares in millions)
|
2017
|
|
2016
|
Net income attributable to common shareowners:
|
|
|
|
Net income from continuing operations
|
$
|
1,386
|
|
|
$
|
1,172
|
|
Income from discontinued operations
|
—
|
|
|
11
|
|
Net income attributable to common shareowners
|
$
|
1,386
|
|
|
$
|
1,183
|
|
Basic weighted average number of shares outstanding
|
793.5
|
|
|
825.0
|
|
Stock awards and equity units
|
8.8
|
|
|
6.3
|
|
Diluted weighted average number of shares outstanding
|
802.3
|
|
|
831.3
|
|
Earnings Per Share of Common Stock - Basic:
|
|
|
|
Net income from continuing operations
|
$
|
1.75
|
|
|
$
|
1.42
|
|
Income from discontinued operations
|
—
|
|
|
0.01
|
|
Net income attributable to common shareowners
|
1.75
|
|
|
1.43
|
|
Earnings Per Share of Common Stock - Diluted:
|
|
|
|
Net income from continuing operations
|
$
|
1.73
|
|
|
$
|
1.41
|
|
Income from discontinued operations
|
—
|
|
|
0.01
|
|
Net income attributable to common shareowners
|
1.73
|
|
|
1.42
|
|
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period because the effect would be anti-dilutive. For the
quarters ended March 31, 2017 and 2016
, the number of stock awards excluded from the computation was approximately
12.2 million
and
16.4 million
, respectively.
Note 4: Inventories and Contracts in Progress
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
March 31, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
2,154
|
|
|
$
|
2,040
|
|
Work-in-process
|
3,075
|
|
|
2,787
|
|
Finished goods
|
3,528
|
|
|
3,305
|
|
Contracts in progress
|
9,592
|
|
|
9,395
|
|
|
18,349
|
|
|
17,527
|
|
Less:
|
|
|
|
Progress payments, secured by lien, on U.S. Government contracts
|
(131
|
)
|
|
(130
|
)
|
Billings on contracts in progress
|
(8,832
|
)
|
|
(8,693
|
)
|
|
$
|
9,386
|
|
|
$
|
8,704
|
|
Inventories include capitalized contract development costs related to certain aerospace programs at UTC Aerospace Systems. As of
March 31, 2017
and
December 31, 2016
, these capitalized costs were
$127 million
and
$140 million
, respectively, which will be liquidated as production units are delivered to the customer. Within commercial aerospace, inventory costs attributable to new engine offerings are recognized based on the average cost per unit expected over the life of each contract using the units-of-delivery method of percentage of completion accounting. Under this method, costs of initial engine deliveries in excess of the projected contract per unit average cost are capitalized, and these capitalized amounts are subsequently expensed as additional engine deliveries occur for engines with costs below the projected contract per unit average cost over the life of the contract. As of
March 31, 2017
and
December 31, 2016
, inventory included
$275 million
and
$233 million
, respectively, of such capitalized amounts.
Note 5: Borrowings and Lines of Credit
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
March 31, 2017
|
|
December 31, 2016
|
Commercial paper
|
$
|
1,074
|
|
|
$
|
522
|
|
Other borrowings
|
126
|
|
|
79
|
|
Total short-term borrowings
|
$
|
1,200
|
|
|
$
|
601
|
|
At
March 31, 2017
, we had revolving credit agreements with various banks permitting aggregate borrowings of up to
$4.35 billion
, pursuant to a
$2.20 billion
revolving credit agreement and a
$2.15 billion
multicurrency revolving credit agreement, both of which expire in
August 2021
. As of
March 31, 2017
, there were no borrowings under these revolving credit agreements. The undrawn portions of these revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of
March 31, 2017
, our maximum commercial paper borrowing limit was
$4.35 billion
. Commercial paper borrowings at
March 31, 2017
include approximately
€500 million
(
$540 million
) of euro-denominated commercial paper. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, debt refinancing, and repurchases of our common stock. The need for commercial paper borrowings arises when the use of domestic cash for acquisitions, dividends, and share repurchases exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
March 31, 2017
|
|
December 31, 2016
|
1.800% notes due 2017
1
|
$
|
1,500
|
|
|
$
|
1,500
|
|
6.800% notes due 2018
|
99
|
|
|
99
|
|
EURIBOR plus 0.800% floating rate notes due 2018 (€750 million principal value)
2
|
811
|
|
|
783
|
|
1.778% junior subordinated notes due 2018
|
1,100
|
|
|
1,100
|
|
LIBOR plus 0.350% floating rate notes due 2019
3
|
350
|
|
|
350
|
|
1.500% notes due 2019
1
|
650
|
|
|
650
|
|
8.875% notes due 2019
|
271
|
|
|
271
|
|
4.875% notes due 2020
1
|
171
|
|
|
171
|
|
4.500% notes due 2020
1
|
1,250
|
|
|
1,250
|
|
8.750% notes due 2021
|
250
|
|
|
250
|
|
1.950% notes due 2021
1
|
750
|
|
|
750
|
|
1.125% notes due 2021 (€950 million principal value)
1
|
1,027
|
|
|
992
|
|
3.100% notes due 2022
1
|
2,300
|
|
|
2,300
|
|
1.250% notes due 2023 (€750 million principal value)
1
|
811
|
|
|
783
|
|
1.875% notes due 2026 (€500 million principal value)
1
|
540
|
|
|
522
|
|
2.650% notes due 2026
1
|
1,150
|
|
|
1,150
|
|
7.100% notes due 2027
|
141
|
|
|
141
|
|
6.700% notes due 2028
|
400
|
|
|
400
|
|
7.500% notes due 2029
1
|
550
|
|
|
550
|
|
5.400% notes due 2035
1
|
600
|
|
|
600
|
|
6.050% notes due 2036
1
|
600
|
|
|
600
|
|
6.800% notes due 2036
1
|
134
|
|
|
134
|
|
7.000% notes due 2038
|
159
|
|
|
159
|
|
6.125% notes due 2038
1
|
1,000
|
|
|
1,000
|
|
5.700% notes due 2040
1
|
1,000
|
|
|
1,000
|
|
4.500% notes due 2042
1
|
3,500
|
|
|
3,500
|
|
4.150% notes due 2045
1
|
850
|
|
|
850
|
|
3.750% notes due 2046
1
|
1,100
|
|
|
1,100
|
|
Project financing obligations
|
130
|
|
|
155
|
|
Other (including capitalized leases)
|
188
|
|
|
189
|
|
Total principal long-term debt
|
23,382
|
|
|
23,299
|
|
Other (fair market value adjustments and discounts)
|
—
|
|
|
1
|
|
Total long-term debt
|
23,382
|
|
|
23,300
|
|
Less: current portion
|
2,484
|
|
|
1,603
|
|
Long-term debt, net of current portion
|
$
|
20,898
|
|
|
$
|
21,697
|
|
|
|
1
|
We may redeem these notes at our option pursuant to their terms.
|
|
|
2
|
The three-month EURIBOR rate as of
March 31, 2017
was approximately -0.329%. The notes may be redeemed at our option in whole, but not in part, at any time in the event of certain developments affecting U.S. taxation.
|
|
|
3
|
The three-month LIBOR rate as of
March 31, 2017
was approximately 1.150%.
|
The average maturity of our long-term debt at
March 31, 2017
is approximately
twelve years
. The average interest expense rate on our total borrowings was approximately
3.5%
and
4.2%
for the
quarters ended March 31, 2017 and 2016
, respectively.
We have an existing universal shelf registration statement filed with the Securities and Exchange Commission (SEC) for an indeterminate amount of equity and debt securities for future issuance, subject to our internal limitations on the amount of equity and debt to be issued under this shelf registration statement.
Note 6: Income Taxes
We conduct business globally and, as a result, UTC or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Belgium, 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 2005.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. It is reasonably possible that over the next 12 months the amount of unrecognized tax benefits may change within a range of a net increase of
$45 million
to a net decrease of
$510 million
as a result of additional worldwide uncertain tax positions, the revaluation of current uncertain tax positions arising from developments in examinations, in appeals, in the courts, or the closure of tax statutes. See Note 15, Contingent Liabilities, for discussion regarding uncertain tax positions, included in the above range, related to pending litigation with respect to certain deductions claimed in Germany.
During the quarter, the Examination Division of the Internal Revenue Service commenced audit fieldwork for UTC’s 2014 tax year. The audit fieldwork is expected to continue beyond the next 12 months.
Note 7: Employee Benefit Plans
Pension and Postretirement Plans.
We sponsor both funded and unfunded domestic and foreign defined pension and other postretirement benefit plans, and defined contribution plans. Contributions to our plans were as follows:
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(Dollars in millions)
|
2017
|
|
2016
|
Defined benefit plans
|
$
|
46
|
|
|
$
|
75
|
|
Defined contribution plans
|
90
|
|
|
78
|
|
There were
no
contributions to our domestic defined benefit pension plans in the
quarters ended March 31, 2017 and 2016
. The following table illustrates the components of net periodic benefit cost for our defined pension and other postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
Quarter Ended March 31,
|
|
Other Postretirement Benefits
Quarter Ended March 31,
|
(Dollars in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
93
|
|
|
$
|
94
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
278
|
|
|
302
|
|
|
7
|
|
|
8
|
|
Expected return on plan assets
|
(540
|
)
|
|
(556
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
(9
|
)
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
Recognized actuarial net loss (gain)
|
143
|
|
|
135
|
|
|
(3
|
)
|
|
(1
|
)
|
Net settlement and curtailment loss
|
1
|
|
|
12
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit (income) cost
|
$
|
(34
|
)
|
|
$
|
(21
|
)
|
|
$
|
5
|
|
|
$
|
8
|
|
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
.
Note 8: Restructuring Costs
During the
quarter ended March 31, 2017
, we recorded net pre-tax restructuring costs totaling
$52 million
for new and ongoing restructuring actions. We recorded charges in the segments as follows:
|
|
|
|
|
(Dollars in millions)
|
|
Otis
|
$
|
5
|
|
UTC Climate, Controls & Security
|
23
|
|
UTC Aerospace Systems
|
23
|
|
Eliminations and other
|
1
|
|
Total
|
$
|
52
|
|
Restructuring charges incurred during the
quarter ended March 31, 2017
primarily relate to actions initiated during
2017
and
2016
, and were recorded as follows:
|
|
|
|
|
(Dollars in millions)
|
|
Cost of sales
|
$
|
21
|
|
Selling, general and administrative
|
31
|
|
Total
|
$
|
52
|
|
2017 Actions
.
During the
quarter ended March 31, 2017
, we recorded net pre-tax restructuring costs totaling
$24 million
, including
$10 million
in cost of sales and
$14 million
in selling, general and administrative expenses. The 2017 actions relate to ongoing cost reduction efforts, including workforce reductions and consolidation of field operations.
We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2017 and
2018
. No specific plans for significant other actions have been finalized at this time. The following table summarizes the accrual balance and utilization for the
2017
restructuring actions for the
quarter ended March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Severance
|
|
Facility Exit, Lease Termination and Other Costs
|
|
Total
|
Net pre-tax restructuring costs
|
$
|
21
|
|
|
$
|
3
|
|
|
$
|
24
|
|
Utilization and foreign exchange
|
(5
|
)
|
|
(3
|
)
|
|
(8
|
)
|
Balance at March 31, 2017
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
16
|
|
The following table summarizes expected, incurred and remaining costs for the
2017
restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Expected
Costs
|
|
Costs Incurred Quarter Ended
March 31, 2017
|
|
Remaining Costs at
March 31, 2017
|
Otis
|
$
|
5
|
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
UTC Climate, Controls & Security
|
21
|
|
|
(12
|
)
|
|
9
|
|
UTC Aerospace Systems
|
15
|
|
|
(9
|
)
|
|
6
|
|
Eliminations and other
|
1
|
|
|
(1
|
)
|
|
—
|
|
Total
|
$
|
42
|
|
|
$
|
(24
|
)
|
|
$
|
18
|
|
2016 Actions
.
During the
quarter ended March 31, 2017
, we recorded net pre-tax restructuring costs totaling
$22 million
for restructuring actions initiated in
2016
, including
$5 million
in cost of sales and
$17 million
in selling, general and administrative expenses. The
2016
actions relate to ongoing cost reduction efforts, including workforce reductions, consolidation of field operations, and costs to exit legacy programs. The following table summarizes the accrual balances and utilization for the
2016
restructuring actions for the
quarter ended March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Severance
|
|
Facility Exit,
Lease
Termination and
Other Costs
|
|
Total
|
Restructuring accruals at December 31, 2016
|
$
|
63
|
|
|
$
|
46
|
|
|
$
|
109
|
|
Net pre-tax restructuring costs
|
15
|
|
|
7
|
|
|
22
|
|
Utilization and foreign exchange
|
(22
|
)
|
|
(6
|
)
|
|
(28
|
)
|
Balance at March 31, 2017
|
$
|
56
|
|
|
$
|
47
|
|
|
$
|
103
|
|
The following table summarizes expected, incurred and remaining costs for the
2016
restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Expected
Costs
|
|
Costs Incurred in 2016
|
|
Costs Incurred Quarter Ended
March 31, 2017
|
|
Remaining Costs at
March 31, 2017
|
Otis
|
$
|
58
|
|
|
$
|
(48
|
)
|
|
$
|
(3
|
)
|
|
$
|
7
|
|
UTC Climate, Controls & Security
|
85
|
|
|
(45
|
)
|
|
(6
|
)
|
|
34
|
|
Pratt & Whitney
|
118
|
|
|
(118
|
)
|
|
—
|
|
|
—
|
|
UTC Aerospace Systems
|
85
|
|
|
(31
|
)
|
|
(13
|
)
|
|
41
|
|
Total
|
$
|
346
|
|
|
$
|
(242
|
)
|
|
$
|
(22
|
)
|
|
$
|
82
|
|
2015 and Prior Actions.
As of March 31, 2017
, we have approximately
$57 million
of accrual balances remaining related to
2015
and prior actions.
Note 9: Financial Instruments
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures.
The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was
$18.5 billion
and
$18.3 billion
at
March 31, 2017
and
December 31, 2016
, respectively.
The following table summarizes the fair value of derivative instruments as of
March 31, 2017
and
December 31, 2016
which consist solely of foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
(Dollars in millions)
|
March 31, 2017
|
|
December 31, 2016
|
|
March 31, 2017
|
|
December 31, 2016
|
Derivatives designated as hedging instruments
|
$
|
22
|
|
|
$
|
15
|
|
|
$
|
128
|
|
|
$
|
196
|
|
Derivatives not designated as hedging instruments
|
84
|
|
|
155
|
|
|
113
|
|
|
158
|
|
As discussed in Note 5,
we have issued approximately €2.95 billion of euro-denominated long-term debt and €500 million of outstanding euro-denominated commercial paper borrowings, which qualify as a net investment hedge against our investments in European businesses
.
As of March 31, 2017, the net investment hedge is deemed to be effective.
The amount of gains and losses related to the Company's derivative financial instruments was as follows:
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(Dollars in millions)
|
2017
|
|
2016
|
Gain recorded in Accumulated other comprehensive loss
|
$
|
64
|
|
|
$
|
159
|
|
Loss reclassified from Accumulated other comprehensive loss into Product sales (effective portion)
|
5
|
|
|
62
|
|
Assuming current market conditions continue, a
$25 million
pre-tax loss is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At
March 31, 2017
, all derivative contracts accounted for as cash flow hedges will mature by
November 2022
.
The effect on the Condensed Consolidated Statement of Operations of foreign exchange contracts not designated as hedging instruments was as follows:
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
(Dollars in millions)
|
2017
|
|
2016
|
Gain recognized in Other income, net
|
$
|
12
|
|
|
$
|
15
|
|
We paid
$113 million
and received
$42 million
from settlements of derivative contracts during the
quarter ended March 31, 2017 and 2016
, respectively.
Note 10: Fair Value Measurements
In accordance with the provisions of ASC 820, the following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and nonrecurring basis in our Condensed Consolidated Balance Sheet as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017 (Dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
316
|
|
|
$
|
316
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
106
|
|
|
2
|
|
|
104
|
|
|
—
|
|
Derivative liabilities
|
(241
|
)
|
|
—
|
|
|
(241
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 (Dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
987
|
|
|
$
|
987
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
170
|
|
|
—
|
|
|
170
|
|
|
—
|
|
Derivative liabilities
|
(354
|
)
|
|
—
|
|
|
(354
|
)
|
|
—
|
|
The reduction in value of available-for-sale securities as of
March 31, 2017
, as compared to
December 31, 2016
, is primarily the result of the sale of UTC Climate, Controls & Security's investments in Watsco, Inc. during the quarter ended March 31, 2017.
Valuation Techniques.
Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally, and are measured at fair value using closing stock prices from active markets. Our derivative assets and liabilities include foreign exchange contracts and commodity derivatives that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks. As of
March 31, 2017
, there were no significant transfers in and out of Level 1 and Level 2.
As of
March 31, 2017
, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties' credit risks.
The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Condensed Consolidated Balance Sheet at
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
(Dollars in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Long-term receivables
|
$
|
143
|
|
|
$
|
134
|
|
|
$
|
127
|
|
|
$
|
121
|
|
Customer financing notes receivable
|
450
|
|
|
428
|
|
|
437
|
|
|
420
|
|
Short-term borrowings
|
(1,200
|
)
|
|
(1,200
|
)
|
|
(600
|
)
|
|
(600
|
)
|
Long-term debt (excluding capitalized leases)
|
(23,361
|
)
|
|
(25,154
|
)
|
|
(23,280
|
)
|
|
(25,110
|
)
|
Long-term liabilities
|
(433
|
)
|
|
(407
|
)
|
|
(457
|
)
|
|
(427
|
)
|
The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Condensed Consolidated Balance Sheet as of
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Long-term receivables
|
$
|
134
|
|
|
$
|
—
|
|
|
$
|
134
|
|
|
$
|
—
|
|
Customer financing notes receivable
|
428
|
|
|
—
|
|
|
428
|
|
|
—
|
|
Short-term borrowings
|
(1,200
|
)
|
|
—
|
|
|
(1,074
|
)
|
|
(126
|
)
|
Long-term debt (excluding capitalized leases)
|
(25,154
|
)
|
|
—
|
|
|
(24,975
|
)
|
|
(179
|
)
|
Long-term liabilities
|
(407
|
)
|
|
—
|
|
|
(407
|
)
|
|
—
|
|
We had commercial aerospace financing and other contractual commitments totaling approximately
$14.2 billion
and
$14.4 billion
as of
March 31, 2017
and
December 31, 2016
, respectively, related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms. Risks associated with changes in interest rates on these commitments are mitigated by the fact that interest rates are variable during the commitment term, and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded.
Note 11: Long-Term Financing Receivables
Our long-term financing receivables primarily represent balances related to our aerospace businesses, such as long-term trade accounts receivable, leases receivable, and notes receivable. We also have other long-term receivables related to our commercial businesses; however, both the individual and aggregate amounts of those other receivables are not significant.
Long-term trade accounts receivable, including unbilled receivables related to long-term aftermarket contracts, are principally amounts arising from the sale of goods and delivery of services with a contractual maturity date or realization period of greater than one year, and are recognized as "Other assets" in our Condensed Consolidated Balance Sheet. Notes and leases receivable represent notes and lease receivables other than receivables related to operating leases, and are recognized as "Customer financing assets" in our Condensed Consolidated Balance Sheet. The following table summarizes the balance by class of aerospace business related long-term receivables as of
March 31, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
March 31, 2017
|
|
December 31, 2016
|
Long-term trade accounts receivable
|
$
|
855
|
|
|
$
|
926
|
|
Notes and leases receivable
|
446
|
|
|
430
|
|
Total long-term receivables
|
$
|
1,301
|
|
|
$
|
1,356
|
|
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
13%
of our total long-term receivables were considered to bear high credit risk as of
March 31, 2017
and
December 31, 2016
.
For long-term trade accounts receivable, we evaluate credit risk and collectability individually to determine if an allowance is necessary. Our long-term receivables reflected in the table above, which include reserves of
$17 million
as of
March 31, 2017
and
December 31, 2016
, are individually evaluated for impairment. At
March 31, 2017
and
December 31, 2016
, we did not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or considered to be not recoverable.
Note 12: Shareowners' Equity and Noncontrolling Interest
A summary of the changes in shareowners' equity and noncontrolling interest comprising total equity for the
quarters ended March 31, 2017 and 2016
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
2017
|
|
2016
|
(Dollars in millions)
|
Share-owners'
Equity
|
|
Non-controlling Interest
|
|
Total
Equity
|
|
Share-owners'
Equity
|
|
Non-controlling Interest
|
|
Total
Equity
|
Equity, beginning of period
|
$
|
27,579
|
|
|
$
|
1,590
|
|
|
$
|
29,169
|
|
|
$
|
27,358
|
|
|
$
|
1,486
|
|
|
$
|
28,844
|
|
Comprehensive income for the period:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
1,386
|
|
|
82
|
|
|
1,468
|
|
|
1,183
|
|
|
81
|
|
|
1,264
|
|
Total other comprehensive (loss) income
|
1
|
|
|
25
|
|
|
26
|
|
|
275
|
|
|
13
|
|
|
288
|
|
Total comprehensive income for the period
|
1,387
|
|
|
107
|
|
|
1,494
|
|
|
1,458
|
|
|
94
|
|
|
1,552
|
|
Common Stock issued under employee plans
|
79
|
|
|
|
|
79
|
|
|
59
|
|
|
|
|
59
|
|
Common Stock repurchased
|
(933
|
)
|
|
|
|
(933
|
)
|
|
—
|
|
|
|
|
—
|
|
Dividends on Common Stock
|
(505
|
)
|
|
|
|
(505
|
)
|
|
(509
|
)
|
|
|
|
(509
|
)
|
Dividends on ESOP Common Stock
|
(18
|
)
|
|
|
|
(18
|
)
|
|
(18
|
)
|
|
|
|
(18
|
)
|
Dividends attributable to noncontrolling interest
|
—
|
|
|
(5
|
)
|
|
(5
|
)
|
|
|
|
|
(51
|
)
|
|
(51
|
)
|
Purchase of subsidiary shares from noncontrolling interest, net
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Acquisition of noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
34
|
|
|
34
|
|
Other
|
5
|
|
|
(13
|
)
|
|
(8
|
)
|
|
5
|
|
|
(12
|
)
|
|
(7
|
)
|
Equity, end of period
|
$
|
27,594
|
|
|
$
|
1,678
|
|
|
$
|
29,272
|
|
|
$
|
28,353
|
|
|
$
|
1,550
|
|
|
$
|
29,903
|
|
On November 11, 2015, we entered into ASR agreements to repurchase an aggregate of
$6 billion
of our common stock utilizing the net after-tax proceeds from the sale of Sikorsky. Under the terms of the ASR agreements, we made aggregate payments and received an initial delivery of approximately
51.9 million
shares of our common stock in November 2015, representing approximately 85% of the shares expected to be repurchased. The shares associated with the remaining portion of the aggregate purchase were settled upon delivery to us of approximately
2.1 million
additional shares of common stock in the quarter ended March 31, 2016 and approximately
8.0 million
additional shares of common stock in the quarter ended September 30, 2016.
A summary of the changes in each component of accumulated other comprehensive (loss) income, net of tax for the
quarters ended March 31, 2017 and 2016
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Foreign
Currency
Translation
|
|
Defined
Benefit
Pension and
Post-
retirement
Plans
|
|
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
|
|
Unrealized
Hedging
(Losses)
Gains
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
Quarter Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
$
|
(3,480
|
)
|
|
$
|
(5,045
|
)
|
|
$
|
353
|
|
|
$
|
(162
|
)
|
|
$
|
(8,334
|
)
|
Other comprehensive (loss) income before
reclassifications, net
|
121
|
|
|
—
|
|
|
(21
|
)
|
|
50
|
|
|
150
|
|
Amounts reclassified, pre-tax
|
—
|
|
|
131
|
|
|
(383
|
)
|
|
5
|
|
|
(247
|
)
|
Tax (benefit) expense reclassified
|
—
|
|
|
(48
|
)
|
|
147
|
|
|
(1
|
)
|
|
98
|
|
Balance at March 31, 2017
|
$
|
(3,359
|
)
|
|
$
|
(4,962
|
)
|
|
$
|
96
|
|
|
$
|
(108
|
)
|
|
$
|
(8,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Foreign
Currency
Translation
|
|
Defined
Benefit
Pension and
Post-
retirement
Plans
|
|
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
|
|
Unrealized
Hedging
(Losses)
Gains
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
Quarter Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
(2,438
|
)
|
|
$
|
(5,135
|
)
|
|
$
|
293
|
|
|
$
|
(339
|
)
|
|
$
|
(7,619
|
)
|
Other comprehensive income (loss) before reclassifications, net
|
26
|
|
|
(17
|
)
|
|
38
|
|
|
117
|
|
|
164
|
|
Amounts reclassified, pre-tax
|
1
|
|
|
126
|
|
|
(27
|
)
|
|
62
|
|
|
162
|
|
Tax (benefit) expense reclassified
|
—
|
|
|
(46
|
)
|
|
12
|
|
|
(17
|
)
|
|
(51
|
)
|
Balance at March 31, 2016
|
$
|
(2,411
|
)
|
|
$
|
(5,072
|
)
|
|
$
|
316
|
|
|
$
|
(177
|
)
|
|
$
|
(7,344
|
)
|
Amounts reclassified that relate to our defined benefit pension and postretirement plans include amortization of prior service costs and transition obligations, and actuarial net losses recognized during each period presented. These costs are recorded as components of net periodic pension cost for each period presented (see Note 7 for additional details).
Amounts reclassified that relate to unrealized gains (losses) on available-for-sale securities, pre-tax includes approximately
$380 million
of previously unrealized gains reclassified to other income as a result of sales of available-for-sale securities in the
quarter ended March 31, 2017
, which consisted primarily of the sale of UTC Climate, Controls & Security's investments in Watsco, Inc.
All noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests) are reported in the mezzanine section of the Condensed Consolidated Balance Sheet, between liabilities and equity, at the greater of redemption value or initial carrying value.
Changes in noncontrolling interests that do not result in a change of control, and where there is a difference between fair value and carrying value, are accounted for as equity transactions. There would have been no pro-forma effect on Net income attributable to common shareowners for the
quarters ended March 31, 2017 and 2016
had the changes been recorded through net income.
Note 13: Variable Interest Entities
Pratt & Whitney holds a 61% net interest in the IAE International Aero Engines AG (IAE) collaboration with MTU Aero Engines AG (MTU) and Japanese Aero Engines Corporation (JAEC) and a 49.5% ownership interest in IAE. IAE's business purpose is to coordinate the design, development, manufacturing and product support of the V2500 program through involvement with the collaborators.
Additionally, Pratt & Whitney, JAEC and MTU are participants in International Aero Engines, LLC (IAE LLC), whose business purpose is to coordinate the design, development, manufacturing and product support for the PW1100G-JM engine for the Airbus A320neo aircraft and the PW1400G-JM engine for the Irkut MC21 aircraft. Pratt & Whitney holds a 59% net interest in the collaboration and a 59% ownership interest in IAE LLC. IAE and IAE LLC retain limited equity with the primary economics of the programs passed to the participants.
As such, we have determined that IAE and IAE LLC are variable interest entities with Pratt & Whitney the primary beneficiary. IAE and IAE LLC have, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for variable interest entities in our Condensed Consolidated Balance Sheet are as follows:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
March 31, 2017
|
|
December 31, 2016
|
Current assets
|
$
|
3,314
|
|
|
$
|
2,722
|
|
Noncurrent assets
|
1,319
|
|
|
1,334
|
|
Total assets
|
$
|
4,633
|
|
|
$
|
4,056
|
|
|
|
|
|
Current liabilities
|
$
|
2,883
|
|
|
$
|
2,422
|
|
Noncurrent liabilities
|
1,663
|
|
|
1,636
|
|
Total liabilities
|
$
|
4,546
|
|
|
$
|
4,058
|
|
Note 14: Guarantees
We extend a variety of financial, market value and product performance guarantees to third parties. There have been no material changes to guarantees outstanding since
December 31, 2016
. The changes in the carrying amount of service and product warranties and product performance guarantees for the
quarter ended March 31, 2017 and 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
2016
|
Balance as of January 1
|
|
$
|
1,199
|
|
|
$
|
1,212
|
|
Warranties and performance guarantees issued
|
|
78
|
|
|
76
|
|
Settlements made
|
|
(56
|
)
|
|
(62
|
)
|
Other
|
|
1
|
|
|
10
|
|
Balance as of March 31
|
|
$
|
1,222
|
|
|
$
|
1,236
|
|
Note 15: Contingent Liabilities
Summarized below are the matters previously described in Note 17 of the Notes to the Consolidated Financial Statements in our
2016
Annual Report, incorporated by reference in our
2016
Form 10-K, updated as applicable.
Except as otherwise noted, while we are unable to predict the final outcome, based on information currently available, we do not believe that resolution of any of the following matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Environmental.
Our operations are subject to environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over our foreign operations. As described in Note 1 to the Consolidated Financial Statements in our
2016
Annual Report, we have accrued for the costs of environmental remediation activities, including but not limited to investigatory, remediation, operating and maintenance costs and performance guaranties, and periodically reassess these amounts. We believe that the likelihood of incurring losses materially in excess of amounts accrued is remote. Additional information pertaining to environmental matters is included in Note 1 to the Consolidated Financial Statements in our
2016
Annual Report.
Government.
In the ordinary course of business, the Company and its subsidiaries and our properties are subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations and threatened legal actions and proceedings. For example, we are now, and believe that, in light of the current U.S. Government contracting environment, we will continue to be the subject of one or more U.S. Government investigations. Such U.S. Government investigations often take years to complete and could result in administrative, civil or criminal liabilities, including repayments, fines, treble and other damages, forfeitures, restitution or penalties, or could lead to suspension or debarment of U.S. Government contracting or of export privileges. For instance, if we or one of our business units were charged with wrongdoing as a result of any of these investigations or other government investigations (including violations of certain anti-bribery, environmental or export laws) the U.S. Government could suspend us from bidding on or receiving awards of new U.S. Government contracts pending the completion of legal proceedings. If convicted or found liable, the U.S. Government could fine and debar us from new U.S. Government contracting for a period generally not to exceed three years. The U.S. Government also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other seriously improper conduct. The U.S. Government could void any contracts found to be tainted by fraud.
Our contracts with the U.S. Government are also subject to audits. Like many defense contractors, we have received audit reports, which recommend that certain contract prices should be reduced to comply with various government regulations, including because cost or pricing data we submitted in negotiation of the contract prices or cost accounting practices may not have conformed to government regulations, or that certain payments be delayed or withheld. Some of these audit reports involved substantial amounts. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and continue to litigate certain cases. In addition, we accrue for liabilities associated with those matters that are probable and can be reasonably estimated. The most likely settlement amount to be incurred is accrued based upon a range of estimates. Where no amount within a range of estimates is more likely, then we accrued the minimum amount.
Legal Proceedings.
Cost Accounting Standards Claim
As previously disclosed, in December 2013, a Divisional Administrative Contracting Officer of the United States Defense Contract Management Agency asserted a claim against Pratt & Whitney to recover overpayments of approximately $177 million plus interest (approximately $65 million through March 31, 2017). The claim is based on Pratt & Whitney's alleged
noncompliance with cost accounting standards from January 1, 2005 to December 31, 2012, due to its method of determining the cost of collaborator parts used in the calculation of material overhead costs for government contracts.
On March 18, 2014, Pratt & Whitney filed an appeal to the Armed Services Board of Contract Appeals. Pratt & Whitney’s appeal is still pending and we continue to believe the government’s claim is without merit.
German Tax Litigation
As previously disclosed, UTC has been involved in administrative review proceedings with the German Tax Office, which concern approximately €215 million (approximately $233 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 $128
million). On August 3, 2012, we filed suit in the local German Tax Court (Berlin-Brandenburg). In March 2016, the local German Tax Court dismissed our suit, and we have appealed this decision to the German Federal Tax Court (FTC).
In 2015, UTC made tax and interest payments to German tax authorities of €275 million (approximately $300 million) in order to avoid additional interest accruals pending final resolution of this matter. In the meantime, we continue vigorously to litigate this matter.
Asbestos Matters
As previously disclosed, like many other industrial companies, we and our subsidiaries have been named as defendants in lawsuits alleging personal injury as a result of exposure to asbestos integrated into certain of our products or business premises. While we have never manufactured asbestos and no longer incorporate it in any currently-manufactured products, certain of our historical products, like those of many other manufacturers, have contained components incorporating asbestos. A substantial majority of these asbestos-related claims have been dismissed without payment or were covered in full or in part by insurance or other forms of indemnity. Additional cases were litigated and settled without any insurance reimbursement. The amounts involved in asbestos related claims were not material individually or in the aggregate in any year.
Our estimated total liability to resolve all pending and unasserted potential future asbestos claims through 2059 is approximately
$379 million
and is principally recorded in Other long-term liabilities on our Condensed Consolidated Balance Sheet as of March 31, 2017. 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
$133 million
, which is included primarily in Other assets on our Condensed Consolidated Balance Sheet as of March 31, 2017.
The amounts recorded by UTC for asbestos-related liabilities and insurance recoveries are based on currently available information and assumptions that we believe are reasonable. Our actual liabilities or insurance recoveries could be higher or lower than those recorded if actual results vary significantly from the assumptions. Key variables in these assumptions include the number and type of new claims to be filed each year, the outcomes or resolution of such claims, the average cost of resolution of each new claim, the amount of insurance available, allocation methodologies, the contractual terms with each insurer with whom we have reached settlements, the resolution of coverage issues with other excess insurance carriers with whom we have not yet achieved settlements, and the solvency risk with respect to our insurance carriers. Other factors that may affect our future liability include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, legal rulings that may be made by state and federal courts, and the passage of state or federal legislation. At least annually, the Company 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 14 of this Form 10-Q and Note 16 to the Consolidated Financial Statements in our
2016
Annual Report, we extend performance and operating cost guarantees beyond our normal warranty and service policies for extended periods on some of our products. We have accrued our estimate of the liability that may result under these guarantees and for service costs that are probable and can be reasonably estimated.
We also have other commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. We accrue contingencies based upon a range of possible outcomes. If no amount within this range is a better estimate than any other, then we accrue the minimum amount.
In the ordinary course of business, the Company and its subsidiaries are also routinely defendants in, parties to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some of these proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries and could result in fines, penalties, compensatory or treble damages or non-monetary
relief. We do not believe that these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Note 16: Segment Financial Data
Our operations are classified into four principal segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems. The segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services.
Results for the
quarters ended March 31, 2017 and 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Operating Profits
|
|
Operating Profit Margins
|
(Dollars in millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Otis
|
$
|
2,804
|
|
|
$
|
2,715
|
|
|
$
|
452
|
|
|
$
|
466
|
|
|
16.1
|
%
|
|
17.2
|
%
|
UTC Climate, Controls & Security
|
3,892
|
|
|
3,728
|
|
|
963
|
|
|
606
|
|
|
24.7
|
%
|
|
16.3
|
%
|
Pratt & Whitney
|
3,758
|
|
|
3,588
|
|
|
393
|
|
|
410
|
|
|
10.5
|
%
|
|
11.4
|
%
|
UTC Aerospace Systems
|
3,611
|
|
|
3,505
|
|
|
576
|
|
|
538
|
|
|
16.0
|
%
|
|
15.3
|
%
|
Total segments
|
14,065
|
|
|
13,536
|
|
|
2,384
|
|
|
2,020
|
|
|
16.9
|
%
|
|
14.9
|
%
|
Eliminations and other
|
(250
|
)
|
|
(179
|
)
|
|
(13
|
)
|
|
16
|
|
|
|
|
|
General corporate expenses
|
—
|
|
|
—
|
|
|
(104
|
)
|
|
(91
|
)
|
|
|
|
|
Consolidated
|
$
|
13,815
|
|
|
$
|
13,357
|
|
|
$
|
2,267
|
|
|
$
|
1,945
|
|
|
16.4
|
%
|
|
14.6
|
%
|
See Note 8 to the Condensed Consolidated Financial Statements for a discussion of restructuring costs included in segment operating results.
Note 17: Accounting Pronouncements
Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers:
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers
. In 2015 and 2016, the FASB issued various updates to this ASU as follows:
|
|
•
|
ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
- delays the effective date of ASU 2014-09 by one year.
|
|
|
•
|
ASU 2016-08,
Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
- clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements.
|
|
|
•
|
ASU 2016-10,
Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing
- clarifies the guidance surrounding licensing arrangements and the identification of performance obligations.
|
|
|
•
|
ASU 2016-12,
Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients
- addresses implementation issues raised by stakeholders concerning collectability, noncash consideration, presentation of sales tax, and transition.
|
|
|
•
|
ASU 2016-20,
Revenue from Contracts with Customers (Topic 606), Technical Corrections and Improvements
- addresses loan guarantee fees, impairment testing of contract costs, provisions for losses on certain contracts, and various disclosures.
|
ASU 2014-09 and its related amendments (collectively, the New Revenue Standard) are effective for reporting periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods; (i) a full retrospective adoption reflecting the application of the standard in each prior reporting period, or (ii) a modified retrospective approach with the cumulative effect of adopting recognized through retained earnings at the date of adoption.
The New Revenue Standard is expected to change the revenue recognition practices for a number of revenue streams across our businesses, although the most significant impacts will be concentrated within our aerospace units. Several businesses, which currently account for revenue on a “point-in-time basis,” will be required to use an “over time” model as they meet one or more of the mandatory criteria established in the New Revenue Standard. Revenue will be recognized based on
percentage-of-completion for certain U.S. Government aerospace contracts; and aerospace aftermarket service work performed on a time and materials basis. For these businesses, unrecognized sales and operating profits related to the satisfied portion of the performance obligations of contracts in process as of the date of adoption will be recorded through retained earnings. The ongoing effect of recording revenue on a percentage-of-completion basis within these businesses is not expected to be material.
In addition to the forgoing, our aerospace businesses will also incur changes related to the timing of manufacturing cost recognition and certain engineering and development costs. In most circumstances, our commercial aerospace businesses will identify the performance obligation, or the unit of accounting, as the individual original equipment (OEM) unit; revenues and costs to manufacture each unit will be recognized upon OEM unit delivery. Under current practice, the unit of accounting is the contract, and early-contract OEM unit costs in excess of the average expected over the contract are capitalized and amortized over lower-cost units later in the contract. With the adoption of the New Revenue Standard, any deferred unit costs in excess of the contract average will be eliminated through retained earnings and will not be amortized into future earnings. As of March 31, 2017, capitalized deferred unit costs in excess of the contract average are $275 million, which is expected to increase during 2017, prior to adoption of the New Revenue Standard.
In regards to costs incurred for the engineering and development of aerospace products under contract with customers, we generally expense as incurred unless there is a contractually guaranteed right of recovery. Any customer funding received for such efforts is recognized when earned, with the corresponding costs recognized as cost of sales. The New Revenue Standard requires customer funding of OEM product engineering and development to be deferred and recognized as revenue as the OEM products are delivered to the customer. The New Revenue Standard also requires product engineering and development costs to 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. For contracts that are open as of the adoption date, previously recognized customer funding will be established as a contract liability.
We continue to evaluate the implications of the standard change. We intend to adopt the New Revenue Standard effective January 1, 2018 using the modified retrospective approach.
Other Accounting Pronouncements
:
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. As discussed in Note 12, we have approximately $96 million of unrealized gains on these securities recorded in Accumulated other comprehensive loss in our Condensed Consolidated Balance Sheet as of March 31, 2017. To the extent currently unrealized gains or losses on these investments are not realized through sale or other actions prior to the date of adoption, these amounts would be recorded directly to retained earnings upon adoption. The provisions of this ASU are effective for years beginning after December 15, 2017.
In February 2016, the FASB issued ASU 2016- 02,
Leases (Topic 842)
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the Condensed Consolidated Statement of Operations. In addition, this standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor doesn’t convey risks and rewards or control, the lease is treated as operating.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases and lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are still evaluating the impact of our pending adoption of the new standard on our consolidated financial statements, we expect that upon adoption we will recognize ROU assets and lease liabilities and that the amounts could be material. We do not expect the ASU to have a material impact on our cash flows or results of operations.
In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13,
Financial Instruments - Credit Losses (Topic 328): Measurement of Credit Losses on Financial Instruments
. This ASU requires that certain financial assets, including those measured at amortized cost basis, be presented at the net amount expected to be collected, utilizing an impairment model known as the current expected credit loss model. In addition, available-for-sale debt securities will no longer use the concept of "other than temporary" when considering credit losses. Under this ASU, entities must use an allowance approach for credit losses on available-for-sale debt securities, and the allowance must be limited to the amount at which a security's fair value is
below the amortized cost of the asset. 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 financial statements or disclosures.
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 are currently evaluating the impact of this ASU.
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 as acquisition of a business or a group of assets, as well as specifying 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 are currently evaluating the impact of this ASU.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. This ASU eliminates Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. We do not expect this ASU to have a significant impact on our financial statements or disclosures.
In March 2017, the FASB issued ASU 2017-07,
Compensation—Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. This ASU requires an employer to report the service cost component of net periodic pension benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, with other cost components presented separately from the service cost component and outside of income from operations. This ASU also allows only the service cost component of net periodic pension benefit cost to be eligible for capitalization when applicable. The provisions of this ASU are effective for years beginning after December 15, 2017. Provisions related to presentation of the service cost components versus other cost components must be applied retrospectively, while provisions related to service cost component eligibility for capitalization must be applied prospectively. We are currently evaluating the impact of this ASU.This ASU impacts only the presentation of net periodic pension cost/benefit and therefore does not have a significant impact on the financial statements.
With respect to the unaudited condensed consolidated financial information of UTC for the
quarters ended March 31, 2017 and 2016
, PricewaterhouseCoopers LLP (PricewaterhouseCoopers) reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated
April 28, 2017
, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the Act) for its report on the unaudited condensed consolidated financial information because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareowners of United Technologies Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of United Technologies Corporation and its subsidiaries
as of March 31, 2017, and the related condensed consolidated statements of operations, of comprehensive income and of cash flows for the three-month periods ended March 31, 2017 and 2016. This interim financial information is the responsibility of the Corporation’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it
to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheet as of December 31, 2016, and the related consolidated statements of operations, of comprehensive income, of cash flows, and of changes in equity
for the year then ended (not presented herein), and in our report dated February 9, 2017, which included a paragraph that described the change in the presentation and classification of certain cash receipts and cash payments and the presentation of restricted cash in the statement of cash flows, as well as the classification and presentation of certain employee share-based payment transactions and the tax-related cash flows resulting from these payments, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
April 28, 2017