UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
____________________________________
FORM 10-Q
____________________________________
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| |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20182019
OR
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| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-812
____________________________________
UNITED TECHNOLOGIES CORPORATION
____________________________________
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| | |
DELAWARE | | 06-0570975 |
10 Farm Springs Road, Farmington, Connecticut 06032 (860) 728-7000 |
Securities registered pursuant to Section 12(b) of the Act:
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| | | |
Title of each class | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock ($1 par value) | UTX | | New York Stock Exchange |
(CUSIP 913017 10 9) | | | |
1.125% Notes due 2021 | UTX 21D | | New York Stock Exchange |
(CUSIP 913017 CD9) | | | |
1.250% Notes due 2023 | UTX 23 | | New York Stock Exchange |
(CUSIP U91301 AD0) | | | |
1.150% Notes due 2024 | UTX 24A | | New York Stock Exchange |
(CUSIP 913017 CU1) | | | |
1.875% Notes due 2026 | UTX 26 | | New York Stock Exchange |
(CUSIP 913017 CE7) | | | |
2.150% Notes due 2030 | UTX 30 | | New York Stock Exchange |
(CUSIP 913017 CV9) | | | |
Floating Rate Notes due 2019 | UTX 19C | | New York Stock Exchange |
(CUSIP 913017 CS6) | | | |
Floating Rate Notes due 2020 | UTX 20B | | New York Stock Exchange |
(CUSIP 913017 CT4) | | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý. No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý. No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | |
Large accelerated filer | ý | Accelerated filer | ¨ |
| | | |
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
| | | |
| | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨. No ý.
At SeptemberJune 30, 20182019 there were 800,984,201862,831,280 shares of Common Stock outstanding.
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
Quarter Ended SeptemberJune 30, 20182019
United Technologies Corporation and its subsidiaries' names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or tradenames of United Technologies Corporation and its subsidiaries. Names, abbreviations of names, logos, and products and service designators of other companies are either the registered or unregistered trademarks or tradenames of their respective owners. As used herein, the terms "we," "us," "our," "the Company," or "UTC," unless the context otherwise requires, mean United Technologies Corporation and its subsidiaries. References to internet web sites in this Form 10-Q are provided for convenience only. Information available through these web sites is not incorporated by reference into this Form 10-Q.
PART I – FINANCIAL INFORMATION
| |
Item 1. | Financial Statements |
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
| | | Quarter Ended September 30, | Quarter Ended June 30, |
(dollars in millions, except per share amounts) | 2018 | | 2017 | 2019 | | 2018 |
Net Sales: | | | | | | |
Product sales | $ | 11,254 |
| | $ | 10,378 |
| $ | 14,033 |
| | $ | 11,520 |
|
Service sales | 5,256 |
| | 4,684 |
| 5,601 |
| | 5,185 |
|
| 16,510 |
| | 15,062 |
| 19,634 |
| | 16,705 |
|
Costs and Expenses: | | | | | | |
Cost of products sold | 9,342 |
| | 7,800 |
| 10,863 |
| | 9,154 |
|
Cost of services sold | 3,194 |
| | 3,306 |
| 3,550 |
| | 3,268 |
|
Research and development | 586 |
| | 592 |
| 743 |
| | 589 |
|
Selling, general and administrative | 1,681 |
| | 1,582 |
| 2,106 |
| | 1,759 |
|
| 14,803 |
| | 13,280 |
| 17,262 |
| | 14,770 |
|
Other income, net | 131 |
| | 250 |
| 212 |
| | 941 |
|
Operating profit | 1,838 |
| | 2,032 |
| 2,584 |
| | 2,876 |
|
Non-service pension (benefit) | (188 | ) | | (131 | ) | (216 | ) | | (192 | ) |
Interest expense, net | 258 |
| | 223 |
| 360 |
| | 234 |
|
Income from operations before income taxes | 1,768 |
| | 1,940 |
| 2,440 |
| | 2,834 |
|
Income tax expense | 419 |
| | 506 |
| 441 |
| | 695 |
|
Net income from operations | 1,349 |
| | 1,434 |
| 1,999 |
| | 2,139 |
|
Less: Noncontrolling interest in subsidiaries' earnings from operations | 111 |
| | 104 |
| 99 |
| | 91 |
|
Net income attributable to common shareowners | $ | 1,238 |
| | $ | 1,330 |
| $ | 1,900 |
| | $ | 2,048 |
|
Earnings Per Share of Common Stock - Basic: | | | | | | |
Net income attributable to common shareowners | $ | 1.56 |
| | $ | 1.69 |
| $ | 2.22 |
| | $ | 2.59 |
|
Earnings Per Share of Common Stock - Diluted: | | | | | | |
Net income attributable to common shareowners | $ | 1.54 |
| | $ | 1.67 |
| $ | 2.20 |
| | $ | 2.56 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
|
| | | | | | | |
| Six Months Ended June 30, |
(dollars in millions, except per share amounts) | 2019 | | 2018 |
Net Sales: | | | |
Product sales | $ | 26,908 |
| | $ | 21,778 |
|
Service sales | 11,091 |
| | 10,169 |
|
| 37,999 |
| | 31,947 |
|
Costs and Expenses: | | | |
Cost of products sold | 21,149 |
| | 17,170 |
|
Cost of services sold | 6,971 |
| | 6,532 |
|
Research and development | 1,471 |
| | 1,143 |
|
Selling, general and administrative | 4,103 |
| | 3,470 |
|
| 33,694 |
| | 28,315 |
|
Other income, net | 324 |
| | 1,172 |
|
Operating profit | 4,629 |
| | 4,804 |
|
Non-service pension (benefit) | (424 | ) | | (383 | ) |
Interest expense, net | 791 |
| | 463 |
|
Income from operations before income taxes | 4,262 |
| | 4,724 |
|
Income tax expense | 838 |
| | 1,217 |
|
Net income from operations | 3,424 |
| | 3,507 |
|
Less: Noncontrolling interest in subsidiaries' earnings from operations | 178 |
| | 162 |
|
Net income attributable to common shareowners | $ | 3,246 |
| | $ | 3,345 |
|
Earnings Per Share of Common Stock - Basic: | | | |
Net income attributable to common shareowners | $ | 3.80 |
| | $ | 4.23 |
|
Earnings Per Share of Common Stock - Diluted: | | | |
Net income attributable to common shareowners | $ | 3.76 |
| | $ | 4.18 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
(dollars in millions, except per share amounts) | 2018 | | 2017 |
Net Sales: | | | |
Product sales | $ | 33,032 |
| | $ | 30,676 |
|
Service sales | 15,425 |
| | 13,481 |
|
| 48,457 |
| | 44,157 |
|
Costs and Expenses: | | | |
Cost of products sold | 26,512 |
| | 23,068 |
|
Cost of services sold | 9,726 |
| | 9,338 |
|
Research and development | 1,729 |
| | 1,797 |
|
Selling, general and administrative | 5,151 |
| | 4,709 |
|
| 43,118 |
| | 38,912 |
|
Other income, net | 1,303 |
| | 1,095 |
|
Operating profit | 6,642 |
| | 6,340 |
|
Non-service pension (benefit) | (571 | ) | | (380 | ) |
Interest expense, net | 721 |
| | 662 |
|
Income from operations before income taxes | 6,492 |
| | 6,058 |
|
Income tax expense | 1,636 |
| | 1,624 |
|
Net income from operations | 4,856 |
| | 4,434 |
|
Less: Noncontrolling interest in subsidiaries' earnings from operations | 273 |
| | 279 |
|
Net income attributable to common shareowners | $ | 4,583 |
| | $ | 4,155 |
|
Earnings Per Share of Common Stock - Basic: | | | |
Net income attributable to common shareowners | $ | 5.80 |
| | $ | 5.26 |
|
Earnings Per Share of Common Stock - Diluted: | | | |
Net income attributable to common shareowners | $ | 5.72 |
| | $ | 5.20 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 1,349 |
| | $ | 1,434 |
| | $ | 4,856 |
| | $ | 4,434 |
|
Other comprehensive income (loss), net of tax (expense) benefit: | | | | | | | |
Foreign currency translation adjustments | | | | | | | |
Foreign currency translation adjustments arising during period | (185 | ) | | 514 |
| | (378 | ) | | 909 |
|
Less: Reclassification adjustments for gain on sale of an investment in a foreign entity recognized in Other income, net | — |
| | (3 | ) | | (3 | ) | | (3 | ) |
| (185 | ) | | 511 |
| | (381 | ) | | 906 |
|
Tax benefit | 4 |
| | — |
| | 60 |
| | — |
|
| (181 | ) | | 511 |
| | (321 | ) | | 906 |
|
Pension and postretirement benefit plans | | | | | | | |
Pension and postretirement benefit plans adjustments during the period | (17 | ) | | (50 | ) | | 9 |
| | (54 | ) |
Amortization of actuarial loss and prior service credit | 86 |
| | 132 |
| | 262 |
| | 395 |
|
| 69 |
| | 82 |
| | 271 |
| | 341 |
|
Tax expense | (15 | ) | | (53 | ) | | (64 | ) | | (149 | ) |
| 54 |
| | 29 |
| | 207 |
| | 192 |
|
Unrealized gain (loss) on available-for-sale securities | | | | | | | |
Unrealized holding gain arising during period | — |
| | 19 |
| | — |
| | 17 |
|
Reclassification adjustments for loss included in Other income, net | — |
| | (138 | ) | | — |
| | (545 | ) |
ASU 2016-01 adoption impact | — |
| | — |
| | (5 | ) | | — |
|
| — |
| | (119 | ) | | (5 | ) | | (528 | ) |
Tax benefit | — |
| | 43 |
| | — |
| | 199 |
|
| — |
| | (76 | ) | | (5 | ) | | (329 | ) |
Change in unrealized cash flow hedging | | | | | | | |
Unrealized cash flow hedging gain (loss) arising during period | 95 |
| | 310 |
| | (105 | ) | | 440 |
|
Loss (gain) reclassified into Product sales | 2 |
| | (24 | ) | | (26 | ) | | (14 | ) |
| 97 |
| | 286 |
| | (131 | ) | | 426 |
|
Tax (expense) benefit | (28 | ) | | (73 | ) | | 28 |
| | (105 | ) |
| 69 |
| | 213 |
| | (103 | ) | | 321 |
|
Other comprehensive (loss) income, net of tax | (58 | ) | | 677 |
| | (222 | ) | | 1,090 |
|
Comprehensive income | 1,291 |
| | 2,111 |
| | 4,634 |
| | 5,524 |
|
Less: Comprehensive income attributable to noncontrolling interest | (92 | ) | | (144 | ) | | (249 | ) | | (362 | ) |
Comprehensive income attributable to common shareowners | $ | 1,199 |
| | $ | 1,967 |
| | $ | 4,385 |
| | $ | 5,162 |
|
|
| | | | | | | | | | | | | | | |
| Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Net income from operations | $ | 1,999 |
| | $ | 2,139 |
| | $ | 3,424 |
| | $ | 3,507 |
|
Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation adjustments | (423 | ) | | (679 | ) | | 98 |
| | (140 | ) |
Pension and postretirement benefit plans adjustments | 24 |
| | 80 |
| | 57 |
| | 153 |
|
ASU 2016-01 adoption impact (Note 12) | — |
| | — |
| | — |
| | (5 | ) |
Change in unrealized cash flow hedging | 25 |
| | (186 | ) | | 33 |
| | (172 | ) |
Other comprehensive (loss) income, net of tax | (374 | ) | | (785 | ) | | 188 |
| | (164 | ) |
Comprehensive income | 1,625 |
| | 1,354 |
| | 3,612 |
| | 3,343 |
|
Less: Comprehensive income attributable to noncontrolling interest | (100 | ) | | (53 | ) | | (182 | ) | | (157 | ) |
Comprehensive income attributable to common shareowners | $ | 1,525 |
| | $ | 1,301 |
| | $ | 3,430 |
| | $ | 3,186 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
|
| | | | | | | |
(dollars in millions) | June 30, 2019 | | December 31, 2018 |
Assets | | | |
Cash and cash equivalents | $ | 6,819 |
| | $ | 6,152 |
|
Accounts receivable, net | 13,695 |
| | 14,271 |
|
Contract assets, current | 4,334 |
| | 3,486 |
|
Inventory, net | 10,934 |
| | 10,083 |
|
Other assets, current | 1,276 |
| | 1,511 |
|
Total Current Assets | 37,058 |
| | 35,503 |
|
Customer financing assets | 3,293 |
| | 3,023 |
|
Future income tax benefits | 1,712 |
| | 1,646 |
|
Fixed assets | 24,689 |
| | 24,084 |
|
Less: Accumulated depreciation | (12,397 | ) | | (11,787 | ) |
Fixed assets, net | 12,292 |
| | 12,297 |
|
Operating lease right-of-use assets
| 2,740 |
| | — |
|
Goodwill | 48,358 |
| | 48,112 |
|
Intangible assets, net | 25,963 |
| | 26,424 |
|
Other assets | 7,574 |
| | 7,206 |
|
Total Assets | $ | 138,990 |
| | $ | 134,211 |
|
Liabilities and Equity | | | |
Short-term borrowings | $ | 1,139 |
| | $ | 1,469 |
|
Accounts payable | 11,109 |
| | 11,080 |
|
Accrued liabilities | 10,753 |
| | 10,223 |
|
Contract liabilities, current | 6,219 |
| | 5,720 |
|
Long-term debt currently due | 6,202 |
| | 2,876 |
|
Total Current Liabilities | 35,422 |
| | 31,368 |
|
Long-term debt | 37,910 |
| | 41,192 |
|
Future pension and postretirement benefit obligations | 3,663 |
| | 4,018 |
|
Operating lease liabilities
| 2,258 |
| | — |
|
Other long-term liabilities | 16,651 |
| | 16,914 |
|
Total Liabilities | 95,904 |
| | 93,492 |
|
Commitments and contingent liabilities (Note 15) |
| |
|
Redeemable noncontrolling interest | 109 |
| | 109 |
|
Shareowners' Equity: | | | |
Common Stock | 22,718 |
| | 22,514 |
|
Treasury Stock | (32,549 | ) | | (32,482 | ) |
Retained earnings | 60,548 |
| | 57,823 |
|
Unearned ESOP shares | (71 | ) | | (76 | ) |
Accumulated other comprehensive loss | (9,892 | ) | | (9,333 | ) |
Total Shareowners' Equity | 40,754 |
| | 38,446 |
|
Noncontrolling interest | 2,223 |
| | 2,164 |
|
Total Equity | 42,977 |
| | 40,610 |
|
Total Liabilities and Equity | $ | 138,990 |
| | $ | 134,211 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| Six Months Ended June 30, |
(dollars in millions) | 2019 | | 2018 |
Operating Activities: | | | |
Net income from operations | $ | 3,424 |
| | $ | 3,507 |
|
Adjustments to reconcile net income from operations to net cash flows provided by operating activities: | | | |
Depreciation and amortization | 1,864 |
| | 1,173 |
|
Deferred income tax provision | 6 |
| | 45 |
|
Stock compensation cost | 156 |
| | 117 |
|
Gain on sale of Taylor Company | — |
| | (795 | ) |
Change in: | | | |
Accounts receivable | 769 |
| | (1,661 | ) |
Contract assets, current | (491 | ) | | (617 | ) |
Inventory | (1,108 | ) | | (962 | ) |
Other current assets | 51 |
| | 301 |
|
Accounts payable and accrued liabilities | (58 | ) | | 2,010 |
|
Contract liabilities, current | 381 |
| | 440 |
|
Global pension contributions | (79 | ) | | (59 | ) |
Canadian government settlement | (38 | ) | | (221 | ) |
Other operating activities, net | (1,266 | ) | | (723 | ) |
Net cash flows provided by operating activities | 3,611 |
| | 2,555 |
|
Investing Activities: | | | |
Capital expenditures | (830 | ) | | (709 | ) |
Investments in businesses (Note 1) | (32 | ) | | (134 | ) |
Dispositions of businesses (Note 1) | 133 |
| | 1,094 |
|
Increase in customer financing assets, net | (331 | ) | | (344 | ) |
Increase in collaboration intangible assets | (169 | ) | | (181 | ) |
Receipts from settlements of derivative contracts | 61 |
| | 82 |
|
Other investing activities, net | (49 | ) | | (46 | ) |
Net cash flows used in investing activities | (1,217 | ) | | (238 | ) |
Financing Activities: | | | |
Issuance of long-term debt | 56 |
| | 2,429 |
|
Repayment of long-term debt | (65 | ) | | (2,092 | ) |
(Decrease) increase in short-term borrowings, net | (327 | ) | | 642 |
|
Proceeds from Common Stock issued under employee stock plans | 11 |
| | 6 |
|
Dividends paid on Common Stock | (1,219 | ) | | (1,070 | ) |
Repurchase of Common Stock | (69 | ) | | (52 | ) |
Other financing activities, net | (153 | ) | | (74 | ) |
Net cash flows used in financing activities | (1,766 | ) | | (211 | ) |
Effect of foreign exchange rate changes on cash and cash equivalents | 16 |
| | (18 | ) |
Net increase in cash, cash equivalents and restricted cash | 644 |
| | 2,088 |
|
Cash, cash equivalents and restricted cash, beginning of year | 6,212 |
| | 9,018 |
|
Cash, cash equivalents and restricted cash, end of period | 6,856 |
| | 11,106 |
|
Less: Restricted cash | 37 |
| | 38 |
|
Cash and cash equivalents, end of period | $ | 6,819 |
| | $ | 11,068 |
|
|
| | | | | | | |
(dollars in millions) | September 30, 2018 | | December 31, 2017 |
Assets | | | |
Cash and cash equivalents | $ | 13,799 |
| | $ | 8,985 |
|
Accounts receivable, net | 12,550 |
| | 12,595 |
|
Contract assets, current | 3,450 |
| | — |
|
Inventories and contracts in progress, net | 9,068 |
| | 9,881 |
|
Other assets, current | 1,337 |
| | 1,397 |
|
Total Current Assets | 40,204 |
| | 32,858 |
|
Customer financing assets | 3,143 |
| | 2,372 |
|
Future income tax benefits | 1,701 |
| | 1,723 |
|
Fixed assets | 21,956 |
| | 21,364 |
|
Less: Accumulated depreciation | (11,720 | ) | | (11,178 | ) |
Fixed assets, net | 10,236 |
| | 10,186 |
|
Goodwill | 27,679 |
| | 27,910 |
|
Intangible assets, net | 15,701 |
| | 15,883 |
|
Restricted cash | 9,205 |
| | 5 |
|
Other assets | 7,070 |
| | 5,983 |
|
Total Assets | $ | 114,939 |
| | $ | 96,920 |
|
Liabilities and Equity | | | |
Short-term borrowings | $ | 1,576 |
| | $ | 392 |
|
Accounts payable | 10,509 |
| | 9,579 |
|
Accrued liabilities | 8,867 |
| | 12,316 |
|
Contract liabilities, current | 5,460 |
| | — |
|
Long-term debt currently due | 92 |
| | 2,104 |
|
Total Current Liabilities | 26,504 |
| | 24,391 |
|
Long-term debt | 38,275 |
| | 24,989 |
|
Future pension and postretirement benefit obligations | 2,412 |
| | 3,036 |
|
Other long-term liabilities | 13,373 |
| | 12,952 |
|
Total Liabilities | 80,564 |
| | 65,368 |
|
Commitments and contingent liabilities (Note 15) |
| |
|
Redeemable noncontrolling interest | 125 |
| | 131 |
|
Shareowners' Equity: | | | |
Common Stock | 17,869 |
| | 17,574 |
|
Treasury Stock | (35,667 | ) | | (35,596 | ) |
Retained earnings | 57,706 |
| | 55,242 |
|
Unearned ESOP shares | (79 | ) | | (85 | ) |
Accumulated other comprehensive loss | (7,723 | ) | | (7,525 | ) |
Total Shareowners' Equity | 32,106 |
| | 29,610 |
|
Noncontrolling interest | 2,144 |
| | 1,811 |
|
Total Equity | 34,250 |
| | 31,421 |
|
Total Liabilities and Equity | $ | 114,939 |
| | $ | 96,920 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWSCHANGES IN EQUITY
(Unaudited)
|
| | | | | | | |
| Nine Months Ended September 30, |
(dollars in millions) | 2018 | | 2017 |
Operating Activities: | | | |
Net income from operations | $ | 4,856 |
| | $ | 4,434 |
|
Adjustments to reconcile net income from operations to net cash flows provided by operating activities: | | | |
Depreciation and amortization | 1,766 |
| | 1,582 |
|
Deferred income tax provision | 70 |
| | 724 |
|
Stock compensation cost | 181 |
| | 145 |
|
Gain on sale of Taylor Company | (799 | ) | | — |
|
Change in: | | | |
Accounts receivable | (2,379 | ) | | (1,051 | ) |
Contract assets, current | (892 | ) | | — |
|
Inventories and contracts in progress | (991 | ) | | (1,249 | ) |
Other current assets | 262 |
| | 78 |
|
Accounts payable and accrued liabilities | 3,044 |
| | 1,864 |
|
Contract liabilities, current | 313 |
| | — |
|
Global pension contributions | (72 | ) | | (2,008 | ) |
Canadian government settlement | (221 | ) | | (246 | ) |
Other operating activities, net | (821 | ) | | (1,163 | ) |
Net cash flows provided by operating activities | 4,317 |
| | 3,110 |
|
Investing Activities: | | | |
Capital expenditures | (1,122 | ) | | (1,214 | ) |
Investments in businesses | (177 | ) | | (196 | ) |
Dispositions of businesses (Note 1) | 1,099 |
| | 37 |
|
Proceeds from sale of investments in Watsco, Inc. | — |
| | 596 |
|
Increase in customer financing assets, net | (453 | ) | | (525 | ) |
Increase in collaboration intangible assets | (302 | ) | | (290 | ) |
Receipts (payments) from settlements of derivative contracts | 71 |
| | (183 | ) |
Other investing activities, net | (135 | ) | | 117 |
|
Net cash flows used in investing activities | (1,019 | ) | | (1,658 | ) |
Financing Activities: | | | |
Issuance of long-term debt | 13,409 |
| | 4,044 |
|
Repayment of long-term debt | (2,093 | ) | | (1,587 | ) |
Increase in short-term borrowings, net | 1,228 |
| | 400 |
|
Proceeds from Common Stock issued under employee stock plans | 33 |
| | 25 |
|
Dividends paid on Common Stock | (1,606 | ) | | (1,541 | ) |
Repurchase of Common Stock | (72 | ) | | (1,430 | ) |
Other financing activities, net | (60 | ) | | (204 | ) |
Net cash flows provided by (used in) financing activities | 10,839 |
| | (293 | ) |
Effect of foreign exchange rate changes on cash and cash equivalents | (111 | ) | | 208 |
|
Net increase in cash, cash equivalents and restricted cash | 14,026 |
| | 1,367 |
|
Cash, cash equivalents and restricted cash, beginning of year | 9,018 |
| | 7,189 |
|
Cash, cash equivalents and restricted cash, end of period | 23,044 |
| | 8,556 |
|
Less: Restricted cash | 9,245 |
| | 33 |
|
Cash and cash equivalents, end of period | $ | 13,799 |
| | $ | 8,523 |
|
|
| | | | | | | | | | | | | | | | |
| | Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions, except per share amounts; shares in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Equity beginning balance | | $ | 41,946 |
| | $ | 32,492 |
| | $ | 40,610 |
| | $ | 31,421 |
|
Common Stock | | | | | | | | |
Beginning balance | | 22,564 |
| | 17,641 |
| | 22,514 |
| | 17,574 |
|
Common Stock issued under employee plans | | 154 |
| | 106 |
| | 211 |
| | 174 |
|
Purchase of subsidiary shares from noncontrolling interest, net | | — |
| | — |
| | — |
| | (1 | ) |
Redeemable noncontrolling interest fair value adjustment | | — |
| | — |
| | (7 | ) | | — |
|
Ending balance | | 22,718 |
| | 17,747 |
| | 22,718 |
| | 17,747 |
|
Treasury Stock | | | | | | | | |
Beginning balance | | (32,511 | ) | | (35,619 | ) | | (32,482 | ) | | (35,596 | ) |
Common Stock issued under employee plans | | 1 |
| | 1 |
| | 4 |
| | 3 |
|
Common Stock repurchased | | (39 | ) | | (27 | ) | | (71 | ) | | (52 | ) |
Ending balance | | (32,549 | ) | | (35,645 | ) | | (32,549 | ) | | (35,645 | ) |
Retained Earnings | | | | | | | | |
Beginning balance | | 59,279 |
| | 55,533 |
| | 57,823 |
| | 55,242 |
|
Net Income | | 1,900 |
| | 2,048 |
| | 3,246 |
| | 3,345 |
|
Dividends on Common Stock | | (610 | ) | | (535 | ) | | (1,219 | ) | | (1,070 | ) |
Dividends on ESOP Common Stock | | (18 | ) | | (17 | ) | | (36 | ) | | (35 | ) |
Redeemable noncontrolling interest fair value adjustment | | (11 | ) | | — |
| | (7 | ) | | (2 | ) |
New Revenue Standard adoption impact | | — |
| | — |
| | — |
| | (480 | ) |
ASU 2018-02 adoption impact (Note 12) | | — |
| | — |
| | 745 |
| | — |
|
Other | | 8 |
| | (2 | ) | | (4 | ) | | 27 |
|
Ending balance | | 60,548 |
| | 57,027 |
| | 60,548 |
| | 57,027 |
|
Unearned ESOP Shares | | | | | | | | |
Beginning balance | | (75 | ) | | (84 | ) | | (76 | ) | | (85 | ) |
Common Stock issued under employee plans | | 4 |
| | 3 |
| | 5 |
| | 4 |
|
Ending balance | | (71 | ) | | (81 | ) | | (71 | ) | | (81 | ) |
Accumulated Other Comprehensive (Loss) Income | | | | | | | | |
Beginning balance | | (9,519 | ) | | (6,937 | ) | | (9,333 | ) | | (7,525 | ) |
Other comprehensive (loss) income, net of tax | | (373 | ) | | (747 | ) | | 186 |
| | (159 | ) |
ASU 2018-02 adoption impact (Note 12) | | — |
| | — |
| | (745 | ) | | — |
|
Ending balance | | (9,892 | ) | | (7,684 | ) | | (9,892 | ) | | (7,684 | ) |
Noncontrolling Interest | | | | | | | | |
Beginning balance | | 2,208 |
| | 1,958 |
| | 2,164 |
| | 1,811 |
|
Net Income | | 99 |
| | 91 |
| | 178 |
| | 162 |
|
Redeemable noncontrolling interest in subsidiaries' earnings | | 2 |
| | (3 | ) | | 5 |
| | (5 | ) |
Other comprehensive income (loss), net of tax | | 1 |
| | (38 | ) | | 4 |
| | (5 | ) |
Dividends attributable to noncontrolling interest | | (101 | ) | | (73 | ) | | (145 | ) | | (139 | ) |
Purchase of subsidiary shares from noncontrolling interest, net | | (1 | ) | | — |
| | (1 | ) | | (1 | ) |
Disposition of noncontrolling interest, net | | — |
| | — |
| | — |
| | (8 | ) |
Capital contributions | | 18 |
| | 42 |
| | 18 |
| | 162 |
|
Other | | (3 | ) | | 5 |
| | — |
| | 5 |
|
Ending balance | | 2,223 |
| | 1,982 |
| | 2,223 |
| | 1,982 |
|
Equity at June 30 | | $ | 42,977 |
| | $ | 33,346 |
| | $ | 42,977 |
| | $ | 33,346 |
|
| | | | |
Supplemental share information |
Shares of Common Stock issued under employee plans | | 799 |
| | 235 |
| | 1,827 |
| | 1,310 |
|
Shares of Common Stock repurchased | | 297 |
| | 214 |
| | 553 |
| | 402 |
|
Dividends per share of Common Stock | | $ | 0.740 |
| | $ | 0.700 |
| | $ | 1.470 |
| | $ | 1.400 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at SeptemberJune 30, 20182019 and for the quarterquarters and ninesix months ended SeptemberJune 30, 20182019 and 20172018 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 (20172018 Annual Report) incorporated by reference in our Annual Report on Form 10-K for calendar year 20172018 (20172018 Form 10-K). Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets
Business Acquisitions and Dispositions.Acquisitions. During the ninesix months ended SeptemberJune 30, 2018,2019, our investment in business acquisitions was $177$32 million, and primarilywhich consisted of an acquisitionsmall acquisitions at Pratt & Whitney. Otis.
On June 21, 2018,9, 2019, UTC Climate, Controls & Security 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).
On September 4, 2017, we announced that we had entered into a merger agreement with Rockwell Collins, Inc. (Rockwell Collins), under which we agreed to acquire Rockwell Collins. Under the termsRaytheon Company (“Raytheon”) providing for an all-stock merger of theequals transaction. The Raytheon merger agreement provides, among other things, that each Rockwell Collins shareowner will receive $93.33 per share in cash and a fraction of a share of UTCRaytheon common stock equal to the quotient obtained by dividing $46.67 by the average of the volume-weighted average prices per share of UTC common stock on the NYSE on each of the 20 consecutive trading days ending with the trading dayissued and outstanding immediately prior to the closing date, (the “UTC Stock Price”), subjectof the Raytheon merger (except for shares held by Raytheon as treasury stock) will be converted into the right to adjustment based on a two-way collar mechanism as described below (the “Stock Consideration”). The cash and UTC stock payable in exchange for each such share of Rockwell Collins common stock are collectively the “Merger Consideration.” The fraction of a sharereceive 2.3348 shares of UTC common stock into which each such sharestock. Upon the closing of Rockwell Collins common stockthe Raytheon merger, Raytheon will be convertedbecome a wholly-owned subsidiary of UTC, and UTC will change its name to Raytheon Technologies Corporation. The Raytheon merger is the “Exchange Ratio.” The Exchange Ratio will be determined based upon the UTC Stock Price. If the UTC Stock Price is greater than $107.01 but less than $124.37, the Exchange Ratio will be equalexpected to the quotient of (i) $46.67 divided by (ii) the UTC Stock Price, which, in each case, will resultclose in the Stock Consideration having a value equal to $46.67. If the UTC Stock Pricefirst half of 2020 and is less than or equal to $107.01 or greater than or equal to $124.37, then a two-way collar mechanism will apply, pursuant to which, (x) if the UTC Stock Price is greater than or equal to $124.37, the Exchange Ratio will be fixed at 0.37525 and the value of the Stock Consideration will be greater than $46.67, and (y) if the UTC Stock Price is less than or equal to $107.01, the Exchange Ratio will be fixed at 0.43613 and the value of the Stock Consideration will be less than $46.67. On January 11, 2018, the merger was approved by Rockwell Collins' shareowners. We currently expect that the merger will be completed in the fourth quarter of 2018, subject to customary closing conditions, including the receipt of required regulatory approvals.approvals, the approval of both Raytheon’s and our shareowners, and the completion of UTC's previously announced separation of its Otis and Carrier businesses.
We anticipate that approximately $15 billion will be required to payOn November 26, 2018, we completed the aggregate cash portionacquisition of Rockwell Collins (the "Rockwell Merger"), 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 Rockwell 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 Rockwell Merger Consideration which will be funded(other than shares held by Rockwell Collins, the Company, Riveter Merger Sub Corp or any of their respective wholly owned subsidiaries) was converted into the right to receive (1) $93.33 in cash, on hand. On August 16, 2018 we issued $11without interest, and (2) 0.37525 shares of Company common stock (together, the “Merger Consideration”), less any applicable withholding taxes, with cash paid in lieu of fractional shares. The total aggregate consideration payable in the Rockwell 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 Rockwell Merger. This equated to a total enterprise value of $30.6 billion, including the $7.8 billion of Rockwell Collins' outstanding debt. |
| | | | |
(dollars in millions) | | Amount |
Cash consideration paid for Rockwell Collins outstanding common stock & equity awards | | $ | 15,533 |
|
Fair value of UTC common stock issued for Rockwell Collins outstanding common stock & equity awards | | 7,960 |
|
Total consideration transferred | | $ | 23,493 |
|
The cash consideration utilized for the Rockwell Merger was partially financed through the previously disclosed issuance of $11.0 billion aggregate principal notes (refer to Note 5)on August 16, 2018 for net proceeds of $10.9 billionbillion. For the remainder of which $9.2 billion is specifically designated to fund the cash portionconsideration, 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 Merger Considerationfair 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 the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, “Business Combinations”. As of June 30, 2019, 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 adjustments. Any potential adjustments could be material in relation to the preliminary values presented below:
|
| | | |
(dollars in millions) | |
Cash and cash equivalents | $ | 640 |
|
Accounts receivable, net | 1,665 |
|
Inventory, net | 1,511 |
|
Contract assets, current | 289 |
|
Other assets, current | 263 |
|
Future income tax benefits | 37 |
|
Fixed assets, net | 1,673 |
|
Intangible assets: | |
Customer relationships | 8,220 |
|
Tradenames/trademarks | 1,870 |
|
Developed technology | 600 |
|
Other assets | 210 |
|
Total identifiable assets acquired | 16,978 |
|
| |
Short-term borrowings | 2,254 |
|
Accounts payable | 515 |
|
Accrued liabilities | 1,618 |
|
Contract liabilities, current | 301 |
|
Long-term debt | 5,530 |
|
Future pension and postretirement benefit obligation | 502 |
|
Other long-term liabilities | 3,481 |
|
Noncontrolling interest | 6 |
|
Total liabilities acquired | 14,207 |
|
Total identifiable net assets | 2,771 |
|
Goodwill | 20,722 |
|
Total consideration transferred | $ | 23,493 |
|
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 fees, expensesprogram intangible assets, which include the related aerospace program original equipment (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 amounts. Therefore, $9.2 billionrelevant 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 proceedscash 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 issuanceincome 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 classified as restricted cashdetermined to have an indefinite life. The intangible assets included above consist of the following:
|
| | | | | |
(dollars in millions) | Estimated Fair Value | | Estimated Life |
Acquired customer relationships | $ | 8,220 |
| | 10-20 years |
Acquired tradenames/trademarks | 1,870 |
| | Indefinite |
Acquired developed technology | 600 |
| | 15 years |
| $ | 10,690 |
| | |
We also identified customer contractual obligations on certain contracts with economic returns that are lower than could be realized in market transactions as of September 30, 2018.
In connectionthe 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 $1,020 million. These liabilities will be liquidated in accordance with the merger agreement withunderlying 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: $77 million in 2019, $129 million in 2020, $131 million in 2021, $132 million in 2022, and $119 million in 2023.
Acquisition-Related Costs:
Acquisition-related costs have been expensed as incurred. In the six months ended June 30, 2019 and 2018, approximately $10 million and $50 million, respectively, of transaction and integration costs have been incurred. These costs were recorded in Selling, general and administrative expenses within the Condensed Consolidated Statement of Operations.
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 announcedcontributed sales of approximately $4.6 billion and operating profit of approximately $665 million for the six months ended June 30, 2019. The following unaudited supplemental pro-forma data presents consolidated information as if the acquisition had been completed on September 4, 2017, we entered into a $6.5 billion 364-day unsecured bridge loan credit agreementJanuary 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 that would have been funded onlyincurred during this pre-acquisition period:
|
| | | | | | | | | | | | | | | |
| Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions, except per share amounts) | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 19,634 |
| | $ | 18,810 |
| | $ | 37,994 |
| | $ | 36,131 |
|
Net income attributable to common shareowners | $ | 1,901 |
| | $ | 2,266 |
| | $ | 3,385 |
| | $ | 3,742 |
|
Basic earnings per share of common stock | $ | 2.22 |
| | $ | 2.66 |
| | $ | 3.96 |
| | $ | 4.39 |
|
Diluted earnings per share of common stock | $ | 2.20 |
| | $ | 2.63 |
| | $ | 3.92 |
| | $ | 4.34 |
|
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.
|
| | | | | | | | | | | | | | | |
| Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Amortization of inventory and fixed asset fair value adjustment 1 | $ | — |
| | $ | (5 | ) | | $ | 141 |
| | $ | (10 | ) |
Amortization of acquired Rockwell Collins intangible assets, net 2 | — |
| | (53 | ) | | — |
| | (106 | ) |
Utilization of contractual customer obligation 3 | — |
| | 8 |
| | — |
| | 10 |
|
UTC/Rockwell Collins fees for advisory, legal, accounting services 4 | 1 |
| | 17 |
| | 3 |
| | 43 |
|
Interest expense incurred on acquisition financing, net 5 | — |
| | (76 | ) | | — |
| | (152 | ) |
Elimination of capitalized pre-production engineering amortization 6 | — |
| | 17 |
| | — |
| | 32 |
|
Adjustment to net periodic pension cost 7 | — |
| | 11 |
| | — |
| | 22 |
|
Adjustment to reflect the adoption of ASC 606 8 | — |
| | 29 |
| | — |
| | 58 |
|
Elimination of entities held for sale 9 | — |
| | (5 | ) | | (5 | ) | | (12 | ) |
| $ | 1 |
| | $ | (57 | ) | | $ | 139 |
| | $ | (115 | ) |
| |
1 | Reflects the elimination of the inventory step-up amortization recorded by UTC in 2019 as this would have been completed within the first two quarters of 2017. 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 Rockwell Collins 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 capitalization of contract costs and changes in timing of sales recognition for contracts requiring an over time method of revenue recognition, partially offset by deferral of revenue recognized on OEM product engineering and development. |
| |
9 | Reflects the elimination of entities required to be sold for regulatory approvals. |
The unaudited supplemental pro-forma financial information does not reflect the potential realization of cost savings related to the extentintegration 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. Cash inflows related to dispositions during the six months ended June 30, 2019 were $133 million and primarily consisted of the dispositions of businesses held for sale associated with the Rockwell Collins acquisition. In accordance with conditions imposed for regulatory approval of the acquisition, Rockwell Collins was required to dispose of certain anticipated debt issuancesbusinesses. These businesses were not completedheld 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 had been accounted for as held for sale at fair value less cost to sell. As of December 31, 2018, assets held for sale of $175 million were included within Other assets, current and liabilities held for sale of $40 million were included within Accrued liabilities on the merger.Consolidated Balance Sheet. The unsecured bridge loan creditmajor classes of assets and liabilities primarily include net Inventory of $51 million and net Fixed assets of $37 million. In the first quarter of 2019, Rockwell Collins completed the sale of all businesses which were held for sale as of December 31, 2018.
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 will 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 in the first half of 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 (subject to UTC’s agreement was terminated on August 16, 2018 upon issuanceto consummate the distributions pursuant to, and subject to the terms and conditions of, the $11 billion of aggregate principal notes described above. We expect to assume approximately $7 billion of Rockwell Collins' outstanding debt upon completion of the merger.Raytheon merger agreement).
As has been previously disclosed, the Company is continuing a strategic review of its portfolio of businesses. There can be no assurance as to the outcome of any such process or that any such process will result in a transaction, or if a transaction is undertaken, as to its terms or timing.
Goodwill. Changes in our goodwill balances for the ninesix months ended SeptemberJune 30, 20182019 were as follows:
|
| | | | | | | | | | | | | | | |
(dollars in millions) | Balance as of January 1, 2019 | | Goodwill Resulting from Business Combinations | | Foreign Currency Translation and Other | | Balance as of June 30, 2019 |
Otis | $ | 1,688 |
| | $ | 7 |
| | $ | (16 | ) | | $ | 1,679 |
|
Carrier | 9,835 |
| | 1 |
| | 3 |
| | 9,839 |
|
Pratt & Whitney | 1,567 |
| | — |
| | (4 | ) | | 1,563 |
|
Collins Aerospace Systems | 35,001 |
| | 255 |
| | — |
| | 35,256 |
|
Total Segments | 48,091 |
| | 263 |
| | (17 | ) | | 48,337 |
|
Eliminations and other | 21 |
| | — |
| | — |
| | 21 |
|
Total | $ | 48,112 |
| | $ | 263 |
| | $ | (17 | ) | | $ | 48,358 |
|
|
| | | | | | | | | | | | | | | |
(dollars in millions) | Balance as of January 1, 2018 | | Goodwill Resulting from Business Combinations | | Foreign Currency Translation and Other | | Balance as of September 30, 2018 |
Otis | $ | 1,737 |
| | $ | 6 |
| | $ | (42 | ) | | $ | 1,701 |
|
UTC Climate, Controls & Security | 10,009 |
| | 1 |
| | (237 | ) | | 9,773 |
|
Pratt & Whitney | 1,511 |
| | 58 |
| | (2 | ) | | 1,567 |
|
UTC Aerospace Systems | 14,650 |
| | — |
| | (35 | ) | | 14,615 |
|
Total Segments | 27,907 |
| | 65 |
| | (316 | ) | | 27,656 |
|
Eliminations and other | 3 |
| | 20 |
| | — |
| | 23 |
|
Total | $ | 27,910 |
| | $ | 85 |
| | $ | (316 | ) | | $ | 27,679 |
|
The $316Goodwill increased $255 million netat Collins Aerospace Systems resulting from several insignificant purchase accounting adjustments made during the six months ended June 30, 2019, the largest of which included a reduction in goodwill within Foreign Currency Translation and Other includes a $151 million reductionacquired customer relationship intangible assets of goodwill attributable to UTC Climate, Controls & Security's sale of Taylor Company. The $20 million increase in goodwill within Eliminations and other is due to an acquisition of a digital analytics company.$100 million.
Intangible Assets. Identifiable intangible assets are comprised of the following:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(dollars in millions) | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
Amortized: | | | | | | | |
Service portfolios | $ | 2,179 |
| | $ | (1,656 | ) | | $ | 2,164 |
| | $ | (1,608 | ) |
Patents and trademarks | 361 |
| | (245 | ) | | 361 |
| | (236 | ) |
Collaboration intangible assets | 4,681 |
| | (779 | ) | | 4,509 |
| | (649 | ) |
Customer relationships and other | 22,598 |
| | (5,099 | ) | | 22,525 |
| | (4,560 | ) |
| 29,819 |
| | (7,779 | ) | | 29,559 |
| | (7,053 | ) |
Unamortized: | | | | | | | |
Trademarks and other | 3,923 |
| | — |
| | 3,918 |
| | — |
|
Total | $ | 33,742 |
| | $ | (7,779 | ) | | $ | 33,477 |
| | $ | (7,053 | ) |
|
| | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
(dollars in millions) | Gross Amount | | Accumulated Amortization | | Gross Amount | | Accumulated Amortization |
Amortized: | | | | | | | |
Service portfolios | $ | 2,181 |
| | $ | (1,604 | ) | | $ | 2,178 |
| | $ | (1,534 | ) |
Patents and trademarks | 362 |
| | (232 | ) | | 399 |
| | (233 | ) |
Collaboration intangible assets | 4,413 |
| | (573 | ) | | 4,109 |
| | (384 | ) |
Customer relationships and other | 13,493 |
| | (4,413 | ) | | 13,352 |
| | (4,100 | ) |
| 20,449 |
| | (6,822 | ) | | 20,038 |
| | (6,251 | ) |
Unamortized: | | | | | | | |
Trademarks and other | 2,074 |
| | — |
| | 2,096 |
| | — |
|
Total | $ | 22,523 |
| | $ | (6,822 | ) | | $ | 22,134 |
| | $ | (6,251 | ) |
CustomerIn addition to customer relationship intangible assets obtained through business combinations, 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 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 for the quarter and ninesix months ended SeptemberJune 30, 20182019 was $225$348 million and $680$722 million, respectively, compared with $211$232 million and $626$455 million for the same periods of 2017.2018. The following is the expected amortization of intangible assets for the years 20182019 through 2023,2024, which reflects the pattern of expected economic benefit on certain aerospace intangible assets.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Remaining 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 |
Amortization expense | | $ | 742 |
| | $ | 1,427 |
| | $ | 1,408 |
| | $ | 1,407 |
| | $ | 1,398 |
| | $ | 1,378 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | | Remaining 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
Amortization expense | | $ | 222 |
| | $ | 877 |
| | $ | 875 |
| | $ | 904 |
| | $ | 924 |
| | $ | 920 |
|
Note 2: Revenue Recognition
ASU 2014-09 and its related amendments (collectively, the New Revenue Standard) are effective for reporting periods beginning after December 15, 2017, and interim periods therein. We adopted the New Revenue Standard effective January 1, 2018 and elected the modified retrospective approach. The results for periods before 2018 were not adjusted for the new
standard and the cumulative effect of the change in accounting was recognized through retained earnings at the date of adoption.
Revenue Recognition Accounting Policy Summary. We account for revenue in accordance with Accounting Standards Codification (ASC)ASC Topic 606: Revenue from Contracts with Customers. Under Topic 606, aCustomers.
Performance Obligations. 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.
Remaining Performance obligations are satisfiedObligations (RPO). RPO represents the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of June 30, 2019 our total RPO was approximately $125.1 billion compared to $115.5 billion 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 isDecember 31, 2018. Of the total RPO as of June 30, 2019, we expect approximately 45% will be 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.
For certain of our long-term aftermarket contracts, revenue is recognized over the contract period. In the commercial businesses, revenue is primarily recognized on a straight-line basis over the contract period. In the aerospace businesses, we generally account for such contracts as a series of daily obligations to stand ready to provide product maintenance and aftermarket services. 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.following 24 months.
Capitalized Contract modifications that are for goods or services that are not distinct are accounted for as part of the existing contract.
Costs. 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)OEM products performance obligations are delivered to the customer.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 are delivered to the customer. Costs to obtain contracts are not material.
Loss provisions on OEM contracts are recognized to the extent that estimated contract costs exceed the estimated consideration from the products contemplated under the contractual arrangement. For new commitments, we generally record loss provisions at the earlier of contract announcement or contract signing except for certain contracts under which losses are recorded upon receipt of the purchase order that obligates us to perform. For existing commitments, anticipated losses on contractual arrangements are recognized in the period in which losses become evident. Products contemplated under contractual arrangements include firm quantities of product sold under contract and, in the 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.
We review our cost estimates on significant contracts on a quarterly basis and for others, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. We record changes in contract estimates using the cumulative catch-up method.
The New Revenue Standard changed the revenue recognition practices for a number of revenue streams across our businesses, although the most significant impacts are concentrated in our aerospace units. Several 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 UTC Climate, Controls & Security; 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 salesperformance obligations related to the satisfied portion of the performance obligations of contracts in process as of the date of adoption of the New Revenue Standard of approximately $220 million were recorded through retained earnings. The ongoing effect on our reported revenues of recognizing 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.
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 intellectual property 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 assatisfied. Capitalized net 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 engineeringwere $1,229 million and development costs of approximately $700$914 million as contract fulfillment cost assets through retained earnings as of January 1, 2018. We also established previouslyJune 30, 2019 and December 31, 2018, respectively and are recognized customer funding of approximately $850 million as a contract liability through retained earnings as of the adoption date.
We expect the New Revenue Standard will have an immaterial impact on our 2018 net income. Adoption of the New Revenue Standard has resulted in Statement of Operations classification changes between Net Sales, Cost of sales, Research & development, and Other income. The New Revenue Standard also resulted in the establishment of Contract asset and Contract liability balance sheet accounts, and in the reclassification of balances to these new accounts from Accounts receivable, Inventories and contracts in progress, net, and Accrued liabilities. In addition to the following disclosures, Note 16 provides incremental disclosures required by the New Revenue Standard, including disaggregation of revenue into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The following schedules quantify the impact of the New Revenue Standard on the statement of operations for the quarter and nine months ended September 30, 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) | Quarter Ended September 30, 2018, under previous standard | | Effect of the New Revenue Standard | | Quarter Ended September 30, 2018 as reported |
Net Sales: | | | | | |
Product sales | $ | 11,228 |
| | $ | 26 |
| | $ | 11,254 |
|
Service sales | 5,233 |
| | 23 |
| | 5,256 |
|
| 16,461 |
| | 49 |
| | 16,510 |
|
Costs and Expenses: | | | | | |
Cost of products sold | 9,389 |
| | (47 | ) | | 9,342 |
|
Cost of services sold | 3,172 |
| | 22 |
| | 3,194 |
|
Research and development | 614 |
| | (28 | ) | | 586 |
|
Selling, general and administrative | 1,681 |
| | — |
| | 1,681 |
|
| 14,856 |
| | (53 | ) | | 14,803 |
|
Other income, net | 132 |
| | (1 | ) | | 131 |
|
Operating profit | 1,737 |
| | 101 |
| | 1,838 |
|
Non-service pension (benefit) | (188 | ) | | — |
| | (188 | ) |
Interest expense, net | 258 |
| | — |
| | 258 |
|
Income from operations before income taxes | 1,667 |
| | 101 |
| | 1,768 |
|
Income tax expense | 394 |
| | 25 |
| | 419 |
|
Net income from operations | 1,273 |
| | 76 |
| | 1,349 |
|
Less: Noncontrolling interest in subsidiaries' earnings from operations | 113 |
| | (2 | ) | | 111 |
|
Net income attributable to common shareowners | $ | 1,160 |
| | $ | 78 |
| | $ | 1,238 |
|
|
| | | | | | | | | | | |
(dollars in millions) | Nine Months Ended September 30, 2018, under previous standard
| | Effect of the New Revenue Standard | |
Nine Months Ended September 30, 2018 as reported
|
Net Sales: | | | | | |
Product sales | $ | 32,801 |
| | $ | 231 |
| | $ | 33,032 |
|
Service sales | 15,201 |
| | 224 |
| | 15,425 |
|
| 48,002 |
| | 455 |
| | 48,457 |
|
Costs and Expenses: | | | | | |
Cost of products sold | 26,250 |
| | 262 |
| | 26,512 |
|
Cost of services sold | 9,568 |
| | 158 |
| | 9,726 |
|
Research and development | 1,794 |
| | (65 | ) | | 1,729 |
|
Selling, general and administrative | 5,151 |
| | — |
| | 5,151 |
|
| 42,763 |
| | 355 |
| | 43,118 |
|
Other income, net | 1,307 |
| | (4 | ) | | 1,303 |
|
Operating profit | 6,546 |
| | 96 |
| | 6,642 |
|
Non-service pension (benefit) | (571 | ) | | — |
| | (571 | ) |
Interest expense, net | 721 |
| | — |
| | 721 |
|
Income from operations before income taxes | 6,396 |
| | 96 |
| | 6,492 |
|
Income tax expense | 1,612 |
| | 24 |
| | 1,636 |
|
Net income from operations | 4,784 |
| | 72 |
| | 4,856 |
|
Less: Noncontrolling interest in subsidiaries' earnings from operations | 269 |
| | 4 |
| | 273 |
|
Net income attributable to common shareowners | $ | 4,515 |
| | $ | 68 |
| | $ | 4,583 |
|
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 basis using an input method revenue model for certain U.S Government and commercial aerospace equipment contracts, and aerospace aftermarket service work at Pratt & Whitney and UTC Aerospace Systems. The New Revenue Standard also resulted in an increase in Cost of products sold during the nine months ended September 30, 2018 related to the timing of manufacturing cost recognition. During the quarter ended September 30, 2018, Cost of products sold were lower under the New Revenue Standard due to a change in the contract average unit costs during the quarter.
The lower amounts of research and development expense recognized under the New Revenue Standard reflect the capitalization of costs of engineering and development of aerospace products as contract fulfillment costs under contracts with customers.
The following schedule quantifies the impact of the New Revenue Standard on our balance sheet as of September 30, 2018.
|
| | | | | | | | | | | |
(dollars in millions) | September 30, 2018 under previous standard | | Effect of the New Revenue Standard | | September 30, 2018 as reported |
Assets | | | | | |
Accounts receivable, net | $ | 13,988 |
| | $ | (1,438 | ) | | $ | 12,550 |
|
Contract assets, current | — |
| | 3,450 |
| | 3,450 |
|
Inventories | 11,337 |
| | (2,269 | ) | | 9,068 |
|
Other assets, current | 1,305 |
| | 32 |
| | 1,337 |
|
Future income tax benefits | 1,669 |
| | 32 |
| | 1,701 |
|
Intangible assets, net | 15,771 |
| | (70 | ) | | 15,701 |
|
Other assets | 5,987 |
| | 1,083 |
| | 7,070 |
|
| | | | | |
Liabilities and Equity | | | | | |
Accrued liabilities | $ | 14,153 |
| | $ | (5,286 | ) | | $ | 8,867 |
|
Contract liabilities, current | — |
| | 5,460 |
| | 5,460 |
|
Other long term liabilities | 12,357 |
| | 1,016 |
| | 13,373 |
|
Noncontrolling interest | 2,138 |
| | 6 |
| | 2,144 |
|
| | | | | |
Retained earnings | 58,118 |
| | (412 | ) | | 57,706 |
|
The decrease in Retained earnings of $412 million in the table above reflects $480 million of adjustments to the balance sheet as of January 1, 2018, resulting from the adoption of the New Revenue Standard partially offset by $68 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.
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.our Condensed Consolidated Balance Sheet.
Contract Assets and Liabilities. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. Total contract assets and contract liabilities as of SeptemberJune 30, 2019 and December 31, 2018 are as follows:
| | (dollars in millions) | September 30, 2018 | June 30, 2019 | | December 31, 2018 |
Contract assets, current | $ | 3,450 |
| $ | 4,334 |
| | $ | 3,486 |
|
Contract assets, noncurrent (included within Other assets) | 1,075 |
| 1,215 |
| | 1,142 |
|
Total contract assets | 4,525 |
| 5,549 |
| | 4,628 |
|
Contract liabilities, current | (5,460 | ) | (6,219 | ) | | (5,720 | ) |
Contract liabilities, noncurrent (included within Other long-term liabilities) | (5,044 | ) | (5,190 | ) | | (5,069 | ) |
Total contract liabilities | (10,504 | ) | (11,409 | ) | | (10,789 | ) |
Net contract liabilities | $ | (5,979 | ) | $ | (5,860 | ) | | $ | (6,161 | ) |
Under the New Revenue Standard,Contract assets increased $921 million during the ninesix months ended SeptemberJune 30, 2018, net2019 primarily due to revenue recognition in excess of customer billings, primarily on Pratt & Whitney military and commercial aftermarket service agreements and various programs at Collins Aerospace Systems. Contract liabilities increased $620 million during the six months ended June 30, 2019 primarily due to customer billings in excess of revenue recognized on Pratt & Whitney commercial aftermarket service agreements, at Collins Aerospace across various programs, and on Otis maintenance contracts. We recognized revenue of $3.2 billion during the six months ended June 30, 2019 related to contract liabilities increased to $5,979 million. This reflects the establishmentas of $6,365 million of net contract liabilities upon the adoption, and $21,093 million of advance payments from customers and reclassifications of contract assets to receivables upon billing during the period. These increases were partially offset by the liquidation of beginning of period contract liabilities of $1,978 million as a result of revenue recognition, and by $19,499 million of revenue recognition within the period. The remaining change is primarily attributable to the impact of foreign currency exchange rate changes on the balance of contract assets and liabilities offset by net contract liabilities acquired through business combinations.
Remaining performance obligations ("RPO") are the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of September 30, 2018, our total RPO is $106.8 billion. Of this total, we expect approximately 42% will be recognized as sales over the following 24 months.December 31, 2018.
Note 3: Earnings Per Share
|
| | | | | | | | | | | | | | | |
| Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions, except per share amounts; shares in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Net income attributable to common shareowners | $ | 1,900 |
| | $ | 2,048 |
| | $ | 3,246 |
| | $ | 3,345 |
|
Basic weighted average number of shares outstanding | 854.4 |
| | 790.5 |
| | 853.8 |
| | 790.2 |
|
Stock awards and equity units (share equivalent) | 9.3 |
| | 9.1 |
| | 8.5 |
| | 9.8 |
|
Diluted weighted average number of shares outstanding | 863.7 |
| | 799.6 |
| | 862.3 |
| | 800.0 |
|
Earnings Per Share of Common Stock: | | | | | | | |
Basic | $ | 2.22 |
| | $ | 2.59 |
| | $ | 3.80 |
| | $ | 4.23 |
|
Diluted | $ | 2.20 |
| | $ | 2.56 |
| | $ | 3.76 |
| | $ | 4.18 |
|
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in millions, except per share amounts; shares in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Net income attributable to common shareowners | $ | 1,238 |
| | $ | 1,330 |
| | $ | 4,583 |
| | $ | 4,155 |
|
Basic weighted average number of shares outstanding | 791.3 |
| | 788.3 |
| | 790.6 |
| | 790.3 |
|
Stock awards and equity units (share equivalent) | 10.5 |
| | 8.8 |
| | 10.1 |
| | 9.1 |
|
Diluted weighted average number of shares outstanding | 801.8 |
| | 797.1 |
| | 800.7 |
| | 799.4 |
|
Earnings Per Share of Common Stock: | | | | | | | |
Basic | $ | 1.56 |
| | $ | 1.69 |
| | $ | 5.80 |
| | $ | 5.26 |
|
Diluted | $ | 1.54 |
| | $ | 1.67 |
| | $ | 5.72 |
| | $ | 5.20 |
|
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 the quarter and ninesix months ended SeptemberJune 30, 2019, the number of stock awards excluded from the computation was approximately 11.0 million and 13.0 million, respectively. For the quarter and six months ended June 30, 2018, the number of stock awards excluded from the computation was approximately 5.05.1 million.
Note 4: Inventory, net
|
| | | | | | | |
(dollars in millions) | June 30, 2019 | | December 31, 2018 |
Raw materials | $ | 3,024 |
| | $ | 3,052 |
|
Work-in-process | 2,863 |
| | 2,673 |
|
Finished goods | 5,047 |
| | 4,358 |
|
| $ | 10,934 |
| | $ | 10,083 |
|
Raw materials, work-in-process and finished goods are net of valuation reserves of $1,405 million and 5.2$1,270 million respectively. For the quarteras of June 30, 2019 and nine months ended September 30, 2017, the number of stock awards excluded from the computation was approximately 5.8 million and 6.4 million,December 31, 2018, respectively.
Note 4: Inventories and Contracts in Progress
|
| | | | | | | |
(dollars in millions) | September 30, 2018 | | December 31, 2017 |
Raw materials | $ | 2,444 |
| | $ | 2,038 |
|
Work-in-process | 2,292 |
| | 3,366 |
|
Finished goods | 4,332 |
| | 3,845 |
|
Contracts in progress | — |
| | 10,205 |
|
| 9,068 |
| | 19,454 |
|
Less: | | | |
Progress payments, secured by lien, on U.S. Government contracts | — |
| | (236 | ) |
Billings on contracts in progress | — |
| | (9,337 | ) |
| $ | 9,068 |
| | $ | 9,881 |
|
Inventories as of December 31, 2017 included capitalized contract development costs of $127 million related to certain aerospace programs at UTC Aerospace Systems. Upon adoption of the New Revenue Standard, these costs are recorded as contract fulfillment costs included in Other assets.
Prior to the adoption of the New Revenue Standard, within our commercial aerospace business, inventory costs attributable to new engine offerings were recognized based on the average cost per unit expected over the life of each contract using the units-of-delivery method of percentage of completion accounting. Under this method, costs of initial engine deliveries in excess of the projected contract per unit average cost were capitalized and these capitalized amounts were subsequently expensed as additional engines were delivered for engines with costs below the projected contract per unit average cost over the life of the contract. As of December 31, 2017, inventory included $438 million of such capitalized amounts. Upon adoption of the New Revenue Standard, these amounts are no longer included in inventory. In addition, amounts previously reported as Contracts in progress have been reclassified as contract assets in accordance with the New Revenue Standard.
Note 5: Borrowings and Lines of Credit
|
| | | | | | | |
(dollars in millions) | June 30, 2019 | | December 31, 2018 |
Commercial paper | $ | 855 |
| | $ | 1,257 |
|
Other borrowings | 284 |
| | 212 |
|
Total short-term borrowings | $ | 1,139 |
| | $ | 1,469 |
|
|
| | | | | | | |
(dollars in millions) | September 30, 2018 | | December 31, 2017 |
Commercial paper | $ | 1,380 |
| | $ | 300 |
|
Other borrowings | 196 |
| | 92 |
|
Total short-term borrowings | $ | 1,576 |
| | $ | 392 |
|
At SeptemberJune 30, 2018,2019, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $4.35$10.35 billion, pursuant toincluding: a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement, both of which expire in August 2021.2021; and a $2.0 billion revolving credit agreement and a $4.0 billion term credit agreement, both of which we entered into on March 15, 2019 and which will expire on March 15, 2021 or, if earlier, the date that is 180 days after the date on which each of the separations of Otis and Carrier have been consummated. On March 15, 2019, we terminated the $1.5 billion revolving credit agreement that we entered into on November 26, 2018. As of SeptemberJune 30, 2018,2019, there were no borrowings under eitherany 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 SeptemberJune 30, 2018,2019, our maximum commercial paper borrowing limit was $4.35$6.35 billion. Commercial paper borrowings at SeptemberJune 30, 20182019 include approximately €750 million ($881855 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.
On August 16, 2018, we issued $1.0 billion aggregate principal amount of 3.350% notes due 2021, $2.25 billion aggregate principal amount of 3.650% notes due 2023, $1.5 billion aggregate principal amount of 3.950% notes due 2025, $3.0 billion aggregate principal amount of 4.125% notes due 2028, $750 million aggregate principal amount of 4.450% notes due 2038, $1.75 billion aggregate principal amount of 4.625% notes due 2048, and $750 million aggregate principal amount of floating rate notes due 2021. The net proceeds received from the issuance of the notes due 2021, notes due 2023, notes due 2025, notes due 2028, notes due 2038 and the floating rate notes due 2021 are specifically designated to finance payment obligations with respect to the cash consideration and related fees, expenses and other amounts in connection with the acquisition of Rockwell Collins. If either the acquisition of Rockwell Collins does not occur on or before July 15, 2019 or we notify the trustee that we will not pursue the acquisition of Rockwell Collins, we will be required to redeem the mandatorily redeemable notes then outstanding at a redemption price equal to 101% of the principal amount of such notes plus accrued and unpaid interest (the special mandatory redemption).
We expect to use the proceeds of the notes due 2048 for general corporate purposes which may include the repayment of debt, including outstanding commercial paper. The notes due 2048 are not subject to the special mandatory redemption.
On May 18, 2018, we issued €750 million aggregate principal amount of 1.150% notes due 2024, €500 million aggregate principal amount of 2.150% notes maturing 2030 and €750 million aggregate principal amount of floating rate notes maturing 2020. The net proceeds received from these debt issuances were used for general corporate purposes.
On May 4, 2018, we repaid at maturity approximately $1.1 billion aggregate principal amount of 1.778% junior subordinated notes.
On February 1, 2018, we repaid at maturity the $99 million 6.80% notes and on February 22, 2018, we repaid at maturity the €750 million EURIBOR plus 0.80% floating rate notes.
In connection with the merger agreement with Rockwell Collins announced on September 4, 2017, we entered into a $6.5 billion 364-day unsecured bridge loan credit agreement that would have been funded only to the extent certain anticipated debt issuances were not completed prior to the completion of the merger. This unsecured bridge loan credit agreement was terminated on August 16, 2018 upon issuance of the $11 billion of aggregate principal notes described above. See Note 1 for additional discussion.
Long-term debt consisted of the following:
|
| | | | | | | |
(dollars in millions) | June 30, 2019 | | December 31, 2018 |
LIBOR plus 0.350% floating rate notes due 2019 3 | $ | 350 |
| | $ | 350 |
|
1.500% notes due 2019 1 | 650 |
| | 650 |
|
1.950% notes due 2019 4 | 300 |
| | 300 |
|
EURIBOR plus 0.15% floating rate notes due 2019 (€750 million principal value) 2 | 855 |
| | 858 |
|
5.250% notes due 2019 4 | 300 |
| | 300 |
|
8.875% notes due 2019 | 271 |
| | 271 |
|
4.875% notes due 2020 1 | 171 |
| | 171 |
|
4.500% notes due 2020 1 | 1,250 |
| | 1,250 |
|
1.900% notes due 2020 1 | 1,000 |
| | 1,000 |
|
EURIBOR plus 0.20% floating rate notes due 2020 (€750 million principal value) 2 | 855 |
| | 858 |
|
8.750% notes due 2021 | 250 |
| | 250 |
|
3.100% notes due 2021 4 | 250 |
| | 250 |
|
3.350% notes due 2021 1 | 1,000 |
| | 1,000 |
|
LIBOR plus 0.650% floating rate notes due 2021 1,3 | 750 |
| | 750 |
|
1.950% notes due 2021 1 | 750 |
| | 750 |
|
1.125% notes due 2021 (€950 million principal value) 1 | 1,082 |
| | 1,088 |
|
2.300% notes due 2022 1 | 500 |
| | 500 |
|
2.800% notes due 2022 4 | 1,100 |
| | 1,100 |
|
3.100% notes due 2022 1 | 2,300 |
| | 2,300 |
|
1.250% notes due 2023 (€750 million principal value) 1 | 855 |
| | 858 |
|
3.650% notes due 2023 1 | 2,250 |
| | 2,250 |
|
3.700% notes due 2023 4 | 400 |
| | 400 |
|
2.800% notes due 2024 1 | 800 |
| | 800 |
|
3.200% notes due 2024 4 | 950 |
| | 950 |
|
1.150% notes due 2024 (€750 million principal value) 1 | 855 |
| | 858 |
|
3.950% notes due 2025 1 | 1,500 |
| | 1,500 |
|
|
| | | | | | | |
(dollars in millions) | September 30, 2018 | | December 31, 2017 |
6.800% notes due 2018 | $ | — |
| | $ | 99 |
|
EURIBOR plus 0.800% floating rate notes due 2018 (€750 million principal value) 2 | — |
| | 890 |
|
1.778% junior subordinated notes due 2018 | — |
| | 1,100 |
|
LIBOR plus 0.350% floating rate notes due 2019 3 | 350 |
| | 350 |
|
1.500% notes due 2019 1 | 650 |
| | 650 |
|
EURIBOR plus 0.15% floating rate notes due 2019 (€750 million principal value) 2 | 881 |
| | 890 |
|
8.875% notes due 2019 | 271 |
| | 271 |
|
4.875% notes due 2020 1 | 171 |
| | 171 |
|
4.500% notes due 2020 1 | 1,250 |
| | 1,250 |
|
1.900% notes due 2020 1 | 1,000 |
| | 1,000 |
|
EURIBOR plus 0.20% floating rate notes due 2020 (€750 million principal value) 2 | 881 |
| | — |
|
8.750% notes due 2021 | 250 |
| | 250 |
|
3.350% notes due 2021 1 | 1,000 |
| | — |
|
LIBOR plus 0.650% floating rate notes due 2021 1,3 | 750 |
| | — |
|
1.950% notes due 2021 1 | 750 |
| | 750 |
|
1.125% notes due 2021 (€950 million principal value) 1 | 1,117 |
| | 1,127 |
|
2.300% notes due 2022 1 | 500 |
| | 500 |
|
3.100% notes due 2022 1 | 2,300 |
| | 2,300 |
|
1.250% notes due 2023 (€750 million principal value) 1 | 881 |
| | 890 |
|
3.650% notes due 2023 1 | 2,250 |
| | — |
|
2.800% notes due 2024 1 | 800 |
| | 800 |
|
1.150% notes due 2024 (€750 million principal value) 1 | 881 |
| | — |
|
3.950% notes due 2025 1 | 1,500 |
| | — |
|
1.875% notes due 2026 (€500 million principal value) 1 | 588 |
| | 593 |
|
2.650% notes due 2026 1 | 1,150 |
| | 1,150 |
|
3.125% notes due 2027 1 | 1,100 |
| | 1,100 |
|
7.100% notes due 2027 | 141 |
| | 141 |
|
6.700% notes due 2028 | 400 |
| | 400 |
|
4.125% notes due 2028 1 | 3,000 |
| | — |
|
7.500% notes due 2029 1 | 550 |
| | 550 |
|
2.150% notes due 2030 (€500 million principal value) 1 | 588 |
| | — |
|
5.400% notes due 2035 1 | 600 |
| | 600 |
|
|
| | | | | | | |
1.875% notes due 2026 (€500 million principal value) 1 | 569 |
| | 573 |
|
2.650% notes due 2026 1 | 1,150 |
| | 1,150 |
|
3.125% notes due 2027 1 | 1,100 |
| | 1,100 |
|
3.500% notes due 2027 4 | 1,300 |
| | 1,300 |
|
7.100% notes due 2027 | 141 |
| | 141 |
|
6.700% notes due 2028 | 400 |
| | 400 |
|
4.125% notes due 2028 1 | 3,000 |
| | 3,000 |
|
7.500% notes due 2029 1 | 550 |
| | 550 |
|
2.150% notes due 2030 (€500 million principal value) 1 | 569 |
| | 573 |
|
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 |
|
4.450% notes due 2038 1 | 750 |
| | 750 |
|
5.700% notes due 2040 1 | 1,000 |
| | 1,000 |
|
4.500% notes due 2042 1 | 3,500 |
| | 3,500 |
|
4.800% notes due 2043 4 | 400 |
| | 400 |
|
4.150% notes due 2045 1 | 850 |
| | 850 |
|
3.750% notes due 2046 1 | 1,100 |
| | 1,100 |
|
4.050% notes due 2047 1 | 600 |
| | 600 |
|
4.350% notes due 2047 4 | 1,000 |
| | 1,000 |
|
4.625% notes due 2048 1 | 1,750 |
| | 1,750 |
|
Project financing obligations 5 | 335 |
| | 287 |
|
Other (including finance leases) | 295 |
| | 287 |
|
Total principal long-term debt | 44,446 |
| | 44,416 |
|
Other (fair market value adjustments, discounts and debt issuance costs) | (334 | ) | | (348 | ) |
Total long-term debt | 44,112 |
| | 44,068 |
|
Less: current portion | 6,202 |
| | 2,876 |
|
Long-term debt, net of current portion | $ | 37,910 |
| | $ | 41,192 |
|
|
| | | | | | | |
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 |
|
4.450% notes due 2038 1 | 750 |
| | — |
|
5.700% notes due 2040 1 | 1,000 |
| | 1,000 |
|
4.500% notes due 2042 1 | 3,500 |
| | 3,500 |
|
4.150% notes due 2045 1 | 850 |
| | 850 |
|
3.750% notes due 2046 1 | 1,100 |
| | 1,100 |
|
4.050% notes due 2047 1 | 600 |
| | 600 |
|
4.625% notes due 2048 1 | 1,750 |
| | — |
|
Project financing obligations | 250 |
| | 158 |
|
Other (including capitalized leases) | 230 |
| | 195 |
|
Total principal long-term debt | 38,473 |
| | 27,118 |
|
Other (fair market value adjustments and discounts) | (106 | ) | | (25 | ) |
Total long-term debt | 38,367 |
| | 27,093 |
|
Less: current portion | 92 |
| | 2,104 |
|
Long-term debt, net of current portion | $ | 38,275 |
| | $ | 24,989 |
|
| |
1 | We may redeem these notes at our option pursuant to their terms. |
| |
2 | The three-month EURIBOR rate as of SeptemberJune 30, 20182019 was approximately -0.318%-0.345%. 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 SeptemberJune 30, 20182019 was approximately 2.398%2.319%. |
| |
4 | Rockwell Collins debt which remained outstanding following the Rockwell Merger. |
| |
5 | Project financing obligations are associated with the sale of rights to unbilled revenues related to the ongoing activity of an entity owned by Carrier. |
We had no debt issuances during the six months ended June 30, 2019 and had the following issuances of debt in 2018:
|
| | | | |
(dollars and Euro in millions)
| |
|
|
Issuance Date | Description of Notes | Aggregate Principal Balance |
August 16, 2018: | 3.350% notes due 20211 | $ | 1,000 |
|
| 3.650% notes due 20231 | 2,250 |
|
| 3.950% notes due 20251 | 1,500 |
|
| 4.125% notes due 20281 | 3,000 |
|
| 4.450% notes due 20381 | 750 |
|
| 4.625% notes due 20482 | 1,750 |
|
| LIBOR plus 0.65% floating rate notes due 20211 | 750 |
|
| | |
May 18, 2018: | 1.150% notes due 20243 | € | 750 |
|
| 2.150% notes due 20303 | 500 |
|
| EURIBOR plus 0.20% floating rate notes due 20203 | 750 |
|
| |
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. |
We had no debt payments during the six months ended June 30, 2019 and had the following repayments of debt in 2018:
|
| | | | |
(dollars and Euro 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
| $ | 482 |
|
May 4, 2018 | 1.778% junior subordinated notes | $ | 1,100 |
|
February 22, 2018 | EURIBOR plus 0.80% floating rate notes
| € | 750 |
|
February 1, 2018 | 6.80% notes
| $ | 99 |
|
| |
1 | This term loan was assumed in connection with the Rockwell Collins acquisition and subsequently repaid. |
The average maturity of our long-term debt at SeptemberJune 30, 20182019 is approximately 1110 years. The average interest expense rate on our total borrowings for the quarterquarters and ninesix months ended SeptemberJune 30, 20182019 and 20172018 were as follows:
|
| | | | | | | | | | | |
| Quarter Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Average interest expense rate | 3.6 | % | | 3.5 | % | | 3.7 | % | | 3.5 | % |
|
| | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Average interest expense rate | 3.6 | % | | 3.6 | % | | 3.5 | % | | 3.6 | % |
We have an existingpreviously had a universal shelf registration statement filed with the SecuritiesSEC, which expired on April 29, 2019. Our ability to renew our shelf registration statement may be limited as a result of the separation transactions as well as our proposed merger with Raytheon; as noted above, we entered into a new $2.0 billion revolving credit agreement and Exchange Commission (SEC) for an indeterminate amount of equity and debt securities for future issuances, subject to our internal limitationsa $4.0 billion term credit agreement on the amount of equity and debtMarch 15, 2019 to be issued under thisused for general corporate purposes, including the repayment, repurchase or redemption of existing debt, and to serve as backup facilities to support additional issuances of commercial paper. We expect to renew our shelf registration statement.statement following the separation transactions or earlier, as appropriate.
Note 6: Income Taxes
On December 22, 2017, Public Law 115-97 “An ActThe decrease in the effective tax rate for the quarter ended June 30, 2019 is primarily the result of favorable adjustments related to Provide for Reconciliation Pursuant to Titles II and Vthe conclusion of the Concurrent Resolution onaudit by the BudgetExamination Division of the Internal Revenue Service for Fiscal Year 2018” was enacted. This lawthe UTC 2014, 2015 and 2016 tax years and the filing by a subsidiary of the Company to participate in an amnesty program offered by the Italian Tax Authority. These benefits were partially offset by tax charges connected to the Company’s portfolio separation transactions.
The decrease in the effective tax rate for the six months ended June 30, 2019 is commonly referredprincipally related to asthe items described above in addition to the impact of the Tax Cuts and Jobs Act of 2017 (TCJA). In accordance with Staff Accounting Bulletin 118 (SAB 118) issued on December 22, 2017, the U.S. income tax amounts recorded attributable to the TCJA’s deemed repatriation provision, the revaluation of U.S. deferred taxes interpretive guidance and the tax consequences relating to states with current conformity to the Internal Revenue Code are provisional amounts. Due to the enactment date and tax complexitiesabsence of the TCJA provisional adjustments recorded through the Company has not completed its accounting related to these items.
Prior to enactmentsecond quarter of the TCJA, with few exceptions, U.S. income taxes had not been provided on undistributed earnings of UTC's international subsidiaries as the Company had intended to reinvest such earnings permanently outside the U.S. or to repatriate such earnings only when it was tax effective to do so. The Company continues to evaluate the impact of the TCJA on its existing accounting position related to the undistributed earnings. Due to the inherent complexities in determining any incremental U.S. Federal and State taxes and the non-U.S. taxes that may be due if all of these earnings were remitted to the U.S. and as provided for by SAB 118 this evaluation has not yet been completed and no provisional amount has been recorded in regard to the undistributed amounts. After completing its evaluation, the Company will accrue any additional taxes due on previously undistributed earnings to be distributed in the future.
The Company will continue to accumulate and refine the relevant data and computational elements needed to finalize its accounting for the effects of the TCJA by December 22, 2018.
We conduct business globally and, as a result, UTC or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, Poland, Singapore, South Korea, Spain, Switzerland, the United Kingdom, and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2006.2008.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. It is reasonably possible that a net reduction within the range of $40$140 million to $610$490 million of unrecognized tax benefits may occur within the next 12 months as a result of additional worldwide uncertain tax positions, the closure of tax statutes, or the revaluation of current uncertain tax positions arising from the issuance of legislation, regulatory or other guidance or developments in examinations, in appeals, or in the courts. The range of potential change includes provisional amounts related to the TCJA based on currently available information. See Note 15, Contingent Liabilities, for discussion regarding uncertain tax positions, included in the above range, related to pending litigation with respect to certain deductions claimed in Germany.
TheDuring the quarter the Examination Division of the Internal Revenue Service is currently auditing UTC tax years(IRS) concluded its audit of the Company’s 2014, 2015 and 2016 tax years. Further, during the quarter, a subsidiary of the Company engaged in certain tax litigation in Italy and made filings necessary to participate in an amnesty program offered by the Italian Tax Authority. As a result of the conclusion of the IRS audit and the auditamnesty filing in Italy, the Company recognized a net gain during the quarter of approximately $307 million, including pre-tax interest of approximately $56 million. It is expectedreasonably possible that additional net non-cash gains could be recognized during the remainder of 2019 in the range of $25 million to conclude within the next 12 months.$70 million, primarily tax, due to other potential settlements with tax authorities and statute of limitations expirations.
Note 7: Employee Benefit Plans
Pension and Postretirement Plans. We sponsor both funded and unfunded domestic and foreign defined pension and other postretirement benefit plans, and defined contribution plans.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires an employer to report the service cost component of net periodic pension benefit cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period, with other cost components presented separately from the service cost component and outside of income from operations. This ASU also allows only the service cost component of net periodic pension benefit cost to be eligible for capitalization when applicable. This ASU was effective for years beginning after December 15, 2017. The Company adopted this standard on January 1, 2018 applying the presentation requirements retrospectively. We elected to apply the practical expedient, which allows us to reclassify amounts disclosed previously in the employee benefit plans note as the basis for applying retrospective presentation for comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. Provisions related to presentation of the service cost component eligibility for capitalization were applied prospectively.
The effect of the retrospective presentation change related to the net periodic benefit cost of our defined benefit pension and postretirement plans on our condensed consolidated statement of operations was as follows:
|
| | | | | | | | | | | |
| Quarter Ended September 30, 2017 |
(dollars in millions) | Previously Reported | | Effect of Change Higher/(Lower) | | As Revised |
Cost of product sold | $ | 7,750 |
| | $ | 50 |
| | $ | 7,800 |
|
Cost of services sold | 3,293 |
| | 13 |
| | 3,306 |
|
Research and development | 582 |
| | 10 |
| | 592 |
|
Selling, general and administrative | 1,524 |
| | 58 |
| | 1,582 |
|
Non-service pension (benefit) | — |
| | (131 | ) | | (131 | ) |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
(dollars in millions) | Previously Reported | | Effect of Change Higher/(Lower) | | As Revised |
Cost of product sold | $ | 22,920 |
| | $ | 148 |
| | $ | 23,068 |
|
Cost of services sold | 9,300 |
| | 38 |
| | 9,338 |
|
Research and development | 1,768 |
| | 29 |
| | 1,797 |
|
Selling, general and administrative | 4,544 |
| | 165 |
| | 4,709 |
|
Non-service pension (benefit) | — |
| | (380 | ) | | (380 | ) |
Contributions to our plans were as follows:
|
| | | | | | | | | | | | | | | |
| Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Defined benefit plans | $ | 47 |
| | $ | 22 |
| | $ | 79 |
| | $ | 59 |
|
Defined contribution plans | 134 |
| | 105 |
| | 287 |
| | 199 |
|
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Defined benefit plans | $ | 13 |
| | $ | 1,929 |
| | $ | 72 |
| | $ | 2,008 |
|
Defined contribution plans | 97 |
| | 86 |
| | 296 |
| | 262 |
|
We made contributions of $25 million to our domestic defined benefit pension plans in the quarter and six months ended June 30, 2019. There were no contributions to our domestic defined benefit pension plans in the quarter and ninesix months ended SeptemberJune 30, 2018. There was a $1.9 billion contribution to our domestic defined benefit pension plansIncluded in the quarter and ninecurrent year contributions to employer sponsored defined contribution plans for the six months ended SeptemberJune 30, 2017.2019 is $65 million of contributions to the Rockwell Collins participants. The following table illustrates the components of net periodic benefit (income) cost for our defined pension and other postretirement benefit plans:
|
| | | | | | | | | | | | | | | |
| Pension Benefits Quarter Ended September 30, | | Other Postretirement Benefits Quarter Ended September 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Service cost | $ | 94 |
| | $ | 94 |
| | $ | — |
| | $ | — |
|
Interest cost | 274 |
| | 281 |
| | 7 |
| | 9 |
|
Expected return on plan assets | (558 | ) | | (555 | ) | | — |
| | — |
|
Amortization of prior service credit | (11 | ) | | (9 | ) | | — |
| | (1 | ) |
Recognized actuarial net loss (gain) | 100 |
| | 144 |
| | (3 | ) | | (2 | ) |
Net settlement and curtailment loss | 3 |
| | 2 |
| | — |
| | — |
|
Total net periodic benefit (income) cost | $ | (98 | ) | | $ | (43 | ) | | $ | 4 |
| | $ | 6 |
|
|
| | | | | | | | | | | | | | | |
| Pension Benefits Quarter Ended June 30, | | Other Postretirement Benefits Quarter Ended June 30, |
(dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Service cost | $ | 89 |
| | $ | 93 |
| | $ | 1 |
| | $ | — |
|
Interest cost | 340 |
| | 278 |
| | 8 |
| | 6 |
|
Expected return on plan assets | (608 | ) | | (562 | ) | | — |
| | — |
|
Amortization of prior service cost (credit) | 4 |
| | (10 | ) | | (11 | ) | | (1 | ) |
Recognized actuarial net loss (gain) | 53 |
| | 101 |
| | (3 | ) | | (2 | ) |
Net settlement and curtailment loss (gain) | 1 |
| | (2 | ) | | — |
| | — |
|
Total net periodic benefit (income) cost | $ | (121 | ) | | $ | (102 | ) | | $ | (5 | ) | | $ | 3 |
|
| | | Pension Benefits Nine Months Ended September 30, | | Other Postretirement Benefits Nine Months Ended September 30, | Pension Benefits Six Months Ended June 30, | | Other Postretirement Benefits Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Service cost | $ | 280 |
| | $ | 280 |
| | $ | 1 |
| | $ | 2 |
| $ | 176 |
| | $ | 186 |
| | $ | 2 |
| | $ | 1 |
|
Interest cost | 831 |
| | 838 |
| | 19 |
| | 22 |
| 680 |
| | 557 |
| | 16 |
| | 12 |
|
Expected return on plan assets | (1,683 | ) | | (1,636 | ) | | — |
| | — |
| (1,215 | ) | | (1,125 | ) | | (1 | ) | | — |
|
Amortization of prior service credit | (31 | ) | | (27 | ) | | (2 | ) | | (1 | ) | |
Amortization of prior service cost (credit) | | 9 |
| | (20 | ) | | (22 | ) | | (2 | ) |
Recognized actuarial net loss (gain) | 302 |
| | 430 |
| | (7 | ) | | (7 | ) | 106 |
| | 202 |
| | (6 | ) | | (4 | ) |
Net settlement and curtailment loss | — |
| | 1 |
| | — |
| | — |
| |
Net settlement and curtailment loss (gain) | | 9 |
| | (3 | ) | | — |
| | — |
|
Total net periodic benefit (income) cost | $ | (301 | ) | | $ | (114 | ) | | $ | 11 |
| | $ | 16 |
| $ | (235 | ) | | $ | (203 | ) | | $ | (11 | ) | | $ | 7 |
|
Note 8: Restructuring Costs
During the ninesix months ended SeptemberJune 30, 2018,2019, we recorded net pre-tax restructuring costs totaling $186178 million for new and ongoing restructuring actions. We recorded charges in the segments as follows:
|
| | | |
(dollars in millions) | |
Otis | $ | 40 |
|
Carrier | 63 |
|
Pratt & Whitney | 17 |
|
Collins Aerospace Systems | 56 |
|
Eliminations and other | 2 |
|
Total | $ | 178 |
|
|
| | | |
(dollars in millions) | |
Otis | $ | 50 |
|
UTC Climate, Controls & Security | 52 |
|
Pratt & Whitney | 3 |
|
UTC Aerospace Systems | 77 |
|
Eliminations and other | 4 |
|
Total | $ | 186 |
|
Restructuring charges incurred during the ninesix months ended SeptemberJune 30, 20182019 primarily relate to actions initiated during 20182019 and 2017,2018, and were recorded as follows:
|
| | | |
(dollars in millions) | |
Cost of sales | $ | 82 |
|
Selling, general and administrative | 96 |
|
Total | $ | 178 |
|
|
| | | |
(dollars in millions) | |
Cost of sales | $ | 112 |
|
Selling, general and administrative | 76 |
|
Non-service pension (benefit) | (2 | ) |
Total | $ | 186 |
|
20182019 Actions. During the ninesix months ended SeptemberJune 30, 2018,2019, we recorded net pre-tax restructuring costs of $97$115 million, comprised of $47$43 million in cost of sales $52and $72 million in selling, general and administrative expenses, and $(2) million in non-service pension benefit.expenses. The 20182019 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field and manufacturing operations.
We are targeting to complete the majority of the remaining workforce and facility related cost reduction actions during 20182019 and 2019.2020. No specific plans for other significant actions have been finalized at this time. The following table summarizes the accrual balance and utilization for the 20182019 restructuring actions for the quarter and ninesix months ended SeptemberJune 30, 2018:2019:
|
| | | | | | | | | | | |
(dollars in millions) | Severance | | Facility Exit, Lease Termination and Other Costs | | Total |
Quarter Ended June 30, 2019 | | | | | |
Restructuring accruals at March 31, 2019 | $ | 53 |
| | $ | 15 |
| | $ | 68 |
|
Net pre-tax restructuring costs | 42 |
| | — |
| | 42 |
|
Utilization, foreign exchange and other costs | (38 | ) | | (4 | ) | | (42 | ) |
Balance at June 30, 2019 | $ | 57 |
| | $ | 11 |
| | $ | 68 |
|
| | | | | |
Six Months Ended June 30, 2019 | | | | | |
Net pre-tax restructuring costs | $ | 110 |
| | $ | 5 |
| | $ | 115 |
|
Utilization, foreign exchange and other costs | (53 | ) | | 6 |
| | (47 | ) |
Balance at June 30, 2019 | $ | 57 |
| | $ | 11 |
| | $ | 68 |
|
|
| | | | | | | | | | | |
(dollars in millions) | Severance | | Facility Exit, Lease Termination and Other Costs | | Total |
Quarter Ended September 30, 2018 | | | | | |
Restructuring accruals at June 30, 2018 | $ | 48 |
| | $ | — |
| | $ | 48 |
|
Net pre-tax restructuring costs | 19 |
| | 5 |
| | 24 |
|
Utilization and foreign exchange | (19 | ) | | (2 | ) | | (21 | ) |
Balance at September 30, 2018 | $ | 48 |
| | $ | 3 |
| | $ | 51 |
|
| | | | | |
Nine Months Ended September 30, 2018 | | | | | |
Net pre-tax restructuring costs | $ | 90 |
| | $ | 7 |
| | $ | 97 |
|
Utilization and foreign exchange | (42 | ) | | (4 | ) | | (46 | ) |
Balance at September 30, 2018 | $ | 48 |
| | $ | 3 |
| | $ | 51 |
|
The following table summarizes expected, incurred and remaining costs for the 20182019 restructuring actions by segment:
|
| | | | | | | | | | | | | | | |
(dollars in millions) | Expected Costs | | Costs Incurred Quarter Ended March 31, 2019 | | Costs Incurred Quarter Ended June 30, 2019 | | Remaining Costs at June 30, 2019 |
Otis | $ | 48 |
| | $ | (19 | ) | | $ | (14 | ) | | $ | 15 |
|
Carrier | 77 |
| | (25 | ) | | (24 | ) | | 28 |
|
Pratt & Whitney | 17 |
| | (14 | ) | | (3 | ) | | — |
|
Collins Aerospace Systems | 44 |
| | (14 | ) | | — |
| | 30 |
|
Eliminations and other | 2 |
| | (1 | ) | | (1 | ) | | — |
|
Total | $ | 188 |
| | $ | (73 | ) | | $ | (42 | ) | | $ | 73 |
|
|
| | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Expected Costs | | Costs Incurred Quarter Ended March 31, 2018 | | Costs Incurred Quarter Ended June 30, 2018 | | Costs Incurred Quarter Ended September 30, 2018 | | Remaining Costs at September 30, 2018 |
Otis | $ | 40 |
| | $ | (9 | ) | | $ | (18 | ) | | $ | (2 | ) | | $ | 11 |
|
UTC Climate, Controls & Security | 97 |
| | (1 | ) | | (23 | ) | | (14 | ) | | 59 |
|
Pratt & Whitney | 3 |
| | — |
| | (3 | ) | | — |
| | — |
|
UTC Aerospace Systems | 36 |
| | — |
| | (15 | ) | | (8 | ) | | 13 |
|
Eliminations and other | 4 |
| | (2 | ) | | (2 | ) | | — |
| | — |
|
Total | $ | 180 |
| | $ | (12 | ) | | $ | (61 | ) | | $ | (24 | ) | | $ | 83 |
|
20172018 Actions. During the ninesix months ended SeptemberJune 30, 2018,2019, we recorded net pre-tax restructuring costs totaling $7639 million for restructuring actions initiated in 20172018, including $5620 million in cost of sales and $2019 million in selling, general and administrative expenses. The 20172018 actions relate to ongoing cost reduction efforts, including workforce reductions, consolidation of field and manufacturing operations, and costs to exit legacy programs. The following table summarizes the accrual balances and utilization for the 20172018 restructuring actions for the quarter and ninesix months ended SeptemberJune 30, 2018:2019:
|
| | | | | | | | | | | |
(dollars in millions) | Severance | | Facility Exit, Lease Termination and Other Costs | | Total |
Quarter Ended June 30, 2019 | | | | | |
Restructuring accruals at March 31, 2019 | $ | 62 |
| | $ | 9 |
| | $ | 71 |
|
Net pre-tax restructuring costs | 14 |
| | 2 |
| | 16 |
|
Utilization, foreign exchange and other costs | (28 | ) | | (2 | ) | | (30 | ) |
Balance at June 30, 2019 | $ | 48 |
| | $ | 9 |
| | $ | 57 |
|
| | | | | |
Six Months Ended June 30, 2019 | | | | | |
Restructuring accruals at December 31, 2018 | $ | 115 |
| | $ | 23 |
| | $ | 138 |
|
Net pre-tax restructuring costs | 35 |
| | 4 |
| | 39 |
|
Utilization, foreign exchange and other costs | (102 | ) | | (18 | ) | | (120 | ) |
Balance at June 30, 2019 | $ | 48 |
| | $ | 9 |
| | $ | 57 |
|
|
| | | | | | | | | | | |
(dollars in millions) | Severance | | Facility Exit, Lease Termination and Other Costs | | Total |
Quarter Ended September 30, 2018 | | | | | |
Restructuring accruals at June 30, 2018 | $ | 73 |
| | $ | (3 | ) | | $ | 70 |
|
Net pre-tax restructuring costs | 3 |
| | 6 |
| | 9 |
|
Utilization and foreign exchange | (19 | ) | | (8 | ) | | (27 | ) |
Balance at September 30, 2018 | $ | 57 |
| | $ | (5 | ) | | $ | 52 |
|
| | | | | |
Nine Months Ended September 30, 2018 | | | | | |
Restructuring accruals at December 31, 2017 | $ | 84 |
| | $ | 1 |
| | $ | 85 |
|
Net pre-tax restructuring costs | 50 |
| | 26 |
| | 76 |
|
Utilization and foreign exchange | (77 | ) | | (32 | ) | | (109 | ) |
Balance at September 30, 2018 | $ | 57 |
| | $ | (5 | ) | | $ | 52 |
|
The following table summarizes expected, incurred and remaining costs for the 20172018 restructuring actions by segment:
|
| | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Expected Costs | | Costs Incurred in 2018 | | Costs Incurred Quarter Ended March 31, 2019 | | Costs Incurred Quarter Ended June 30, 2019 | | Remaining Costs at June 30, 2019 |
Otis | $ | 58 |
| | $ | (48 | ) | | $ | (5 | ) | | $ | (1 | ) | | $ | 4 |
|
Carrier | 85 |
| | (64 | ) | | (7 | ) | | (6 | ) | | 8 |
|
Pratt & Whitney | 3 |
| | (3 | ) | | — |
| | — |
| | — |
|
Collins Aerospace Systems | 115 |
| | (87 | ) | | (11 | ) | | (9 | ) | | 8 |
|
Eliminations and other | 5 |
| | (5 | ) | | — |
| | — |
| | — |
|
Total | $ | 266 |
| | $ | (207 | ) | | $ | (23 | ) | | $ | (16 | ) | | $ | 20 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Expected Costs | | Costs Incurred in 2017 | | Costs Incurred Quarter Ended March 31, 2018 | | Costs Incurred Quarter Ended June 30, 2018 | | Costs Incurred Quarter Ended September 30, 2018 | | Remaining Costs at September 30, 2018 |
Otis | $ | 69 |
| | $ | (43 | ) | | $ | (15 | ) | | $ | (4 | ) | | $ | (1 | ) | | $ | 6 |
|
UTC Climate, Controls & Security | 78 |
| | (76 | ) | | (7 | ) | | 5 |
| | 1 |
| | 1 |
|
Pratt & Whitney | 7 |
| | (7 | ) | | — |
| | — |
| | — |
| | — |
|
UTC Aerospace Systems | 207 |
| | (43 | ) | | (29 | ) | | (17 | ) | | (9 | ) | | 109 |
|
Eliminations and other | 7 |
| | (7 | ) | | — |
| | — |
| | — |
| | — |
|
Total | $ | 368 |
| | $ | (176 | ) | | $ | (51 | ) | | $ | (16 | ) | | $ | (9 | ) | | $ | 116 |
|
20162017 and Prior Actions. During the ninesix months ended SeptemberJune 30, 2018,2019, we recorded net pre-tax restructuring costs totaling $13$24 million for restructuring actions initiated in 20162017 and prior. As of SeptemberJune 30, 20182019, we have approximately $8374 million of accrual balances remaining related to 20162017 and prior actions.
Note 9: Financial Instruments
We enter into derivative instruments primarily for risk management purposes, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options, to manage certain foreign currency, interest rate and commodity price exposures.
The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $20.0$18.2 billion and $19.120.1 billion at SeptemberJune 30, 20182019 and December 31, 20172018, respectively.
The following table summarizes the fair value and presentation in the Condensed Consolidated Balance Sheets for derivative instruments as of SeptemberJune 30, 20182019 and December 31, 20172018:
|
| | | | | | | | |
(dollars in millions) | Balance Sheet Location | June 30, 2019 | | December 31, 2018 |
Derivatives designated as hedging instruments: | | | | |
Foreign exchange contracts | Asset Derivatives: | | | |
| Other assets, current | $ | 16 |
| | $ | 10 |
|
| Other assets | 19 |
| | 12 |
|
| Total asset derivatives | $ | 35 |
| | $ | 22 |
|
| Liability Derivatives: | | | |
| Accrued liabilities | (59 | ) | | (83 | ) |
| Other long-term liabilities | (90 | ) | | (111 | ) |
| Total liability derivatives | $ | (149 | ) | | $ | (194 | ) |
Derivatives not designated as hedging instruments: | | | | |
Foreign exchange contracts | Asset Derivatives: | | | |
| Other assets, current | $ | 79 |
| | $ | 44 |
|
| Other assets | 7 |
| | 19 |
|
| Total asset derivatives | $ | 86 |
| | $ | 63 |
|
| Liability Derivatives: | | | |
| Accrued liabilities | (80 | ) | | (89 | ) |
| Other long-term liabilities | (2 | ) | | (3 | ) |
| Total liability derivatives | $ | (82 | ) | | $ | (92 | ) |
|
| | | | | | | | |
(dollars in millions) | Balance Sheet Location | September 30, 2018 | | December 31, 2017 |
Derivatives designated as hedging instruments: | | | | |
Foreign exchange contracts | Asset Derivatives: | | | |
| Other assets, current | $ | 36 |
| | $ | 77 |
|
| Other assets | 46 |
| | 101 |
|
| Total asset derivatives | $ | 82 |
| | $ | 178 |
|
| Liability Derivatives: | | | |
| Accrued liabilities | (25 | ) | | (10 | ) |
| Other long-term liabilities | (35 | ) | | (8 | ) |
| Total liability derivatives | $ | (60 | ) | | $ | (18 | ) |
Derivatives not designated as hedging instruments: | | | | |
Foreign exchange contracts | Asset Derivatives: | | | |
| Other assets, current | 48 |
| | 70 |
|
| Other assets | 20 |
| | 5 |
|
| Total asset derivatives | $ | 68 |
| | $ | 75 |
|
| Liability Derivatives: | | | |
| Accrued liabilities | (55 | ) | | (57 | ) |
| Other long-term liabilities | (3 | ) | | (3 | ) |
| Total liability derivatives | $ | (58 | ) | | $ | (60 | ) |
The effect of cash flow hedging relationships on accumulatedAccumulated other comprehensive income and on the Condensed Consolidated Statement of Operations for the quarterquarters and ninesix months ended SeptemberJune 30, 20182019 and 20172018 are presented in the table below. The amounts of gain or (loss) are attributable to foreign exchange contract activity and are recorded as a component of Product sales when reclassified from accumulated other comprehensive income.
|
| | | | | | | | | | | | | | | |
| Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Gain (loss) recorded in Accumulated other comprehensive loss | $ | 21 |
| | $ | (245 | ) | | $ | 28 |
| | $ | (200 | ) |
Loss (gain) reclassified from Accumulated other comprehensive loss into Product sales | 16 |
| | (1 | ) | | 20 |
| | (28 | ) |
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Gain (loss) recorded in Accumulated other comprehensive loss | $ | 95 |
| | $ | 310 |
| | $ | (105 | ) | | $ | 440 |
|
Loss (gain) reclassified from Accumulated other comprehensive loss into Product sales | 2 |
| | (24 | ) | | (26 | ) | | (14 | ) |
The table above reflects the effect of cash flow hedging relationships on the Condensed Consolidated Statements of Operations for the quarter and nine months ended September 30, 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.
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 SeptemberJune 30, 2018,2019, the net investment hedge is deemed to be effective.
Assuming current market conditions continue, a $10$23 million pre-tax gainloss 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 SeptemberJune 30, 2018,2019, all derivative contracts accounted for as cash flow hedges will mature by October 2022.July 2023.
The effect of derivatives not designated as hedging instruments within Other income, net, on the Condensed Consolidated Statement of Operations was as follows:
|
| | | | | | | | | | | | | | | |
| Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Foreign exchange contracts | $ | 18 |
| | $ | 19 |
| | $ | 36 |
| | $ | 70 |
|
|
| | | | | | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Foreign exchange contracts | $ | 16 |
| | $ | 10 |
| | $ | 86 |
| | $ | 50 |
|
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 nonrecurringnon-recurring basis in our Condensed Consolidated Balance Sheet as of SeptemberJune 30, 20182019 and December 31, 2017:2018:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 |
(dollars in millions) | Total | | Level 1 | | Level 2 | | Level 3 |
Recurring fair value measurements: | | | | | | | |
Available-for-sale securities | $ | 60 |
| | $ | 60 |
| | $ | — |
| | $ | — |
|
Derivative assets | 121 |
| | — |
| | 121 |
| | — |
|
Derivative liabilities | (231 | ) | | — |
| | (231 | ) | | — |
|
|
| | | | | | | | | | | | | | | |
September 30, 2018 (dollars in millions) | Total | | Level 1 | | Level 2 | | Level 3 |
Recurring fair value measurements: | | | | | | | |
Available-for-sale securities | $ | 42 |
| | $ | 42 |
| | $ | — |
| | $ | — |
|
Derivative assets | 150 |
| | — |
| | 150 |
| | — |
|
Derivative liabilities | (118 | ) | | — |
| | (118 | ) | | — |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
(dollars in millions) | Total | | Level 1 | | Level 2 | | Level 3 |
Recurring fair value measurements: | | | | | | | |
Available-for-sale securities | $ | 51 |
| | $ | 51 |
| | $ | — |
| | $ | — |
|
Derivative assets | 85 |
| | — |
| | 85 |
| | — |
|
Derivative liabilities | (286 | ) | | — |
| | (286 | ) | | — |
|
|
| | | | | | | | | | | | | | | |
December 31, 2017 (dollars in millions) | Total | | Level 1 | | Level 2 | | Level 3 |
Recurring fair value measurements: | | | | | | | |
Available-for-sale securities | $ | 64 |
| | $ | 64 |
| | $ | — |
| | $ | — |
|
Derivative assets | 253 |
| | — |
| | 253 |
| | — |
|
Derivative liabilities | (78 | ) | | — |
| | (78 | ) | | — |
|
Valuation Techniques. Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally, and are measured at fair value using closing stock prices from active markets. Our derivative assets and liabilities include foreign exchange contracts that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks.
As of SeptemberJune 30, 2018, there were no significant transfers in or out of Level 1 and Level 2.
As of September 30, 2018,2019, 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 SeptemberJune 30, 20182019 and December 31, 2017:2018:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(dollars in millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Long-term receivables | $ | 384 |
| | $ | 370 |
| | $ | 334 |
| | $ | 314 |
|
Customer financing notes receivable | 283 |
| | 282 |
| | 272 |
| | 265 |
|
Short-term borrowings | (1,139 | ) | | (1,139 | ) | | (1,469 | ) | | (1,469 | ) |
Long-term debt (excluding finance leases) | (44,027 | ) | | (47,458 | ) | | (43,996 | ) | | (44,003 | ) |
Long-term liabilities | (422 | ) | | (399 | ) | | (508 | ) | | (467 | ) |
|
| | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
(dollars in millions) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Long-term receivables | $ | 128 |
| | $ | 125 |
| | $ | 127 |
| | $ | 121 |
|
Customer financing notes receivable | 458 |
| | 433 |
| �� | 609 |
| | 596 |
|
Short-term borrowings | (1,576 | ) | | (1,576 | ) | | (392 | ) | | (392 | ) |
Long-term debt (excluding capitalized leases) | (38,344 | ) | | (38,803 | ) | | (27,067 | ) | | (29,180 | ) |
Long-term liabilities | (295 | ) | | (263 | ) | | (362 | ) | | (330 | ) |
The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Condensed Consolidated Balance Sheet at SeptemberJune 30, 20182019 and December 31, 2017:2018:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 |
(dollars in millions) | Total | | Level 1 | | Level 2 | | Level 3 |
Long-term receivables | $ | 370 |
| | $ | — |
| | $ | 370 |
| | $ | — |
|
Customer financing notes receivable | 282 |
| | — |
| | 282 |
| | — |
|
Short-term borrowings | (1,139 | ) | | — |
| | (855 | ) | | (284 | ) |
Long-term debt (excluding finance leases) | (47,458 | ) | | — |
| | (47,035 | ) | | (423 | ) |
Long-term liabilities | (399 | ) | | — |
| | (399 | ) | | — |
|
|
| | | | | | | | | | | | | | | |
| September 30, 2018 |
(dollars in millions) | Total | | Level 1 | | Level 2 | | Level 3 |
Long-term receivables | $ | 125 |
| | $ | — |
| | $ | 125 |
| | $ | — |
|
Customer financing notes receivable | 433 |
| | — |
| | 433 |
| | — |
|
Short-term borrowings | (1,576 | ) | | — |
| | (1,380 | ) | | (196 | ) |
Long-term debt (excluding capitalized leases) | (38,803 | ) | | — |
| | (38,465 | ) | | (338 | ) |
Long-term liabilities | (263 | ) | | — |
| | (263 | ) | | — |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
(dollars in millions) | Total | | Level 1 | | Level 2 | | Level 3 |
Long-term receivables | $ | 314 |
| | $ | — |
| | $ | 314 |
| | $ | — |
|
Customer financing notes receivable | 265 |
| | — |
| | 265 |
| | — |
|
Short-term borrowings | (1,469 | ) | | — |
| | (1,258 | ) | | (211 | ) |
Long-term debt (excluding finance leases) | (44,003 | ) | | — |
| | (43,620 | ) | | (383 | ) |
Long-term liabilities | (467 | ) | | — |
| | (467 | ) | | — |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
(dollars in millions) | Total | | Level 1 | | Level 2 | | Level 3 |
Long-term receivables | $ | 121 |
| | $ | — |
| | $ | 121 |
| | $ | — |
|
Customer financing notes receivable | 596 |
| | — |
| | 596 |
| | — |
|
Short-term borrowings | (392 | ) | | — |
| | (300 | ) | | (92 | ) |
Long-term debt (excluding capitalized leases) | (29,180 | ) | | — |
| | (28,970 | ) | | (210 | ) |
Long-term liabilities | (330 | ) | | — |
| | (330 | ) | | — |
|
We had commercial aerospace financing and other contractual commitments totaling approximately $15.1$15.9 billion and $15.315.5 billion as of SeptemberJune 30, 20182019 and December 31, 20172018, respectively, related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms. Associated risks on these commitments from changes in interest rates are mitigated because interest rates are variable during the commitment term and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded.
Note 11: Long-Term Financing Receivables
Our long-term financing receivables primarily represent balances related to ourthe aerospace businesses such as long-term trade accounts receivable, notes receivable,leases, and leasesnotes receivable. We also have other long-term receivables related toin our commercial businesses; however, both the individual and aggregate amounts of those other receivables are not significant.
Prior to the adoption of the New Revenue Standard, long-term trade accounts receivable, including unbilled receivables related to long-term aftermarket contracts, were principally amounts arising from the sale of goods and the delivery of services with a contract maturity date or realization period of greater than one year and were recognized as "Other assets" in our Condensed Consolidated Balance Sheet. With the adoption of the New Revenue Standard, these unbilled receivables are classified as non-current contract assets and are recognized as "Other assets" in our Condensed Consolidated Balance Sheet. Notes and leases receivable represent notes and lease receivables other than receivables related to operating leases, and are recognized as "Customer financing assets" in our Condensed Consolidated Balance Sheet. The following table summarizes the balance by class of aerospace business related long-term receivables as of SeptemberJune 30, 20182019 and December 31, 2017.
2018:
|
| | | | | | | |
(dollars in millions) | June 30, 2019 | | December 31, 2018 |
Long-term trade accounts receivable | $ | 294 |
| | $ | 269 |
|
Notes and leases receivable | 256 |
| | 258 |
|
Total long-term receivables | $ | 550 |
| | $ | 527 |
|
|
| | | | | | | |
(dollars in millions) | September 30, 2018 | | December 31, 2017 |
Long-term trade accounts receivable | $ | 64 |
| | $ | 973 |
|
Notes and leases receivable | 430 |
| | 424 |
|
Total long-term receivables | $ | 494 |
| | $ | 1,397 |
|
Customer credit ratings range from customers with an extremely strong capacity to meet financial obligations to customers whose uncollateralized receivables arereceivable 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. The decrease in Long-term trade accounts receivable from December 31, 2017 is primarily driven by the reclassification of unbilled receivables related to long-term aftermarket contracts to contract assets in accordance with the New Revenue Standard as described above. Based upon the customer credit ratings, approximately $140 million and $170$150 million of our total long-term receivables were considered to bear high credit risk as of SeptemberJune 30, 20182019 and December 31, 2017, respectively.2018.
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 $18$23 million and $17$16 million as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, are individually evaluated for impairment. At SeptemberJune 30, 20182019 and December 31, 2017,2018, we did not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or are considered to be unrecoverable.impaired.
Note 12: Shareowners' Equity and Noncontrolling Interest
A summary of the changes in shareowners' equity and noncontrolling interest comprising total equity for the quarter and nine months ended September 30, 2018 and 2017 is provided below:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 30, |
| 2018 | | 2017 |
(dollars in millions) | Share-owners' Equity | | Non-controlling Interest | | Total Equity | | Share-owners' Equity | | Non-controlling Interest | | Total Equity |
Equity, beginning of period | $ | 31,364 |
| | $ | 1,982 |
| | $ | 33,346 |
| | $ | 28,442 |
| | $ | 1,713 |
| | $ | 30,155 |
|
Comprehensive income (loss) for the period: | | | | | | | | | | | |
Net income | 1,238 |
| | 111 |
| | 1,349 |
| | 1,330 |
| | 104 |
| | 1,434 |
|
Total other comprehensive (loss) income | (39 | ) | | (19 | ) | | (58 | ) | | 637 |
| | 40 |
| | 677 |
|
Total comprehensive income for the period | 1,199 |
| | 92 |
| | 1,291 |
| | 1,967 |
| | 144 |
| | 2,111 |
|
Common Stock issued under employee plans | 125 |
| | — |
| | 125 |
| | 86 |
| | — |
| | 86 |
|
Common Stock repurchased | (23 | ) | | — |
| | (23 | ) | | (60 | ) | | — |
| | (60 | ) |
Dividends on Common Stock | (536 | ) | | — |
| | (536 | ) | | (533 | ) | | — |
| | (533 | ) |
Dividends on ESOP Common Stock | (18 | ) | | — |
| | (18 | ) | | (19 | ) | | — |
| | (19 | ) |
Dividends attributable to noncontrolling interest | — |
| | (73 | ) | | (73 | ) | | — |
| | (105 | ) | | (105 | ) |
Capital contributions | — |
| | 138 |
| | 138 |
| | — |
| | 54 |
| | 54 |
|
Sale of subsidiary shares from noncontrolling interest, net | — |
| | — |
| | — |
| | 5 |
| | 9 |
| | 14 |
|
Acquisition of noncontrolling interest | — |
| | — |
| | — |
| | — |
| | 14 |
| | 14 |
|
Redeemable noncontrolling interest fair value adjustment | (6 | ) | | — |
| | (6 | ) | | (4 | ) | | — |
| | (4 | ) |
Other | 1 |
| | 5 |
| | 6 |
| | (3 | ) | | (19 | ) | | (22 | ) |
Equity, end of period | $ | 32,106 |
| | $ | 2,144 |
| | $ | 34,250 |
| | $ | 29,881 |
| | $ | 1,810 |
| | $ | 31,691 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
(dollars in millions) | Share-owners' Equity | | Non-controlling Interest | | Total Equity | | Share-owners' Equity | | Non-controlling Interest | | Total Equity |
Equity, beginning of period | $ | 29,610 |
| | $ | 1,811 |
| | $ | 31,421 |
| | $ | 27,579 |
| | $ | 1,590 |
| | $ | 29,169 |
|
Comprehensive income (loss) for the period: | | | | | | | | | | | |
Net income | 4,583 |
| | 273 |
| | 4,856 |
| | 4,155 |
| | 279 |
| | 4,434 |
|
Total other comprehensive (loss) income | (198 | ) | | (24 | ) | | (222 | ) | | 1,007 |
| | 83 |
| | 1,090 |
|
Total comprehensive income for the period | 4,385 |
| | 249 |
| | 4,634 |
| | 5,162 |
| | 362 |
| | 5,524 |
|
Common Stock issued under employee plans | 306 |
| | — |
| | 306 |
| | 256 |
| | — |
| | 256 |
|
Common Stock repurchased | (75 | ) | | — |
| | (75 | ) | | (1,430 | ) | | — |
| | (1,430 | ) |
Dividends on Common Stock | (1,606 | ) | | — |
| | (1,606 | ) | | (1,541 | ) | | — |
| | (1,541 | ) |
Dividends on ESOP Common Stock | (53 | ) | | — |
| | (53 | ) | | (54 | ) | | — |
| | (54 | ) |
Dividends attributable to noncontrolling interest | — |
| | (212 | ) | | (212 | ) | | — |
| | (217 | ) | | (217 | ) |
Capital contributions | — |
| | 300 |
| | 300 |
| | — |
| | 97 |
| | 97 |
|
(Purchase) sale of subsidiary shares from noncontrolling interest, net | (1 | ) | | (1 | ) | | (2 | ) | | 4 |
| | 4 |
| | 8 |
|
Acquisition of noncontrolling interest | — |
| | — |
| | — |
| | — |
| | 14 |
| | 14 |
|
Disposition of noncontrolling interest | — |
| | (8 | ) | | (8 | ) | | — |
| | — |
| | — |
|
Redeemable noncontrolling interest fair value adjustment | (8 | ) | | — |
| | (8 | ) | | (99 | ) | | — |
| | (99 | ) |
New Revenue Standard adoption impact | (480 | ) | | — |
| | (480 | ) | | — |
| | — |
| | — |
|
Other | 28 |
| | 5 |
| | 33 |
| | 4 |
| | (40 | ) | | (36 | ) |
Equity, end of period | $ | 32,106 |
| | $ | 2,144 |
| | $ | 34,250 |
| | $ | 29,881 |
| | $ | 1,810 |
| | $ | 31,691 |
|
Accumulated Other Comprehensive LossA summary of the changes in each component of Accumulated other comprehensive (loss) income,loss, net of tax for the quarterquarters and ninesix months ended SeptemberJune 30, 20182019 and 20172018 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 June 30, 2019 | | | | | | | | | |
Balance at March 31, 2019 | $ | (2,932 | ) | | $ | (6,422 | ) | | $ | — |
| | $ | (165 | ) | | $ | (9,519 | ) |
Other comprehensive (loss) income before reclassifications, net | (435 | ) | | (13 | ) | | — |
| | 21 |
| | (427 | ) |
Amounts reclassified, pre-tax | (1 | ) | | 43 |
| | — |
| | 16 |
| | 58 |
|
Tax expense (benefit) reclassified | 14 |
| | (6 | ) | | — |
| | (12 | ) | | (4 | ) |
Balance at June 30, 2019 | $ | (3,354 | ) | | $ | (6,398 | ) | | $ | — |
| | $ | (140 | ) | | $ | (9,892 | ) |
| | | | | | | | | |
Six Months Ended June 30, 2019 | | | | | | | | | |
Balance at December 31, 2018 | $ | (3,442 | ) | | $ | (5,718 | ) | | $ | — |
| | $ | (173 | ) | | $ | (9,333 | ) |
Other comprehensive income (loss) before reclassifications, net | 95 |
| | (14 | ) | | — |
| | 28 |
| | 109 |
|
Amounts reclassified, pre-tax | — |
| | 87 |
| | — |
| | 20 |
| | 107 |
|
Tax expense (benefit) reclassified | 1 |
| | (16 | ) | | — |
| | (15 | ) | | (30 | ) |
ASU 2018-02 adoption impact | (8 | ) | | (737 | ) | | — |
| | — |
| | (745 | ) |
Balance at June 30, 2019 | $ | (3,354 | ) | | $ | (6,398 | ) | | $ | — |
| | $ | (140 | ) | | $ | (9,892 | ) |
|
| | | | | | | | | | | | | | | | | | | |
(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 September 30, 2018 | | | | | | | | | |
Balance at June 30, 2018 | $ | (3,085 | ) | | $ | (4,499 | ) | | $ | — |
| | $ | (100 | ) | | $ | (7,684 | ) |
Other comprehensive (loss) income before reclassifications, net | (166 | ) | | (17 | ) | | — |
| | 95 |
| | (88 | ) |
Amounts reclassified, pre-tax | — |
| | 86 |
| | — |
| | 2 |
| | 88 |
|
Tax expense (benefit) | 4 |
| | (15 | ) | | — |
| | (28 | ) | | (39 | ) |
Balance at September 30, 2018 | $ | (3,247 | ) | | $ | (4,445 | ) | | $ | — |
| | $ | (31 | ) | | $ | (7,723 | ) |
| | | | | | | | | |
Nine Months Ended September 30, 2018 | | | | | | | | | |
Balance at December 31, 2017 | $ | (2,950 | ) | | $ | (4,652 | ) | | $ | 5 |
| | $ | 72 |
| | $ | (7,525 | ) |
Other comprehensive (loss) income before reclassifications, net | (354 | ) | | 9 |
| | — |
| | (105 | ) | | (450 | ) |
Amounts reclassified, pre-tax | (3 | ) | | 262 |
| | — |
| | (26 | ) | | 233 |
|
Tax expense (benefit) | 60 |
| | (64 | ) | | — |
| | 28 |
| | 24 |
|
ASU 2016-01 adoption impact | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Balance at September 30, 2018 | $ | (3,247 | ) | | $ | (4,445 | ) | | $ | — |
| | $ | (31 | ) | | $ | (7,723 | ) |
|
| | | | | | | | | | | | | | | | | | | |
(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 June 30, 2018 | | | | | | | | | |
Balance at March 31, 2018 | $ | (2,444 | ) | | $ | (4,579 | ) | | $ | — |
| | $ | 86 |
| | $ | (6,937 | ) |
Other comprehensive (loss) income before reclassifications, net | (564 | ) | | 18 |
| | — |
| | (245 | ) | | (791 | ) |
Amounts reclassified, pre-tax | (3 | ) | | 88 |
| | — |
| | (1 | ) | | 84 |
|
Tax (benefit) expense reclassified | (74 | ) | | (26 | ) | | — |
| | 60 |
| | (40 | ) |
Balance at June 30, 2018 | $ | (3,085 | ) | | $ | (4,499 | ) | | $ | — |
| | $ | (100 | ) | | $ | (7,684 | ) |
| | | | | | | | | |
Six Months Ended June 30, 2018 | | | | | | | | | |
Balance at December 31, 2017 | $ | (2,950 | ) | | $ | (4,652 | ) | | $ | 5 |
| | $ | 72 |
| | $ | (7,525 | ) |
Other comprehensive (loss) income before reclassifications, net | (188 | ) | | 26 |
| | — |
| | (200 | ) | | (362 | ) |
Amounts reclassified, pre-tax | (3 | ) | | 176 |
| | — |
| | (28 | ) | | 145 |
|
Tax expense (benefit) reclassified | 56 |
| | (49 | ) | | — |
| | 56 |
| | 63 |
|
ASU 2016-01 adoption impact | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Balance at June 30, 2018 | $ | (3,085 | ) | | $ | (4,499 | ) | | $ | — |
| | $ | (100 | ) | | $ | (7,684 | ) |
|
| | | | | | | | | | | | | | | | | | | |
(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 September 30, 2017 | | | | | | | | | |
Balance at June 30, 2017 | $ | (3,128 | ) | | $ | (4,882 | ) | | $ | 100 |
| | $ | (54 | ) | | $ | (7,964 | ) |
Other comprehensive income (loss) before reclassifications, net | 474 |
| | (37 | ) | | 12 |
| | 232 |
| | 681 |
|
Amounts reclassified, pre-tax | (3 | ) | | 132 |
| | (138 | ) | | (24 | ) | | (33 | ) |
Tax (benefit) expense reclassified | — |
| | (66 | ) | | 50 |
| | 5 |
| | (11 | ) |
Balance at September 30, 2017 | $ | (2,657 | ) | | $ | (4,853 | ) | | $ | 24 |
| | $ | 159 |
| | $ | (7,327 | ) |
| | | | | | | | | |
Nine Months Ended September 30, 2017 | | | | | | | | | |
Balance at December 31, 2016 | $ | (3,480 | ) | | $ | (5,045 | ) | | $ | 353 |
| | $ | (162 | ) | | $ | (8,334 | ) |
Other comprehensive income (loss) before reclassifications, net | 826 |
| | (39 | ) | | 11 |
| | 332 |
| | 1,130 |
|
Amounts reclassified, pre-tax | (3 | ) | | 395 |
| | (545 | ) | | (14 | ) | | (167 | ) |
Tax (benefit) expense reclassified | — |
| | (164 | ) | | 205 |
| | 3 |
| | 44 |
|
Balance at September 30, 2017 | $ | (2,657 | ) | | $ | (4,853 | ) | | $ | 24 |
| | $ | 159 |
| | $ | (7,327 | ) |
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 TCJA. We elected to reclassify the income tax effects of TCJA from AOCI of $745 million to retained earnings, effective January 1, 2019.In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Upon adoption, investments that do not result in consolidation and are not accounted for under the equity method generally must be carried at fair value, with changes in fair value recognized in net income. We had approximately $5 million of unrealized gains on these securities recorded in Accumulated other comprehensive loss in our Consolidated Balance Sheet as of December 31, 2017. We adopted this standard effective January 1, 2018, with these amounts recorded directly to retained earnings as of that date.
Amounts reclassified that relate to our defined benefit pension and postretirement plans include the amortization of prior service costs and actuarial net losses recognized during each period presented. These costs are recorded as components of net periodic pension cost for each period presented (see Note 7 for additional details).
Amounts reclassified that relate to unrealized gains (losses) on available-for-sale securities, pre-tax includes approximately $500 million of previously unrealized gains reclassified to other income as a result of sales of significant investments in available-for-sale securities in the nine months ended September 30, 2017, including UTC Climate, Controls & Security's sale of investments in Watsco, Inc.
All noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests) are reported in the mezzanine section of the Condensed Consolidated Balance Sheet, between liabilities and equity, at the greater of redemption value or initial carrying value.
Note 13: Variable Interest Entities
Pratt & Whitney holds a 61% 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 program through involvement with the collaborators. Additionally, Pratt & Whitney, JAEC and MTU are participants in International Aero Engines, LLC (IAE LLC), whose business purpose is to coordinate the design, development, manufacturing and product support for the PW1100G-JM engine for the Airbus A320neo aircraft and the PW1400G-JM engine for the Irkut MC21 aircraft. Pratt & Whitney holds a 59% net interest and a 59% ownership interest in IAE LLC. IAE and IAE LLC retain limited equity with the primary economics of the programs passed to the participants. As such, we have determined that IAE and IAE LLC are variable interest entities with Pratt & Whitney the primary beneficiary. IAE and IAE LLC have, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for variable interest entities in our Condensed Consolidated Balance Sheet are as follows:
|
| | | | | | | |
(dollars in millions) | June 30, 2019 | | December 31, 2018 |
Current assets | $ | 4,484 |
| | $ | 4,732 |
|
Noncurrent assets | 1,700 |
| | 1,600 |
|
Total assets | $ | 6,184 |
| | $ | 6,332 |
|
| | | |
Current liabilities | $ | 5,121 |
| | $ | 4,946 |
|
Noncurrent liabilities | 1,884 |
| | 1,898 |
|
Total liabilities | $ | 7,005 |
| | $ | 6,844 |
|
|
| | | | | | | |
(dollars in millions) | September 30, 2018 | | December 31, 2017 |
Current assets | $ | 5,423 |
| | $ | 3,976 |
|
Noncurrent assets | 1,439 |
| | 1,534 |
|
Total assets | $ | 6,862 |
| | $ | 5,510 |
|
| | | |
Current liabilities | $ | 5,465 |
| | $ | 3,601 |
|
Noncurrent liabilities | 1,951 |
| | 2,086 |
|
Total liabilities | $ | 7,416 |
| | $ | 5,687 |
|
Note 14: Guarantees
We extend a variety of financial, market value and product performance guarantees to third parties. There have been no material changes to financial guarantees outstanding since December 31, 20172018. The changes in the carrying amount of service and product warranties and product performance guarantees for the ninesix months ended SeptemberJune 30, 20182019 and 20172018 are as follows:
|
| | | | | | | | |
(dollars in millions) | | 2019 | | 2018 |
Balance as of January 1 | | $ | 1,449 |
| | $ | 1,146 |
|
Warranties and performance guarantees issued | | 309 |
| | 233 |
|
Settlements made | | (241 | ) | | (200 | ) |
Other | | 5 |
| | (7 | ) |
Balance as of June 30 | | $ | 1,522 |
| | $ | 1,172 |
|
|
| | | | | | | | |
(dollars in millions) | | 2018 | | 2017 |
Balance as of January 1 | | $ | 1,146 |
| | $ | 1,199 |
|
Warranties and performance guarantees issued | | 472 |
| | 221 |
|
Settlements made | | (380 | ) | | (194 | ) |
Other | | (8 | ) | | 21 |
|
Balance as of September 30 | | $ | 1,230 |
| | $ | 1,247 |
|
Note 15: Contingent Liabilities
Summarized below are the matters previously described in Note 18 of the Notes to the Consolidated Financial Statements in our 20172018 Annual Report, incorporated by reference in our 20172018Form 10-K, updated as applicable. Except as otherwise noted, while we are unable to predict the final outcome, based on information currently available, we do not believe that resolution of any of the following matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Environmental. Our operations are subject to environmental regulation by federal, state and local authorities in the United States and authorities with jurisdiction over our foreign operations. As described in Note 1 to the Consolidated Financial Statements in our 20172018 Annual Report, we have accrued for the costs of environmental remediation activities, including but not limited to investigatory, remediation, operating and maintenance costs and performance guarantees, and periodically reassess these amounts. We believe that the likelihood of incurring losses materially in excess of amounts accrued is remote. Additional information pertaining to environmental matters is included in Note 1 to the Consolidated Financial Statements in our 20172018 Annual Report.
Government. In the ordinary course of business, the Company and its subsidiaries and our properties are subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations and threatened legal actions and proceedings. For example, we are now, and believe that, in light of the current U.S. Government contracting environment, we will continue to be the subject of one or more U.S. Government investigations. Such U.S. Government investigations often take years to complete and could result in administrative, civil or criminal liabilities, including repayments, fines, treble and other damages, forfeitures, restitution or penalties, or could lead to suspension or debarment of U.S. Government contracting or of export privileges. For instance, if we or one of our business units were charged with wrongdoing as a result of any of these investigations or other government investigations (including violations of certain anti-bribery, environmental or export laws) the U.S. Government could suspend us from bidding on or receiving awards of new U.S. Government contracts pending the completion of legal proceedings. If convicted or found liable, the U.S. Government could fine and debar us from new U.S. Government contracting for a period generally not to exceed three years. The U.S. Government also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other seriously improper conduct. The U.S. Government could also void any contracts found to be tainted by fraud.
Our contracts with the U.S. Government are also subject to audits. Like many defense contractors, we have received audit reports which recommend thatrecommending the reduction of certain contract prices should be reduced to comply with various government regulations, including because, for example, cost or pricing data we submitted in negotiation of the contract prices or cost accounting practices used to price and negotiate those contracts may not
have conformed to government regulations, or that certain payments be delayed or withheld.regulations. Some of these audit reports involvedrecommend that certain payments be repaid, delayed, or withheld, and may involve substantial amounts. We have made
voluntary refunds in those cases we believe appropriate, have settled some allegations and, in some cases, continue to litigate negotiate and/or challenge certain matters.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 accruedaccrue the minimum amount.
Legal Proceedings.
Cost Accounting Standards ClaimClaims
As previously disclosed, in December 2013,In April 2019, a Divisional Administrative Contracting Officer (DACO) of the United States Defense Contract Management Agency (DCMA) asserted a claim against Pratt & Whitney to recover overpayments of approximately $1.73 billion plus interest (approximately $506 million through June 30, 2019). The claim is based on Pratt & Whitney's alleged noncompliance with cost accounting standards from January 1, 2007 to March 31, 2019, due to its method of allocating independent research and development costs to government contracts. Pratt & Whitney believes that the claim is without merit and filed an appeal to the Armed Services Board of Contract Appeals (ASBCA) on June 7, 2019.
As previously disclosed, in December 2013, a DCMA DACO asserted a claim against Pratt & Whitney to recover overpayments of approximately $177 million plus interest (approximately $80$92 million through SeptemberJune 30, 2018)2019). 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,In 2014, Pratt & Whitney filed an appeal to the Armed Services Board of Contract Appeals. Pratt & Whitney’s appeal is still pendingASBCA. An evidentiary hearing was held and wecompleted in June 2019. The parties are now engaged in post-hearing briefing, and a decision from the ASBCA will follow. We continue to believe that the government’s claim is without merit. In December 2018, a DCMA DACO 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 $48.1 million through June 30, 2019), which we also believe is without merit and which Pratt & Whitney appealed to the ASBCA in January 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 $253$245 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 $139 $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 onin 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 $341$328 million and is principally recorded in Other long-term liabilities on our Condensed Consolidated Balance Sheet as of SeptemberJune 30, 2018.2019. 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 $156$147 million, which is included primarily in Other assets on our Condensed Consolidated Balance Sheet as of SeptemberJune 30, 2018.2019.
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, the 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 end of each year, the Company evaluateswill evaluate all of these factors and, with input from an outside actuarial expert, makesmake any necessary adjustments to both our estimated asbestos liabilities and insurance recoveries.
Other.
As described in Note 14 of this Form 10-Q and Note 17 to the Consolidated Financial Statements in our 20172018 Annual Report, we extend performance and operating cost guarantees beyond our normal warranty and service policies for extended periods on some of our products. We have accrued our estimate of the liability that may result under these guarantees and for service costs that are probable and can be reasonably estimated.
We also have other commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. We accrue contingencies based upon a range of possible outcomes. If no amount within this range is a better estimate than any other, then we accrue the minimum amount.
In the ordinary course of business, the Company and its subsidiaries are also routinely defendants in, parties to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some instances, claims for substantial monetary damages are asserted against the Company and its subsidiaries and could result in fines, penalties, compensatory or treble damages or non-monetary relief. We do not believe that these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Note 16: Leases
ASU 2016-02, Leases (Topic 842) and its related amendments (collectively, the New Lease Accounting Standard) are effective for reporting periods beginning after December 15, 2018. We adopted the New Lease Accounting Standard effective January 1, 2019 and elected the modified retrospective approach in which results for periods before 2019 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 Lease Accounting Standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the Condensed Consolidated Balance Sheet for all leases with terms longer than 12 months. Leases are 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.
We have elected certain of the practical expedients available under the New Lease Accounting Standard upon adoption. We have applied the practical expedient which allows prospective transition to the New Lease Accounting Standard on January 1, 2019. Under the transition practical expedient, we did not reassess lease classification, embedded leases or initial direct costs. We have applied the practical expedient for short-term leases. We have lease agreements with lease and non-lease components. We have elected the practical expedients to combine these components for certain equipment leases. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease right-of-use assets and liabilities. The adoption of the New Lease Accounting Standard did not have a material effect on our Condensed Consolidated Statement of Operations or Condensed Consolidated Statement of Cash Flows. Upon adoption, we recorded a $2.6 billion right-of-use asset and a $2.7 billion lease liability. The adoption of the New Lease Accounting Standard had an immaterial impact on retained earnings.
We enter into lease agreements for the use of real estate space, vehicles, information technology equipment, and certain otherequipment under operating and finance leases. We determine if an arrangement contains a lease at inception. Operating leases are included in Operating lease right-of-use assets, Accrued liabilities, and Operating lease liabilities in our Condensed Consolidated Balance Sheet. Finance leases are not considered significant to our Condensed Consolidated Balance Sheet or Condensed Consolidated Statement of Operations. Finance lease right-of-use assets at June 30, 2019 of $74 million are included in Other assets in our Condensed Consolidated Balance Sheet. Finance lease liabilities at June 30, 2019 of $85 million are included in Long term debt currently due, and Long term debt in our Condensed Consolidated Balance Sheet.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments, and use the implicit rate when readily determinable. We determine our incremental borrowing rate through market sources including relevant industry rates. Our lease right-of-use assets also include any lease pre-payments and exclude lease incentives. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. We exclude variable payments from lease right-of-use assets and lease liabilities, to the extent not considered fixed, and instead, expense variable payments as incurred. Variable lease expense and lease expense for short duration contracts is not a material component of lease expense. Our leases generally have remaining lease terms of 1 to 20 years, some of which include options to extend leases. The majority of our leases with options to extend are up to 5 years with the ability to terminate the lease within 1 year. The exercise of lease renewal options is at our sole discretion and our lease right-of-use assets and liabilities reflect only the options we are reasonably certain that we will exercise. Lease expense is recognized on a straight-line basis over the lease term.
In limited instances we act as a lessor, primarily for commercial aerospace engines and certain heating, ventilation and air conditioning (HVAC) systems and commercial equipment, all of which are classified as operating leases. These leases are not significant to our Condensed Consolidated Balance Sheet or Condensed Consolidated Statement of Operations.
Operating lease expense for the quarter and six months ended June 30, 2019 was $220 million and $379 million, respectively.
Supplemental cash flow information related to operating leases was as follows:
|
| | | | | | | |
(dollars in millions) | Quarter Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Operating cash flows for the measurement of operating lease liabilities | $ | (192 | ) | | $ | (337 | ) |
Operating lease right-of-use assets obtained in exchange for operating lease obligations | 174 |
| | 201 |
|
Operating lease right-of-use assets and liabilities are reflected on our Condensed Consolidated Balance Sheet as follows:
|
| | | |
(dollars in millions, except lease term and discount rate) | June 30, 2019 |
Operating lease right-of-use assets | $ | 2,740 |
|
| |
Accrued liabilities | $ | (580 | ) |
Operating lease liabilities | (2,258 | ) |
Total operating lease liabilities | $ | (2,838 | ) |
Supplemental balance sheet information related to operating leases was as follows:
|
| | |
| June 30, 2019 |
Weighted Average Remaining Lease Term (in years) | 6.8 |
|
Weighted Average Discount Rate | 3.6 | % |
Undiscounted maturities of operating lease liabilities as of June 30, 2019 are as follows:
|
| | | |
(dollars in millions) | Operating 1 |
|
2019 | $ | 344 |
|
2020 | 629 |
|
2021 | 543 |
|
2022 | 412 |
|
2023 | 287 |
|
Thereafter | 878 |
|
Total undiscounted lease payments | 3,093 |
|
Less imputed interest | (255 | ) |
Total discounted lease payments | $ | 2,838 |
|
1 Operating lease payments include $225 million related to options to extend lease terms that are reasonably certain of being exercised.
Prior to the adoption of the New Lease Accounting Standard, rental commitments on an undiscounted basis were approximately $2.9 billion at December 31, 2018 under long-term non-cancelable operating leases and were 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.
Note 16:17: Segment Financial Data
Our operations are classified into four principal segments: Otis, UTC Climate, Controls & Security,Carrier, Pratt & Whitney, and UTCCollins Aerospace Systems. The segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. As discussed in Note 7, 2017 amounts have been recast based on the adoption of ASU 2017-07.
Total sales by segment include inter-segment sales, which are generally made at prices approximating those that the selling entity is able to obtain on external sales. Results for the quarters ended SeptemberJune 30, 20182019 and 20172018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | Operating Profits | | Operating Profit Margins |
(dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Otis | $ | 3,348 |
| | $ | 3,344 |
| | $ | 515 |
| | $ | 488 |
| | 15.4 | % | | 14.6 | % |
Carrier | 4,962 |
| | 5,035 |
| | 836 |
| | 1,645 |
| | 16.8 | % | | 32.7 | % |
Pratt & Whitney | 5,150 |
| | 4,736 |
| | 424 |
| | 397 |
| | 8.2 | % | | 8.4 | % |
Collins Aerospace Systems | 6,576 |
| | 3,962 |
| | 1,172 |
| | 569 |
| | 17.8 | % | | 14.4 | % |
Total segments | 20,036 |
| | 17,077 |
| | 2,947 |
| | 3,099 |
| | 14.7 | % | | 18.1 | % |
Eliminations and other | (402 | ) | | (372 | ) | | (239 | ) | | (97 | ) | | | | |
General corporate expenses | — |
| | — |
| | (124 | ) | | (126 | ) | | | | |
Consolidated | $ | 19,634 |
| | $ | 16,705 |
| | $ | 2,584 |
| | $ | 2,876 |
| | 13.2 | % | | 17.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | Operating Profits | | Operating Profit Margins |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Otis | $ | 3,223 |
| | $ | 3,156 |
| | $ | 486 |
| | $ | 550 |
| | 15.1 | % | | 17.4 | % |
UTC Climate, Controls & Security | 4,880 |
| | 4,688 |
| | 844 |
| | 794 |
| | 17.3 | % | | 16.9 | % |
Pratt & Whitney | 4,789 |
| | 3,871 |
| | 109 |
| | 188 |
| | 2.3 | % | | 4.9 | % |
UTC Aerospace Systems | 3,955 |
| | 3,637 |
| | 610 |
| | 572 |
| | 15.4 | % | | 15.7 | % |
Total segments | 16,847 |
| | 15,352 |
| | 2,049 |
| | 2,104 |
| | 12.2 | % | | 13.7 | % |
Eliminations and other | (337 | ) | | (290 | ) | | (102 | ) | | 32 |
| | | | |
General corporate expenses | — |
| | — |
| | (109 | ) | | (104 | ) | | | | |
Consolidated | $ | 16,510 |
| | $ | 15,062 |
| | $ | 1,838 |
| | $ | 2,032 |
| | 11.1 | % | | 13.5 | % |
Results for the ninesix months ended SeptemberJune 30, 20182019 and 20172018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | Operating Profits | | Operating Profit Margins |
(dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Otis | $ | 6,444 |
| | $ | 6,381 |
| | $ | 941 |
| | $ | 938 |
| | 14.6 | % | | 14.7 | % |
Carrier | 9,285 |
| | 9,411 |
| | 1,365 |
| | 2,237 |
| | 14.7 | % | | 23.8 | % |
Pratt & Whitney | 9,967 |
| | 9,065 |
| | 857 |
| | 810 |
| | 8.6 | % | | 8.9 | % |
Collins Aerospace Systems | 13,089 |
| | 7,779 |
| | 2,028 |
| | 1,157 |
| | 15.5 | % | | 14.9 | % |
Total segments | 38,785 |
| | 32,636 |
| | 5,191 |
| | 5,142 |
| | 13.4 | % | | 15.8 | % |
Eliminations and other | (786 | ) | | (689 | ) | | (340 | ) | | (108 | ) | | | | |
General corporate expenses | — |
| | — |
| | (222 | ) | | (230 | ) | | | | |
Consolidated | $ | 37,999 |
| | $ | 31,947 |
| | $ | 4,629 |
| | $ | 4,804 |
| | 12.2 | % | | 15.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | Operating Profits | | Operating Profit Margins |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
Otis | $ | 9,604 |
| | $ | 9,091 |
| | $ | 1,424 |
| | $ | 1,536 |
| | 14.8 | % | | 16.9 | % |
UTC Climate, Controls & Security | 14,291 |
| | 13,292 |
| | 3,081 |
| | 2,562 |
| | 21.6 | % | | 19.3 | % |
Pratt & Whitney | 13,854 |
| | 11,699 |
| | 919 |
| | 908 |
| | 6.6 | % | | 7.8 | % |
UTC Aerospace Systems | 11,734 |
| | 10,888 |
| | 1,767 |
| | 1,637 |
| | 15.1 | % | | 15.0 | % |
Total segments | 49,483 |
| | 44,970 |
| | 7,191 |
| | 6,643 |
| | 14.5 | % | | 14.8 | % |
Eliminations and other | (1,026 | ) | | (813 | ) | | (210 | ) | | 9 |
| | | | |
General corporate expenses | — |
| | — |
| | (339 | ) | | (312 | ) | | | | |
Consolidated | $ | 48,457 |
| | $ | 44,157 |
| | $ | 6,642 |
| | $ | 6,340 |
| | 13.7 | % | | 14.4 | % |
Geographic sales are attributed to the geographic regions based on their location of origin. Segment information for the quarterquarters ended SeptemberJune 30, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
(dollars in millions) | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total | | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total |
United States | $ | 904 |
| $ | 2,707 |
| $ | 3,967 |
| $ | 4,797 |
| $ | 12,375 |
| | $ | 859 |
| $ | 2,618 |
| $ | 3,652 |
| $ | 2,776 |
| $ | 9,905 |
|
Europe | 992 |
| 1,301 |
| 112 |
| 988 |
| 3,393 |
| | 1,054 |
| 1,455 |
| 126 |
| 585 |
| 3,220 |
|
Asia Pacific | 1,200 |
| 737 |
| 294 |
| 210 |
| 2,441 |
| | 1,169 |
| 720 |
| 312 |
| 85 |
| 2,286 |
|
Other | 252 |
| 217 |
| 777 |
| 581 |
| 1,827 |
| | 262 |
| 242 |
| 646 |
| 516 |
| 1,666 |
|
Total segment | $ | 3,348 |
| $ | 4,962 |
| $ | 5,150 |
| $ | 6,576 |
| $ | 20,036 |
| | $ | 3,344 |
| $ | 5,035 |
| $ | 4,736 |
| $ | 3,962 |
| $ | 17,077 |
|
|
| | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Otis | | UTC Climate, Controls & Security | | Pratt & Whitney | | UTC Aerospace Systems | | Total |
Primary Geographical Markets | | | | | | | | | |
United States | $ | 864 |
| | $ | 2,537 |
| | $ | 3,696 |
| | $ | 2,805 |
| | $ | 9,902 |
|
Europe | 968 |
| | 1,377 |
| | 141 |
| | 560 |
| | 3,046 |
|
Asia Pacific | 1,129 |
| | 726 |
| | 316 |
| | 86 |
| | 2,257 |
|
Other | 262 |
| | 240 |
| | 636 |
| | 504 |
| | 1,642 |
|
Total segment | $ | 3,223 |
| | $ | 4,880 |
| | $ | 4,789 |
| | $ | 3,955 |
| | 16,847 |
|
Eliminations and other | | | | | | | | | (337 | ) |
Consolidated | | | | | | | | | $ | 16,510 |
|
Segment geographic information for the ninesix months ended SeptemberJune 30, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
(dollars in millions) | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total | | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total |
United States | $ | 1,816 |
| $ | 4,921 |
| $ | 7,699 |
| $ | 9,527 |
| $ | 23,963 |
| | $ | 1,704 |
| $ | 4,713 |
| $ | 6,773 |
| $ | 5,430 |
| $ | 18,620 |
|
Europe | 1,947 |
| 2,593 |
| 221 |
| 2,011 |
| 6,772 |
| | 2,059 |
| 2,839 |
| 299 |
| 1,192 |
| 6,389 |
|
Asia Pacific | 2,176 |
| 1,349 |
| 549 |
| 399 |
| 4,473 |
| | 2,091 |
| 1,405 |
| 680 |
| 169 |
| 4,345 |
|
Other | 505 |
| 422 |
| 1,498 |
| 1,152 |
| 3,577 |
| | 527 |
| 454 |
| 1,313 |
| 988 |
| 3,282 |
|
Total segment | $ | 6,444 |
| $ | 9,285 |
| $ | 9,967 |
| $ | 13,089 |
| $ | 38,785 |
| | $ | 6,381 |
| $ | 9,411 |
| $ | 9,065 |
| $ | 7,779 |
| $ | 32,636 |
|
|
| | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Otis | | UTC Climate, Controls & Security | | Pratt & Whitney | | UTC Aerospace Systems | | Total |
Primary Geographical Markets | | | | | | | | | |
United States | $ | 2,568 |
| | $ | 7,250 |
| | $ | 10,469 |
| | $ | 8,235 |
| | $ | 28,522 |
|
Europe | 3,028 |
| | 4,216 |
| | 440 |
| | 1,752 |
| | 9,436 |
|
Asia Pacific | 3,220 |
| | 2,131 |
| | 996 |
| | 255 |
| | 6,602 |
|
Other | 788 |
| | 694 |
| | 1,949 |
| | 1,492 |
| | 4,923 |
|
Total segment | $ | 9,604 |
| | $ | 14,291 |
| | $ | 13,854 |
| | $ | 11,734 |
| | 49,483 |
|
Eliminations and other | | | | | | | | | (1,026 | ) |
Consolidated | | | | | | | | | $ | 48,457 |
|
Segment sales disaggregated by product type and product versus service for the quarterquarters ended SeptemberJune 30, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
(dollars in millions) | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total | | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total |
Commercial and industrial, non aerospace | $ | 3,348 |
| $ | 4,962 |
| $ | 5 |
| $ | 12 |
| $ | 8,327 |
| | $ | 3,344 |
| $ | 5,035 |
| $ | 5 |
| $ | 15 |
| $ | 8,399 |
|
Commercial aerospace | — |
| — |
| 3,538 |
| 4,855 |
| 8,393 |
| | — |
| — |
| 3,369 |
| 3,024 |
| 6,393 |
|
Military aerospace | — |
| — |
| 1,607 |
| 1,709 |
| 3,316 |
| | — |
| — |
| 1,362 |
| 923 |
| 2,285 |
|
Total segment | $ | 3,348 |
| $ | 4,962 |
| $ | 5,150 |
| $ | 6,576 |
| $ | 20,036 |
| | $ | 3,344 |
| $ | 5,035 |
| $ | 4,736 |
| $ | 3,962 |
| $ | 17,077 |
|
|
| | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Otis | | UTC Climate, Controls & Security | | Pratt & Whitney | | UTC Aerospace Systems | | Total |
Product Type | | | | | | | | | |
Commercial and industrial, non aerospace | $ | 3,223 |
| | $ | 4,880 |
| | $ | 5 |
| | $ | 14 |
| | $ | 8,122 |
|
Commercial aerospace | — |
| | — |
| | 3,421 |
| | 3,031 |
| | 6,452 |
|
Military aerospace | — |
| | — |
| | 1,363 |
| | 910 |
| | 2,273 |
|
Total segment | $ | 3,223 |
| | $ | 4,880 |
| | $ | 4,789 |
| | $ | 3,955 |
| | 16,847 |
|
Eliminations and other | | | | | | | | | (337 | ) |
Consolidated | | | | | | | | | $ | 16,510 |
|
| | | | | | | | | |
Sales Type | | | | | | | | | |
Product | $ | 1,448 |
| | $ | 4,106 |
| | $ | 2,703 |
| | $ | 3,297 |
| | $ | 11,554 |
|
Service | 1,775 |
| | 774 |
| | 2,086 |
| | 658 |
| | 5,293 |
|
Total segment | $ | 3,223 |
| | $ | 4,880 |
| | $ | 4,789 |
| | $ | 3,955 |
| | 16,847 |
|
Eliminations and other | | | | | | | | | (337 | ) |
Consolidated | | | | | | | | | $ | 16,510 |
|
Segment sales disaggregated by product type and product versus service for the ninesix months ended SeptemberJune 30, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
(dollars in millions) | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total | | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total |
Commercial and industrial, non aerospace | $ | 6,444 |
| $ | 9,285 |
| $ | 28 |
| $ | 26 |
| $ | 15,783 |
| | $ | 6,381 |
| $ | 9,411 |
| $ | 26 |
| $ | 30 |
| $ | 15,848 |
|
Commercial aerospace | — |
| — |
| 6,913 |
| 9,683 |
| 16,596 |
| | — |
| — |
| 6,568 |
| 5,935 |
| 12,503 |
|
Military aerospace | — |
| — |
| 3,026 |
| 3,380 |
| 6,406 |
| | — |
| — |
| 2,471 |
| 1,814 |
| 4,285 |
|
Total segment | $ | 6,444 |
| $ | 9,285 |
| $ | 9,967 |
| $ | 13,089 |
| $ | 38,785 |
| | $ | 6,381 |
| $ | 9,411 |
| $ | 9,065 |
| $ | 7,779 |
| $ | 32,636 |
|
|
| | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Otis | | UTC Climate, Controls & Security | | Pratt & Whitney | | UTC Aerospace Systems | | Total |
Product Type | | | | | | | | | |
Commercial and industrial, non aerospace | $ | 9,604 |
| | $ | 14,291 |
| | $ | 31 |
| | $ | 44 |
| | $ | 23,970 |
|
Commercial aerospace | — |
| | — |
| | 9,989 |
| | 8,966 |
| | 18,955 |
|
Military aerospace | — |
| | — |
| | 3,834 |
| | 2,724 |
| | 6,558 |
|
Total segment | $ | 9,604 |
| | $ | 14,291 |
| | $ | 13,854 |
| | $ | 11,734 |
| | 49,483 |
|
Eliminations and other | | | | | | | | | (1,026 | ) |
Consolidated | | | | | | | | | $ | 48,457 |
|
| | | | | | | | | |
Sales Type | | | | | | | | | |
Product | $ | 4,192 |
| | $ | 11,917 |
| | $ | 8,016 |
| | $ | 9,825 |
| | $ | 33,950 |
|
Service | 5,412 |
| | 2,374 |
| | 5,838 |
| | 1,909 |
| | 15,533 |
|
Total segment | $ | 9,604 |
| | $ | 14,291 |
| | $ | 13,854 |
| | $ | 11,734 |
| | 49,483 |
|
Eliminations and other | | | | | | | | | (1,026 | ) |
Consolidated | | | | | | | | | $ | 48,457 |
|
Segment sales disaggregated by sales type for the quarters ended June 30, 2019 and 2018 are as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
(dollars in millions) | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total | | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total |
Product | $ | 1,511 |
| $ | 4,138 |
| $ | 3,305 |
| $ | 5,440 |
| $ | 14,394 |
| | $ | 1,525 |
| $ | 4,213 |
| $ | 2,775 |
| $ | 3,340 |
| $ | 11,853 |
|
Service | 1,837 |
| 824 |
| 1,845 |
| 1,136 |
| 5,642 |
| | 1,819 |
| 822 |
| 1,961 |
| 622 |
| 5,224 |
|
Total segment | $ | 3,348 |
| $ | 4,962 |
| $ | 5,150 |
| $ | 6,576 |
| $ | 20,036 |
| | $ | 3,344 |
| $ | 5,035 |
| $ | 4,736 |
| $ | 3,962 |
| $ | 17,077 |
|
Segment sales disaggregated by sales type for the six months ended June 30, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
(dollars in millions) | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total | | Otis | Carrier | Pratt & Whitney | Collins Aerospace Systems | Total |
Product | $ | 2,791 |
| $ | 7,705 |
| $ | 6,278 |
| $ | 10,846 |
| $ | 27,620 |
| | $ | 2,744 |
| $ | 7,811 |
| $ | 5,312 |
| $ | 6,528 |
| $ | 22,395 |
|
Service | 3,653 |
| 1,580 |
| 3,689 |
| 2,243 |
| 11,165 |
| | 3,637 |
| 1,600 |
| 3,753 |
| 1,251 |
| 10,241 |
|
Total segment | $ | 6,444 |
| $ | 9,285 |
| $ | 9,967 |
| $ | 13,089 |
| $ | 38,785 |
| | $ | 6,381 |
| $ | 9,411 |
| $ | 9,065 |
| $ | 7,779 |
| $ | 32,636 |
|
Note 17:18: Accounting Pronouncements
In FebruaryJune 2016, the FASB issued ASU 2016-02, LeasesAccounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability328): Measurement of Credit Losses 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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, LeasesFinancial Instruments. This ASU makes various targeted amendmentsamends the impairment model to the leasing standard and we are evaluating this ASUutilize an expected loss methodology in connection with adoptionplace of the standard. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This standard allowsincurred loss methodology for financial instruments, including trade receivables, and off-balance sheet credit exposures. The amendment requires entities to initially apply the new leases standard at the adoption date and recognizeconsider a cumulative-effect adjustmentbroader range of information to the opening balanceestimate expected credit losses, which may result in earlier recognition of retained earnings in the period of adoption. We will be adopting this alternative transition method when adopting the new leasing standard as of January 1, 2019. We expect that upon adoption of these standards, we will recognize ROU assets and lease liabilities and that the amounts will be material. We do not expect ASU 2016-02 to have a material impact on our cash flows or results of operations.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). The new standard allows companies to reclassify to retained earnings the stranded tax effects in accumulated other comprehensive income (AOCI) from the newly-enacted U.S. Tax Cuts and Jobs Act. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We expect that upon adoption we will recognize a reclassification from AOCI to retained earnings that could be material, primarily related to pension. 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 includes updates to the disclosure requirements for fair value measurements including several additions, deletions and modifications to the disclosure requirements.losses. 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.ASU and its related amendments.
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. This standard did not have a material impact on our financial statement disclosures. We early adopted this standard effective January 1, 2019.
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 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 generally accepted accounting principles (GAAP)). 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. 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 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 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.
With respect to the unaudited condensed consolidated financial information of UTC for the quarterquarters and ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, 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 OctoberJuly 26, 2018,2019, 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 Shareowners and Board of Directors of United Technologies Corporation
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of United Technologies Corporation and its subsidiaries (the “Company”) as of SeptemberJune 30, 2018,2019, and the related condensed consolidated statements of operations, and of comprehensive income and of changes in equity for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 20172018 and the condensed consolidated statementstatements of cash flows for the nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 2017,2018, including the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the CorporationCompany as of December 31, 2017,2018, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for the year then ended (not presented herein), and in our report dated February 8,7, 2019, which included a paragraph describing a change in the manner of accounting for revenue from contracts with customers and net periodic benefit cost in the 2018 financial statements, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet information as of December 31, 20172018 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Corporation’sCompany’s management.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 CorporationCompany 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 review in accordance with the standards of the PCAOB. 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 PCAOB, 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.
/s/ PricewaterhouseCoopers LLP
Hartford, CT
OctoberJuly 26, 20182019
| |
Item 2. | 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, UTC Climate, Controls & Security,Carrier, Pratt & Whitney, and UTCCollins Aerospace Systems. Otis and UTC Climate, Controls & SecurityCarrier are referred to as the "commercial businesses," while Pratt & Whitney and UTCCollins Aerospace Systems are referred to as the "aerospace businesses."
The current status of significant factors affecting our business environment in 20182019 is discussed below. For additional discussion, refer to the "Business Overview" section in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 20172018 Annual Report, which is incorporated by reference in our 2017 2018 Form 10-K.10-K. General
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 (OEM) 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 UTC Climate, Controls & SecurityCarrier 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 the public and private sectors, and our businesses reflect an extensive geographic diversification that has evolved with continued globalization.
Our military businesses' sales are affected by U.S. Department of Defense budget and spending levels. Total sales to the U.S. Government were $1.9 billion and $1.4 billion for the quarters ended September 30, 2018 and 2017, 11% and 9% of total UTC sales for those periods, respectively. The defense portion of our aerospace business is affected bylevels, changes in market demand and the global political environment. Total sales to the U.S. Government were $2.7 billion and $1.8 billion for the quarters ended June 30, 2019 and 2018, 14% and 11% of total UTC sales for those periods, respectively. Our participation in long-term production, development and sustainment programs for the U.S. Government has and is expected to contribute positively to our results in 2018.2019.
As has been previously disclosed, 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 the Collins Aerospace Systems and Pratt & Whitney businesses, and Otis and Carrier will 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 in the first half of 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 (subject to UTC’s agreement to consummate the distributions pursuant to, and subject to the terms and conditions of, the Raytheon merger agreement). See Notes To Condensed Consolidated Financial Statements, Note 1 for additional information regarding the Raytheon transaction.
On June 9, 2019, UTC entered into a merger agreement with Raytheon Company (“Raytheon”) providing for an all-stock merger of equals transaction. The Raytheon merger agreement provides, among other things, that each share of Raytheon common stock issued and outstanding immediately prior to the closing of the Raytheon merger (except for shares held by Raytheon as treasury stock) will be converted into the right to receive 2.3348 shares of UTC common stock. Upon the closing of the Raytheon merger, Raytheon will become a wholly-owned subsidiary of UTC, and UTC will change its name to Raytheon Technologies Corporation. The Raytheon merger is continuingexpected to undertake a strategic reviewclose in the first half of 2020 and is subject to customary closing conditions, including receipt of required regulatory approvals and the approval of both Raytheon’s and our shareowners, as well as the completion of UTC's previously announced separation of its portfolio ofOtis and Carrier businesses. There can be no assurance as to the outcome of any such process or that any such process will result in a transaction, or if a transaction is undertaken, as to its terms or timing.
Acquisition Activity
Our growth strategy contemplates acquisitions. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated, and anticipated synergies or cost savings are achieved. During the ninesix months ended SeptemberJune 30, 2018,2019, our investment in business acquisitions was $177$32 million, which primarily reflects an acquisitionconsisted of small acquisitions at Pratt & Whitney. On September 4, 2017, we announced that we had entered into a merger agreement with Rockwell Collins, under which we agreed to acquire Rockwell Collins. See Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets for additional discussion. We do not expect to have additional significant acquisition spend, other than the pending acquisition of Rockwell Collins. However, actual acquisition spending may vary depending upon the timing, availability and value of acquisition opportunities. To help manage the cash flow and liquidity resulting from the pending acquisition, we have suspended share repurchases, excluding activity relating to our equity award programs and employee savings plans.Otis.
Other
Government legislation, policies and regulations can have a negative impact on our worldwide operations. Government regulation of refrigerants and energy efficiency standards, elevator safety codes and fire protection regulations are important to
our commercial businesses. Government and market-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, and government procurement practices can impact our aerospace and defense businesses.
Global economic and political conditions, changes in raw material and commodity prices, interest rates, foreign currency exchange rates, energy costs, levels of end market demand in construction, levels of air travel, the financial condition of commercial airlines, and the impact from natural disasters and weather conditions create uncertainties that could impact our earnings outlook for the remainder of 2018.2019. With regard to political conditions, the U.S. Government suspended Turkey’s participation in the F-35 Joint Strike Fighter program because Turkey accepted delivery of the Russian-built S-400 air and missile defense system. The U.S. may also impose sanctions on Turkish entities as a result. Turkish companies supply components, some of which are sole-sourced, to our aerospace businesses for commercial and military engines and aerospace products. Depending upon the scope and timing of U.S. sanctions on Turkey and potential reciprocal actions, if any, such sanctions or actions could impact our aerospace businesses’ sources of supply and could have a material adverse effect on our results of operations, cash flows or financial condition. See Part I, Item 1A, "Risk Factors" in our 20172018 Form 10-K for further discussion.
The following activity is disclosed as required by Section 13(r)(1)(D) of the Securities Exchange Act of 1934, as amended, as transactions or dealings with the government of Iran that have not been specifically authorized by a U.S. federal department or agency:
Beginning in June 2016, Rockwell Collins provided access to two of its Flight Management Systems databases containing navigation and mapping information to MPT Maintenance, a South African aircraft maintenance provider, to support a Beechcraft B300 King Air aircraft owned by Iran Airports Company. MPT Maintenance purchased a subscription to the databases that ran through November 2017, and was automatically renewed in December 2017, and again in December 2018. MPT Maintenance paid a total of $11,365 for the original subscription and the first renewal, but it did not pay for the second renewal and Rockwell Collins disabled the subscription in mid-December 2018. The last download from the databases under the subscription occurred in early December 2018. In May 2019, MPT Maintenance sought to reopen the subscription, and at that time, Rockwell Collins recognized the transaction was impermissible. Iran Airports Company is believed to be owned by the Ministry of Roads and Urban Development, an agency of the Government of Iran. UTC and its affiliates did not receive any revenues or profits attributable to this subscription after its acquisition of Rockwell Collins and has filed the relevant disclosure with the Treasury Department’s Office of Foreign Assets Control. UTC and its affiliates do not intend to engage in any further activity with Iran Airports Company.
CRITICAL ACCOUNTING ESTIMATES
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. We believe 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. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in our 20172018 Annual Report, incorporated by reference in our 20172018Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. Effective January 1, 2018, we adopted ASU 2014-09 and its related amendments (collectively, There have been no significant changes in our critical accounting estimates during the New Revenue Standard) and elected the modified retrospective approach. Note 2 of the condensed consolidated financial statements contains further detail regarding the adoption of the New Revenue Standard and its impact on the statement of operations for the quarter and ninesix months ended SeptemberJune 30, 2018 and the balance sheet as of September 30, 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. Also as described in Note 2, 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 UTC Climate, Controls & Security; 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. For further discussion of significant judgments and estimates related to long-term contract accounting, see the Critical Accounting Estimates disclosure in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Form 10-K.2019.
RESULTS OF OPERATIONS
Net Sales
| | | Quarter Ended September 30, | | Nine Months Ended September 30, | Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Net Sales | $ | 16,510 |
| | $ | 15,062 |
| | $ | 48,457 |
| | $ | 44,157 |
| $ | 19,634 |
| | $ | 16,705 |
| | $ | 37,999 |
| | $ | 31,947 |
|
The factors contributing to the total percentage change year-over-year in total net sales for the quarter and ninesix months ended SeptemberJune 30, 20182019 are as follows:
| | | Quarter Ended September 30, 2018 | | Nine Months Ended September 30, 2018 | Quarter Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Organic change | 8 | % | | 7 | % | 6 | % | | 7 | % |
Foreign currency translation | (1 | )% | | 1 | % | (1 | )% | | (2 | )% |
Other | 3 | % | | 2 | % | |
Acquisitions and divestitures, net | | 13 | % | | 14 | % |
Total % change | 10 | % | | 10 | % | 18 | % | | 19 | % |
All four segments experienced organic sales growth for both the quarter and ninesix months ended SeptemberJune 30, 2018.2019. During the quarter ended SeptemberJune 30, 2018, Pratt & Whitney sales grew 13% organically, driven by higher commercial aftermarket, commercial OEM, and military sales. UTC2019, Collins Aerospace Systems sales grew 9% organically, primarily driven by higher commercial aerospaceaftermarket and military OEM and aftermarket sales, and higher military sales. Organic sales growth of 7% at Climate, ControlsPratt & Security was driven by growth in global commercial HVAC, North America residential HVAC, and transport refrigeration. OtisWhitney sales grew 4%9% organically, reflecting higher sales across all channels. Otis experienced 4% organic growth, reflecting higher service sales across all regions, and higher new equipment sales driven by growth in Europe and North America, and higher serviceChina. Organic sales growth of 2% at Carrier was driven by growth in North Americaglobal HVAC and Asia.
transport refrigeration. The 13% increase in Acquisitions and divestitures, net for the quarter ended June 30, 2019 primarily reflects the impact of the November 26, 2018 acquisition of Rockwell Collins.
During the ninesix months ended SeptemberJune 30, 2018,2019, Pratt & Whitney sales grew 11% organically, reflecting higher commercial aftermarket, military, and commercial OEM sales. UTCsales across all channels. Collins Aerospace Systems sales grew 7%10% organically, driven byreflecting higher commercial aftermarket, commercial OEM, and military sales. Organic sales growth of 6% at Climate, Controls & SecurityOtis reflects higher new equipment sales driven by China and the Americas, and higher service sales across all regions. Organic sales growth of 3% at Carrier was driven by growth in North America residential HVAC,transport refrigeration, as well as global commercial HVAC,HVAC. The 14% increase in Acquisitions and transport refrigeration. Otis sales grew 2% organically, reflecting higher service sales, driven by growth in North America and Asia. Otis new equipment sales were up slightly as growth in Europe and North America was partially offset by a decline in China.divestitures, net for the six months ended June 30, 2019 primarily reflects the impact of the November 26, 2018 acquisition of Rockwell Collins.
Cost of Products and Services Sold
| | | Quarter Ended September 30, | Nine Months Ended September 30, | Quarter Ended June 30, | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Total cost of products and services sold | $ | 12,536 |
| | $ | 11,106 |
| | $ | 36,238 |
| | $ | 32,406 |
| $ | 14,413 |
| | $ | 12,422 |
| | $ | 28,120 |
| | $ | 23,702 |
|
Percentage of net sales | 75.9 | % | | 73.7 | % | | 74.8 | % | | 73.4 | % | 73.4 | % | | 74.4 | % | | 74.0 | % | | 74.2 | % |
The factors contributing to the percentage change year-over-year for the quarter and ninesix months ended SeptemberJune 30, 20182019 in total cost of products and services sold are as follows:
| | | Quarter Ended September 30, 2018 | | Nine Months Ended September 30, 2018 | Quarter Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Organic change | 10 | % | | 8 | % | 6 | % | | 7 | % |
Foreign currency translation | (1 | )% | | 1 | % | (2 | )% | | (2 | )% |
Other | 4 | % | | 3 | % | |
Acquisitions and divestitures, net | | 12 | % | | 14 | % |
Total % change | 13 | % | | 12 | % | 16 | % | | 19 | % |
The organic increase in total cost of products and services sold for the quarter and ninesix months ended SeptemberJune 30, 20182019 was primarily driven by the organic sales increases noted above. The 4% increase in OtherAcquisitions and divestitures, net of 12% and 14% for the quarter ended September 30, 2018 primarily reflects an increase in cost of sales related to a current year customer contract settlement (3%) and the absence of a prior year decrease to cost of sales related to a prior year customer contract matter (2%) at Pratt & Whitney. The 3% increase in Other for the ninesix months ended SeptemberJune 30, 20182019 respectively, primarily reflects the impact of the adoptionacquisition of the New Revenue Standard (1%), a current year customer contract settlement at Pratt & Whitney (1%) and the absence of a prior year customer contract matter at Pratt & Whitney (1%).Rockwell Collins.
Gross Margin
| | | Quarter Ended September 30, | | Nine Months Ended September 30, | Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Gross margin | $ | 3,974 |
| | $ | 3,956 |
| | $ | 12,219 |
| | $ | 11,751 |
| $ | 5,221 |
| | $ | 4,283 |
| | $ | 9,879 |
| | $ | 8,245 |
|
Percentage of net sales | 24.1 | % | | 26.3 | % | | 25.2 | % | | 26.6 | % | 26.6 | % | | 25.6 | % | | 26.0 | % | | 25.8 | % |
The decreaseincrease in gross margin as a percentage of sales for the quarter ended SeptemberJune 30, 2018 was2019 reflects a 300 basis point increase at Collins Aerospace Systems primarily driven by a 520the impact of the Rockwell Collins merger, including the resulting synergies achieved, as well as an increase in commercial aftermarket sales and cost reduction initiatives. Otis gross margin increased 50 basis point decline inpoints primarily driven by improved service margins. Pratt & Whitney's gross margin driven by the unfavorable year-over-year impact of customer contract matters and higher negative engine margin. Otis gross margin declined 22010 basis
points as lower aftermarket margins driven by unfavorable pricecontract adjustments were partially offset by higher product margins driven by cost reduction and mix.favorable mix on large commercial engine shipments. Gross margin at UTC Aerospace Systems declined 20Carrier was down 30 basis points as the benefit of higher commercial aftermarket volumes and cost reduction was more than offsetprimarily driven by adverse commercial OEMunfavorable mix and higher warranty expense. Gross margin at UTC Climate, Controls & Security was up slightly as favorable pricing and the favorable year-over-year impact of contract adjustments related to a large commercial project were largely offset by increased commodities, tariffs, and logistics costs.
The decreaseincrease in gross margin as a percentage of sales for the ninesix months ended SeptemberJune 30, 2018 includes2019 was primarily driven by a 30090 basis point declineincrease at Collins Aerospace Systems primarily driven the impact of the Rockwell Collins merger, including the resulting synergies achieved, and by an increase in commercial aftermarket sales and cost reduction initiatives. Otis gross margin was consistent with the prior year. Pratt & Whitney's gross margin declined 20 basis points as lower aftermarket margins driven by the unfavorable year-over-year impact of customer contract mattersadjustments were partially offset by higher product margins driven by cost reduction and higher negativefavorable mix on large commercial engine margin.shipments. Gross margin at Otis declined 170Carrier was down 40 basis points primarily driven by unfavorable pricemix and mix, primarily in China. Gross margin at UTC Climate, Controls & Security was consistent with the prior year as favorable pricing and the favorable year-over-year impact of contract adjustments related to a large commercial project were largely offset by increasedhigher commodities, tariffs, and logistics costs. UTC Aerospace Systems gross margin improved 30 basis points as the benefit of higher commercial aftermarket volumes and cost reduction more than offset adverse commercial OEM mix and higher warranty expense.
Research and Development
| | | Quarter Ended September 30, | | Nine Months Ended September 30, | Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Company-funded | $ | 586 |
| | $ | 592 |
| | $ | 1,729 |
| | $ | 1,797 |
| $ | 743 |
| | $ | 589 |
| | $ | 1,471 |
| | $ | 1,143 |
|
Percentage of net sales | 3.5 | % | | 3.9 | % | | 3.6 | % | | 4.1 | % | 3.8 | % | | 3.5 | % | | 3.9 | % | | 3.6 | % |
Customer-funded | $ | 356 |
| | $ | 359 |
| | $ | 1,044 |
| | $ | 1,094 |
| $ | 573 |
| | $ | 365 |
| | $ | 1,124 |
| | $ | 688 |
|
Percentage of net sales | 2.2 | % | | 2.4 | % | | 2.2 | % | | 2.5 | % | 2.9 | % | | 2.2 | % | | 3.0 | % | | 2.2 | % |
Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year fluctuations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses. The year-over-year decrease (1%increase (26%) in company-funded research and development for the quarter ended SeptemberJune 30, 20182019 was primarily driven by a decline at Pratt & Whitney (3%the impact of the Rockwell Collins merger (19%) reflecting lower. The remaining increase primarily reflects higher expenses across various commercial programs partially offset by an increase at UTC Climate, ControlsPratt & Security (2%Whitney (6%) to support the continued investment in new products. Company-funded research and development at UTC Aerospace Systems was consistent with the prior year as increased spend across various commercial programs was offset by the deferral of certain development costs in accordance with the New Revenue Standard.. For the ninesix months ended SeptemberJune 30, 20182019 company-funded research and development decreased 4%increased 29%, driven by lower spending at Pratt & Whitney (3%the impact of the Rockwell Collins acquisition (22%) and UTC Aerospace Systems (3%) reflecting lower. The remaining increase primarily reflects higher expenses across various commercial programs at Pratt & Whitney (6%) and the deferral of certain development costs in accordance with the New Revenue Standard, partially offset by an increase in spending at UTC Climate, Controls & Security (2%Collins Aerospace Systems (3%) to support the continued investment in new products..
The decrease (1%increase (57%) in customer-funded research and development for the quarter ended SeptemberJune 30, 2018 reflects a decline at UTC Aerospace Systems (3%)2019 was primarily driven by the deferralimpact of certainthe Rockwell Collins merger (62%). Excluding this impact, customer-funded research and development costs in accordance with the New Revenue Standard and lower expenses across various programs, partially offset by an increase at Pratt & Whitney (3%decreased (5%), primarily year-over-year driven by higherlower research and development expenses on military development programs.programs at Pratt & Whitney (8%), partially offset by an increase in military development programs at Collins Aerospace Systems (2%). The decline (5%increase (63%) in customer-funded research and development for the ninesix months ended SeptemberJune 30, 2018 reflects a decrease at UTC Aerospace Systems (5%), primarily2019 was also driven by the deferralimpact of certainthe Rockwell Collins acquisition (64%). Excluding this impact, customer-funded research and development costs in accordance with the New Revenue Standard, partially offset by an increase at Pratt & Whitney (3%decreased (1%), primarily driven by higher as lower research and development expenses on military development programs.programs at Pratt & Whitney (4%), were partially offset by higher expenses at Collins Aerospace Systems (2%).
Selling, General and Administrative
| | | Quarter Ended September 30, | | Nine Months Ended September 30, | Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Selling, general and administrative expenses | $ | 1,681 |
| | $ | 1,582 |
| | $ | 5,151 |
| | $ | 4,709 |
| $ | 2,106 |
| | $ | 1,759 |
| | $ | 4,103 |
| | $ | 3,470 |
|
Percentage of net sales | 10.2 | % | | 10.5 | % | | 10.6 | % | | 10.7 | % | 10.7 | % | | 10.5 | % | | 10.8 | % | | 10.9 | % |
Selling, general and administrative expenses increased 6%20% in the quarter ended SeptemberJune 30, 2018, but decreased 30 basis points as a percentage of net sales.2019. The increase reflects higherin expenses at UTC Aerospace Systems (3%) primarily driven by increased headcount and employee compensation related expenses; an increase at UTC Climate, Controls & Security (2%) primarily driven by employee compensation related expenses; and higher expenses at Otis (1%) resulting from higher labor and information technology costs. The increase also reflects transaction costs related toincludes the merger agreement withimpact of the Rockwell Collins (1%acquisition (11%), and costs associated with a strategic reviewthe Company's intention to separate its commercial businesses (9%). Excluding these impacts, selling, general and administrative expenses were consistent with the prior year at each of the Company's portfolio of businesses (1%), which were offset by the impact of lower restructuring expenses (1%), and a decrease resulting from the impact of foreign exchange (1%).four segments.
Selling, general and administrative expenses increased 9%18% in the ninesix months ended SeptemberJune 30, 2018, but decreased 10 basis points as a percentage of net sales. The increase reflects higher expenses at UTC Aerospace Systems (3%)2019, primarily driven by increased headcountthe impact of the Rockwell Collins acquisition (10%), costs associated with the Company's intention to separate its commercial businesses (6%) and employee compensation related expenses; an increase at UTC Climate, Controls & Security (2%higher restructuring costs (1%) primarily driven by employee compensation related expenses;. The growth in Selling, general and administrative expenses also includes higher expenses at Pratt & Whitney (1%) driven by increased headcount and employee compensation related expenses and costs to support higher volumes;volumes. Selling, general and higheradministrative expenses at Collins Aerospace Systems, Otis (1%) resulting from higher labor and information technology costs;Carrier were consistent with the unfavorable impact of foreign exchange (2%) and transaction costs related to the merger agreement with Rockwell Collins (1%).prior year.
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 8: Restructuring Costs and the Restructuring Costs section of this Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
Other Income, Net
| | | Quarter Ended September 30, | | Nine Months Ended September 30, | Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Other income, net | $ | 131 |
| | $ | 250 |
| | $ | 1,303 |
| | $ | 1,095 |
| $ | 212 |
| | $ | 941 |
| | $ | 324 |
| | $ | 1,172 |
|
Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, as well as other ongoing and nonrecurring items. The year-over-year decrease in Other income (48%(77%) for the quarter ended SeptemberJune 30, 2018 was2019 primarily driven byreflects the absence of the prior year gains on the sale of securities (48%).
The year-over-year increase in Other income, net (19%) for the nine months ended September 30, 2018 primarily reflects the gain on the sale of Taylor Company ($799 million, 73%(84%) and a gain on a divestiture at Pratt & Whitney (2%the net unfavorable year-over-year impact of foreign exchange gains and losses (3%), partially offset by the absence of a prior year gain from the sale of UTC Climate, Controls & Security's investments in Watsco, Inc (35%), the absence of prior year gains on the sale of securities (13%), an impairment of assets related to a previously acquired UTCbusiness at Collins Aerospace Systems business (4%(5%).
The year-over-year decrease in Other income, net (72%) andfor the six months ended June 30, 2019 primarily reflects the absence of athe prior year gain on the sale of an investment inTaylor Company (68%) and the net unfavorable year-over-year impact of foreign exchange gains and losses (5%), partially offset by the absence of a UTC Climate, Controls & Security joint venture (2%prior year impairment of assets related to a previously acquired business at Collins Aerospace Systems (4%).
Interest Expense, Net
| | | Quarter Ended September 30, | | Nine Months Ended September 30, | Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Interest expense | $ | 323 |
| | $ | 258 |
| | $ | 837 |
| | $ | 745 |
| $ | 438 |
| | $ | 258 |
| | $ | 888 |
| | $ | 514 |
|
Interest income | (65 | ) | | (35 | ) | | (116 | ) | | (83 | ) | (78 | ) | | (24 | ) | | (97 | ) | | (51 | ) |
Interest expense, net | $ | 258 |
| | $ | 223 |
| | $ | 721 |
| | $ | 662 |
| $ | 360 |
| | $ | 234 |
| | $ | 791 |
| | $ | 463 |
|
Average interest expense rate | 3.6 | % | | 3.6 | % | | 3.5 | % | | 3.6 | % | 3.6 | % | | 3.5 | % | | 3.7 | % | | 3.5 | % |
Interest expense, net increased 16%54% and 9%71% for the quarter and ninesix months ended SeptemberJune 30, 2018,2019, respectively. The increase in interest expense primarily 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: 1.8% 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 $1.1 billion of aggregate principal. The average maturity of our long-term debt at SeptemberJune 30, 20182019 is approximately 1110 years.
$9.2 billion of the $11 billion in aggregate principal amount of notes issued on August 16, 2018 is specifically designated to fund the cash consideration in the acquisition of Rockwell Collins and related fees, expenses and other amounts. Therefore, $9.2 billion of the net proceeds from the issuance have been classified as restricted cash as of September 30, 2018. We expect to use the remaining proceeds for general corporate purposes which may include the repayment of debt, including outstanding commercial paper. The increase in interest income for the quarter and ninesix months ended SeptemberJune 30, 20182019 was primarily reflectsdriven by interest earned on higher cash balances.income related to tax settlements.
Income Taxes
|
| | | | | | | | | | | |
| Quarter Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Effective tax rate | 23.7 | % | | 26.1 | % | | 25.2 | % | | 26.8 | % |
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). In accordance with Staff Accounting Bulletin 118 (SAB 118) issued on December 22, 2017, the U.S. income tax amounts recorded attributable to the TCJA’s deemed repatriation provision, the revaluation of U.S. deferred taxes and the tax consequences relating to states with current conformity to the Internal Revenue Code are provisional amounts. Due to the enactment date and tax complexities of the TCJA, the Company has not completed its accounting related to these items.
Prior to enactment of the TCJA, with few exceptions, U.S. income taxes had not been provided on undistributed earnings of UTC's international subsidiaries as the Company had intended to reinvest such earnings permanently outside the U.S. or to repatriate such earnings only when it was tax effective to do so. The Company continues to evaluate the impact of the TCJA on its existing accounting position related to the undistributed earnings. Due to the inherent complexities in determining any
incremental U.S. Federal and State taxes and the non-U.S. taxes that may be due if all of these earnings were remitted to the U.S. and as provided for by SAB 118 this evaluation has not yet been completed and no provisional amount has been recorded in regard to the undistributed amounts. After completing its evaluation, the Company will accrue any additional taxes due on previously undistributed earnings to be distributed in the future.
The Company will continue to accumulate and refine the relevant data and computational elements needed to finalize its accounting for the effects of the TCJA by December 22, 2018. |
| | | | | | | | | | | |
| Quarter Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Effective tax rate | 18.1 | % | | 24.5 | % | | 19.7 | % | | 25.8 | % |
The decrease in the effective tax rate for the quarter and nine months ended SeptemberJune 30, 20182019 is primarily duethe result of favorable adjustments related to the conclusion of the audit by the Examination Division of the Internal Revenue Service for the UTC 2014, 2015 and 2016 tax years and the filing by a subsidiary of the Company to participate in an amnesty program offered by the Italian Tax Authority. These benefits were partially offset by tax charges connected to the Company’s portfolio separation transactions.
The decrease in the estimated full year forecasted effective tax rate as a resultfor the six months ended June 30, 2019 is principally related to the items described above in addition to the impact of the enactmentTax Cuts and Jobs Act of TCJA. This is partially offset by2017 (TCJA) interpretive guidance and the absence of non-cash tax gains associated with certain federal, statethe TCJA provisional adjustments recorded through the second quarter of 2018.
The Company will continue to review and non-US tax year closures dueincorporate as necessary TCJA changes related to audit resolutionsforthcoming U.S. Treasury Regulations, other updates, and the expirationfinalization of applicable statutes of limitations in the third quarter of 2017.deemed inclusions to be reported on the Company’s 2018 U.S. federal income tax return.
As shown in the table above, the effective tax rate for the ninesix months ended SeptemberJune 30, 20182019 is 25.2%19.7%; the effective income tax rate for the same period, excluding restructuring, non-operational nonrecurring items is 24.1%23.1%. The rate is still subject to change as guidance and interpretations related to the TCJA continue to be finalized. We expectanticipate some variability in our full year annual effective incomethe tax
rate excluding restructuring, non-operational nonrecurring items and any provisional adjustments relatedquarter to quarter from potential discrete items. The Company expects to continue to incur tax costs associated with the TCJA.ongoing separation of its commercial businesses which is expected to be complete in the first half of 2020.
Net Income Attributable to Common Shareowners
| | | Quarter Ended September 30, | | Nine Months Ended September 30, | Quarter Ended June 30, | | Six Months Ended June 30, |
(dollars in millions, except per share amounts) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Net income attributable to common shareowners | $ | 1,238 |
| | $ | 1,330 |
| | $ | 4,583 |
| | $ | 4,155 |
| $ | 1,900 |
| | $ | 2,048 |
| | $ | 3,246 |
| | $ | 3,345 |
|
Diluted earnings per share from operations | $ | 1.54 |
| | $ | 1.67 |
| | $ | 5.72 |
| | $ | 5.20 |
| $ | 2.20 |
| | $ | 2.56 |
| | $ | 3.76 |
| | $ | 4.18 |
|
Net income attributable to common shareowners for the quarter ended SeptemberJune 30, 2019 includes restructuring charges, net of tax benefit, of $48 million, as well as a net gain for significant non-operational and/or nonrecurring items, including the impact of taxes, of $50 million. The offsetting effects of restructuring charges and significant non-operational and/or nonrecurring items resulted in no net impact on diluted earnings per share for the quarter ended June 30, 2019. The effect of foreign currency translation and Pratt &Whitney Canada hedging generated an unfavorable impact of $0.01 per diluted share.
Net income attributable to common shareowners for the quarter ended June 30, 2018 includes restructuring charges, net of tax benefit, of $28$59 million as well as a net chargegain for significant non-operational and/or nonrecurring items, netincluding the impact of tax,taxes, of $281 million.$531 million, primarily reflecting a gain on the sale of Taylor Company. The effect of restructuring charges and significant non-operational and/or nonrecurring items on diluted earnings per share for the quarter ended SeptemberJune 30, 2018 was a chargegain of $0.39 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging had no impact on diluted earnings per diluted share.
Net income from continuing operations attributable to common shareowners for the quarter ended September 30, 2017 includes restructuring charges, net of tax benefit, of $45 million as well as a net charge for significant non-operational and/or nonrecurring items, net of tax, of $5 million. The effect of restructuring charges and significant non-operational and/or nonrecurring items on diluted earnings per share for the quarter ended September 30, 2017 was a charge of $0.06$0.59 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated a favorable impact of $0.01 per diluted share.
Net income attributable to common shareowners for the six months ended June 30, 2019 includes restructuring charges, net of tax benefit, of $131 million as well as a net charge for significant non-operational and/or nonrecurring items, including the impact of taxes, of $168 million. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the six months ended June 30, 2019 was a charge of $0.35 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated an unfavorable impact of $0.04 per diluted share.
Net income attributable to common shareowners for the ninesix months ended SeptemberJune 30, 2018 includes restructuring charges, net of tax benefit, of $139$111 million as well as a net gain for significant non-operational and/or nonrecurring items, including the impact of taxes, of $179 million.$459 million, primarily reflecting a gain on the sale of Taylor Company. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the ninesix months ended SeptemberJune 30, 2018 was a gain of $0.05$0.44 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated a favorable impact of $0.05$0.06 per diluted share.
Net income from continuing operations attributable to common shareowners for the nine months ended September 30, 2017 includes restructuring charges, net of tax benefit, of $119 million as well as the net favorable impact of significant non-operational and/or nonrecurring items, net of tax, of $233 million. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the nine months ended September 30, 2017 was a gain of $0.14 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated a favorable impact of $0.11 per diluted share.
Restructuring Costs
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | 2019 | | 2018 |
Restructuring costs | $ | 186 |
| | $ | 177 |
| $ | 178 |
| | $ | 149 |
|
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 expect restructuring costs in 2018 to be consistent with 2017, including trailing costs related to prior actions associated with our
continuing cost reduction efforts and the integration of acquisitions. 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.2019 Actions. During the ninesix months ended SeptemberJune 30, 2018,2019, we recorded net pre-tax restructuring charges of $97$115 million relating to ongoing cost reduction actions initiated in 2018.2019. We expect to incur additional restructuring charges of $83$73 million to complete these actions. We are targeting to complete in 20182019 and 20192020 the majority of the remaining workforce and facility related cost reduction actions initiated in 2018.2019. We expect recurring pre-tax savings in continuing operations to increase to approximately $110$160 million annually over the two-year period subsequent to initiating the actions. Approximately 81%92% of the total expected pre-tax charges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the ninesix months ended SeptemberJune 30, 2018,2019, we had cash outflows of approximately $48$55 million related to the 20182019 actions.
2017 Actions.
2018 Actions. During the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, we recorded net pre-tax restructuring charges of $76$39 million and $114$73 million, respectively, for actions initiated in 2017.2018. We expect to incur additional restructuring charges of $116$20 million to complete these actions. We are targeting to complete in 20182019 the majority of the remaining workforce and facility related cost reduction actions initiated in 2017.2018. We expect recurring pre-tax savings in continuing operations to increase over the two-year period subsequent to initiating the actions to approximately $250$260 million annually, of which, approximately $139$85 million was realized during the ninesix months ended SeptemberJune 30, 2018.2019. Approximately 77%92% of the total expected pre-tax chargecharges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the ninesix months ended SeptemberJune 30, 2018,2019, we had cash outflows of approximately $86$104 million related to the 20172018 actions.
In addition, during the ninesix months ended SeptemberJune 30, 2018,2019, we recorded net pre-tax restructuring costs totaling $13$24 million for restructuring actions initiated in 20162017 and prior. For additional discussion of restructuring, see Note 8 to the Condensed Consolidated Financial Statements.
Segment Review
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. Adjustments to reconcile segment reporting to the consolidated results for the quarterquarters and ninesix months ended SeptemberJune 30, 20182019 and 20172018 are included in "Eliminations and other", which also includes certain smaller subsidiaries. We attempt to quantify material cited factors within our discussion of the results of each segment whenever those factors are determinable. However, in some instances, the factors we cite within our segment discussion are based upon input measures or qualitative information that does not lend itself to quantification when discussed in the context of the financial results measured on an output basis and are not, therefore, quantified in the below discussions.
Commercial Businesses
Our commercial businesses generally serve customers in the worldwide commercial and residential property industries, and UTC Climate, Controls & SecurityCarrier also serves customers in the commercial and transport refrigeration industries. Sales in the commercial businesses are 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. UTC Climate, Controls & Security'sCarrier's financial performance can also be influenced by production and utilization of transport equipment and, in the case of its residential business, weather conditions. To ensure adequate supply of products in the distribution channel, UTC Climate, Controls & SecurityCarrier customarily offers its customers incentives to purchase products. The principal incentive program provides reimbursements to distributors for offering promotional pricing on UTC Climate, Controls & SecurityCarrier products. We account for incentive payments made as a reduction to sales.
At constant currency and excluding the effect of acquisitions and divestitures, UTC Climate, Controls & SecurityCarrier equipment orders in the quarter ended SeptemberJune 30, 2018 increased 13%2019 decreased 12% in comparison to the same period of the prior year, driven by increasesdecreases in transport refrigeration (91%(63%), firecommercial refrigeration (11%), commercial HVAC (4%) and North America residential HVAC equipment (3%). Fire and security products (8%), residential equipment (2%) and commercial HVAC (2%).orders were consistent with the prior year. At constant currency, and excluding the impact of the New Revenue Standard, Otis new equipment orders in the quarter increased 9%decreased 6% in comparison to the prior year driven byas increased orders in North America (30%China (5%) were more than offset by decreased orders in the Americas (17%), Asia excluding China (16%) and China (14%), partially offset by a decline in Europe (10%and the Middle East (2%).
Summary performance for each of the commercial businesses for the quarters ended SeptemberJune 30, 20182019 and 20172018 was as follows:
| | | Otis | | UTC Climate, Controls & Security | Otis | | Carrier |
(dollars in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Net Sales | $ | 3,223 |
| | $ | 3,156 |
| | 2 | % | | $ | 4,880 |
| | $ | 4,688 |
| | 4 | % | $ | 3,348 |
| | $ | 3,344 |
| | — | % | | $ | 4,962 |
| | $ | 5,035 |
| | (1 | )% |
Cost of Sales | 2,291 |
| | 2,175 |
| | 5 | % | | 3,421 |
| | 3,292 |
| | 4 | % | 2,374 |
| | 2,389 |
| | (1 | )% | | 3,487 |
| | 3,521 |
| | (1 | )% |
| 932 |
| | 981 |
| | (5 | )% | | 1,459 |
| | 1,396 |
| | 5 | % | 974 |
| | 955 |
| | 2 | % | | 1,475 |
| | 1,514 |
| | (3 | )% |
Operating Expenses and Other | 446 |
| | 431 |
| | 3 | % | | 615 |
| | 602 |
| | 2 | % | 459 |
| | 467 |
| | (2 | )% | | 639 |
| | (131 | ) | | (588 | )% |
Operating Profits | $ | 486 |
| | $ | 550 |
| | (12 | )% | | $ | 844 |
| | $ | 794 |
| | 6 | % | $ | 515 |
| | $ | 488 |
| | 6 | % | | $ | 836 |
| | $ | 1,645 |
| | (49 | )% |
|
| | | | | | | | | | | | | | | |
Operating Profit Margins | 15.1 | % | | 17.4 | % | | | | 17.3 | % | | 16.9 | % | | |
|
| | | | | | | | | | | | | | | |
Operating Profit Margins | 15.4 | % | | 14.6 | % | | | | 16.8 | % | | 32.7 | % | | |
Summary performance for each of the commercial businesses for the ninesix months ended SeptemberJune 30, 20182019 and 20172018 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| Otis | | UTC Climate, Controls & Security |
(dollars in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
Net Sales | $ | 9,604 |
| | $ | 9,091 |
| | 6 | % | | $ | 14,291 |
| | $ | 13,292 |
| | 8 | % |
Cost of Sales | 6,814 |
| | 6,293 |
| | 8 | % | | 10,046 |
| | 9,343 |
| | 8 | % |
| 2,790 |
| | 2,798 |
| | — | % | | 4,245 |
| | 3,949 |
| | 7 | % |
Operating Expenses and Other | 1,366 |
| | 1,262 |
| | 8 | % | | 1,164 |
| | 1,387 |
| | (16 | )% |
Operating Profits | $ | 1,424 |
| | $ | 1,536 |
| | (7 | )% | | $ | 3,081 |
| | $ | 2,562 |
| | 20 | % |
|
| | | | | | | | | | | | | | | |
Operating Profit Margins | 14.8 | % | | 16.9 | % | | | | 21.6 | % | | 19.3 | % | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Otis | | Carrier |
(dollars in millions) | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Net Sales | $ | 6,444 |
| | $ | 6,381 |
| | 1 | % | | $ | 9,285 |
| | $ | 9,411 |
| | (1 | )% |
Cost of Sales | 4,569 |
| | 4,523 |
| | 1 | % | | 6,575 |
| | 6,625 |
| | (1 | )% |
| 1,875 |
| | 1,858 |
| | 1 | % | | 2,710 |
| | 2,786 |
| | (3 | )% |
Operating Expenses and Other | 934 |
| | 920 |
| | 2 | % | | 1,345 |
| | 549 |
| | 145 | % |
Operating Profits | $ | 941 |
| | $ | 938 |
| | — | % | | $ | 1,365 |
| | $ | 2,237 |
| | (39 | )% |
|
| | | | | | | | | | | | | | | |
Operating Profit Margins | 14.6 | % | | 14.7 | % | | | | 14.7 | % | | 23.8 | % | | |
Otis –
Quarter Ended SeptemberJune 30, 20182019 Compared with Quarter Ended SeptemberJune 30, 20172018
| | | Factors Contributing to Total % Change | Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other | Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 4 | % | | (2 | )% | | — | % | | — | % | | — | % | 4 | % | | (4 | )% | | — | % | | — | % | | — | % |
Cost of Sales | 7 | % | | (2 | )% | | — | % | | — | % | | — | % | 4 | % | | (5 | )% | | — | % | | — | % | | — | % |
Operating Profits | (11 | )% | | (2 | )% | | — | % | | — | % | | 1 | % | 7 | % | | (6 | )% | | — | % | | 2 | % | | 3 | % |
The organic sales increase of 4% primarily reflects higher service sales across all regions (2%), primarily driven by growth in the Americas (1%) and Asia (1%), and higher new equipment sales (2%), driven by growth in Europe and North America, and higher service sales (2%), driven by growth in North America and Asia.
The operational profit decrease of 11% was driven by:
unfavorable price and mix (8%)
unfavorable year-over-year transactional foreign exchange from mark-to-market adjustments (4%)
higher selling, general and administrative expenses and research and development costs (4%)
unfavorable commodity costs (2%)
These decreases were partially offset by:
profit contribution from the higher sales volumes noted above (7%)
Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017
|
| | | | | | | | | | | | | | |
| Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 2 | % | | 3 | % | | — | % | | — | % | | 1 | % |
Cost of Sales | 4 | % | | 3 | % | | — | % | | — | % | | 1 | % |
Operating Profits | (8 | )% | | 3 | % | | — | % | | (2 | )% | | — | % |
The organic sales increase of 2% primarily reflects higher service sales (2%), driven by growth in North America and Asia. New equipment sales increased slightly primarily driven by growth in Europe and North America (combined, 1%), partially offset by a decline in China (1%).
The operational profit decrease of 8% was driven by:
unfavorable price and mix (9%), 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%)
These decreases were partially offset by:
profit contribution from the higher sales volumes noted above (7%)
UTC Climate, Controls & Security –
Quarter Ended September 30, 2018 Compared with Quarter Ended September 30, 2017
|
| | | | | | | | | | | | | | |
| Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 7 | % | | (1 | )% | | (2 | )% | | — | % | | — | % |
Cost of Sales | 7 | % | | (1 | )% | | (2 | )% | | — | % | | — | % |
Operating Profits | 7 | % | | — | % | | (2 | )% | | 3 | % | | (2 | )% |
The organic sales increase of 7% was driven by growth in global commercial HVAC (3%), North America residential HVAC (2%), and transport refrigeration (2%), which was primarily driven by strong performance in the container division.
China.
The operational profit increase of 7% was driven by:
profitmargin contribution from the higher sales volumes noted above net of mix (8%)
the year-over-year impact of contract adjustments related to a large commercial project (4%(9%)
favorable pricing net of commodities (4%productivity (1%)
These increases were partially offset by:
increasedhigher selling, general and administrative expenses (3%)
unfavorable transactional foreign exchange gains and losses from mark-to-market adjustments and embedded foreign currency derivatives within certain new equipment contracts (1%)
The 3% increase in "Other" primarily represents the absence of the unfavorable impact of prior year legal matters.
Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2018
|
| | | | | | | | | | | | | | |
| Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 6 | % | | (5 | )% | | — | % | | — | % | | — | % |
Cost of Sales | 6 | % | | (5 | )% | | — | % | | — | % | | — | % |
Operating Profits | 3 | % | | (5 | )% | | — | % | | 1 | % | | 1 | % |
The organic sales increase of 6% primarily reflects higher new equipment sales (3%) driven by growth in China (2%) and the Americas (1%), and higher service sales (3%), driven by growth in the Americas (1%), Asia (1%) and Europe and the Middle East (1%).
The operational profit increase of 3% was driven by:
margin contribution from the higher sales volumes noted above (8%)
favorable productivity (1%)
These increases were partially offset by:
higher selling, general and administrative expenses (3%)
unfavorable transactional foreign exchange gains and losses from mark-to-market adjustments and embedded foreign currency derivatives within certain new equipment contracts (4%)
The 1% increase in "Other" primarily represents the absence of the unfavorable impact of prior year legal matters.
Carrier –
Quarter Ended June 30, 2019 Compared with Quarter Ended June 30, 2018
|
| | | | | | | | | | | | | | |
| Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 2 | % | | (2 | )% | | (1 | )% | | — | % | | — | % |
Cost of Sales | 3 | % | | (3 | )% | | (1 | )% | | — | % | | — | % |
Operating Profits | (1 | )% | | (1 | )% | | — | % | | — | % | | (47 | )% |
The organic sales increase of 2% was primarily driven by growth in commercial HVAC (1%) as well as increases in North America residential HVAC and transport refrigeration (1%, combined).
Operational profit decreased 1% in comparison to the prior year as the impact of favorable pricing (4%) was partially offset by the unfavorable impact of commodity costs, tariffs, labor productivity and logistics (3%). This net favorability was more than offset by investments in productivity initiatives (1%) and unfavorable mix, net of higher volume (1%).
The 47% decrease in Other primarily reflects the absence of the prior year gain on the sale of Taylor Company.
Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2018
|
| | | | | | | | | | | | | | |
| Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 3 | % | | (3 | )% | | (1 | )% | | — | % | | — | % |
Cost of Sales | 4 | % | | (3 | )% | | (2 | )% | | — | % | | — | % |
Operating Profits | (2 | )% | | (1 | )% | | (1 | )% | | (1 | )% | | (34 | )% |
The organic sales increase of 3% was primarily driven by growth in transport refrigeration (1%) as well as global HVAC (2%).
Operational profit decreased 2% in comparison to the prior year. The impact of favorable pricing and material productivity (6%, combined) was partially offset by the unfavorable impact of commodity costs, tariffs, labor productivity and logistics (5%)
. This net favorability was more than offset by increased selling, general and administrative costs, net of restructuring savings (2%(1%), unfavorable mix, net of higher volume (1%) and investments in productivity initiatives (1%).
increased research and development costs (1%)
The 2%34% decrease in Other primarily reflects the absence of athe prior year gain on the sale of an investment.Taylor Company.
Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017
|
| | | | | | | | | | | | | | |
| Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 6 | % | | 3 | % | | (1 | )% | | — | % | | — | % |
Cost of Sales | 6 | % | | 3 | % | | (1 | )% | | — | % | | — | % |
Operating Profits | 6 | % | | 1 | % | | — | % | | 1 | % | | 12 | % |
The organic sales increase of 6% was driven primarily by growth in North America residential HVAC (2%), global commercial HVAC (2%), and transport refrigeration (2%) which was primarily driven by strong performance in the container division.
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 (4%)
These increases were partially offset by:
increased logistics costs (2%)
increased research and development costs (1%)
The impact of pricing, net of commodities, was consistent with the prior year.
The 12% increase in Other primarily reflects the year-over-year impact of gains on sale of investments (14%), primarily driven by the sale of Taylor Company in 2018, partially offset by the absence of the prior year sale of Watsco, Inc.
Aerospace Businesses
The aerospace businesses serve both commercial and government aerospace customers. Revenue passenger miles (RPMs), U.S. Government military and space spending, and the general economic health of airline carriers are all barometers for our aerospace businesses. Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits.
We continue to see growth in a strong commercial airline industry which is benefiting from traffic growth and stronger economic conditions. Airline traffic, as measured by RPMs, grew approximately 7%5% in the first eightfive months of 2018.2019.
Our commercial aftermarket businesses continue to evolve as a significant portion of our aerospace businesses' customers are covered under Fleet Management Programs (FMPs)long-term aftermarket service agreements at Pratt & Whitney and long-term aftermarket service agreements at UTCCollins Aerospace Systems. FMPsThese agreements are comprehensive long-term spare part and service agreements with our customers. We expect a continued shift to FMPs and long-term aftermarket service agreements in lieu of transactional spare part sales as new aerospace product offeringsproducts enter our customers' fleets under long-term service agreements and legacy fleets are retired. For the first ninesix months of 2018,2019, as compared with 2017,2018, total commercial aerospace aftermarket sales increased 69% at Collins Aerospace Systems (up 13% excluding the impact of the Rockwell Collins acquisition) and 1% at Pratt & Whitney and 13% at UTC Aerospace Systems.Whitney.
Operating profit in the quarter ended September 30, 2018 included significant net favorable changes in aerospace contract estimates totaling $55 million, primarily reflecting favorable net contract adjustments at Pratt & Whitney. Operating profit for the nineand six months ended SeptemberJune 30, 20182019 included significant net unfavorable changes in aerospace contract estimates totaling $28$69 million and $81 million, respectively, primarily reflecting net unfavorable net contract adjustments recorded at both UTC Aerospace Systems and Pratt & Whitney. Operating profit in the quarter and ninesix months ended SeptemberJune 30, 20172018 included significant net unfavorable changes in aerospace contract estimates totaling $21$41 million and $50$82 million, respectively, primarily reflecting net unfavorable net contract adjustments recorded at Pratt & Whitney.
Summary performance for each of the aerospace businesses for the quarters ended SeptemberJune 30, 20182019 and 20172018 was as follows:
| | | Pratt & Whitney | | UTC Aerospace Systems | Pratt & Whitney | | Collins Aerospace Systems |
(dollars in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Net Sales | $ | 4,789 |
| | $ | 3,871 |
| | 24 | % | | $ | 3,955 |
| | $ | 3,637 |
| | 9 | % | $ | 5,150 |
| | $ | 4,736 |
| | 9% | | $ | 6,576 |
| | $ | 3,962 |
| | 66% |
Cost of Sales | 4,215 |
| | 3,207 |
| | 31 | % | | 2,909 |
| | 2,667 |
| | 9 | % | 4,237 |
| | 3,893 |
| | 9% | | 4,654 |
| | 2,922 |
| | 59% |
| 574 |
| | 664 |
| | (14 | )% | | 1,046 |
| | 970 |
| | 8 | % | 913 |
| | 843 |
| | 8% | | 1,922 |
| | 1,040 |
| | 85% |
Operating Expenses and Other | 465 |
| | 476 |
| | (2 | )% | | 436 |
| | 398 |
| | 10 | % | 489 |
| | 446 |
| | 10% | | 750 |
| | 471 |
| | 59% |
Operating Profits | $ | 109 |
| | $ | 188 |
| | (42 | )% | | $ | 610 |
| | $ | 572 |
| | 7 | % | $ | 424 |
| | $ | 397 |
| | 7% | | $ | 1,172 |
| | $ | 569 |
| | 106% |
|
| | | | | | | | | | | | | | | |
Operating Profit Margins | 2.3 | % | | 4.9 | % | | | | 15.4 | % | | 15.7 | % | | |
|
| | | | | | | | | | | | | | | |
Operating Profit Margins | 8.2 | % | | 8.4 | % | | | | 17.8 | % | | 14.4 | % | | |
Summary performance for each of the aerospace businesses for the ninesix months ended SeptemberJune 30, 20182019 and 20172018 was as follows:
| | | Pratt & Whitney | | UTC Aerospace Systems | Pratt & Whitney | | Collins Aerospace Systems |
(dollars in millions) | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Net Sales | $ | 13,854 |
| | $ | 11,699 |
| | 18 | % | | $ | 11,734 |
| | $ | 10,888 |
| | 8 | % | $ | 9,967 |
| | $ | 9,065 |
| | 10 | % | | $ | 13,089 |
| | $ | 7,779 |
| | 68 | % |
Cost of Sales | 11,629 |
| | 9,460 |
| | 23 | % | | 8,614 |
| | 8,024 |
| | 7 | % | 8,168 |
| | 7,414 |
| | 10 | % | | 9,484 |
| | 5,705 |
| | 66 | % |
| 2,225 |
| | 2,239 |
| | (1 | )% | | 3,120 |
| | 2,864 |
| | 9 | % | 1,799 |
| | 1,651 |
| | 9 | % | | 3,605 |
| | 2,074 |
| | 74 | % |
Operating Expenses and Other | 1,306 |
| | 1,331 |
| | (2 | )% | | 1,353 |
| | 1,227 |
| | 10 | % | 942 |
| | 841 |
| | 12 | % | | 1,577 |
| | 917 |
| | 72 | % |
Operating Profits | $ | 919 |
| | $ | 908 |
| | 1 | % | | $ | 1,767 |
| | $ | 1,637 |
| | 8 | % | $ | 857 |
| | $ | 810 |
| | 6 | % | | $ | 2,028 |
| | $ | 1,157 |
| | 75 | % |
|
| | | | | | | | | | | | | | | |
Operating Profit Margins | 6.6 | % | | 7.8 | % | | | | 15.1 | % | | 15.0 | % | | |
|
| | | | | | | | | | | | | | | |
Operating Profit Margins | 8.6 | % | | 8.9 | % | | | | 15.5 | % | | 14.9 | % | | |
Pratt & Whitney –
Quarter Ended SeptemberJune 30, 20182019 Compared with Quarter Ended SeptemberJune 30, 20172018
| | | Factors Contributing to Total % Change | Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation* | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other | Organic / Operational | | FX Translation* | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 13 | % | | — | % | | — | % | | — | % | | 11 | % | 9 | % | | — | % | | — | % | | — | % | | — | % |
Cost of Sales | 18 | % | | (1 | )% | | — | % | | — | % | | 14 | % | 9 | % | | — | % | | — | % | | — | % | | — | % |
Operating Profits | (36 | )% | | 4 | % | | — | % | | (1 | )% | | (9 | )% | 4 | % | | 2 | % | | — | % | | — | % | | 1 | % |
* For Pratt & Whitney only, the transactional impact of foreign exchange hedging at Pratt & Whitney Canada has been netted against the translational foreign exchange impact for presentation purposes in the table above. For all other segments these foreign exchange transactional impacts are included within the organic/operational 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.
The organic sales increase of 13% primarily reflects higher commercial aftermarket sales of (5%), increased commercial OEM sales of (4%) and growth in military sales of (4%). The 11% increase in Other reflects the absence of a prior year customer contract matter (10%) and the impact of the adoption the New Revenue Standard (1%).
The operational profit decrease of 36% was primarily driven by:
lower commercial OEM profit contribution (73%), reflecting higher negative engine margin and other ramp-related costs, as well as increased selling, general and administrative expenses
This decrease was partially offset by:
higher commercial aftermarket profit contribution (33%), driven by the sales increase noted above
higher military profit contribution (3%), driven by the sales increase noted above, partially offset by the impact of adverse mix on military development programs
The 9% decrease in Other primarily reflects a customer contract settlement (159%), partially offset by the impact of the absence of a prior year customer contract matter (104%) and the adoption of the New Revenue Standard (46%).
Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017
|
| | | | | | | | | | | | | | |
| Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation* | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 11 | % | | 1 | % | | — | % | | — | % | | 6 | % |
Cost of Sales | 14 | % | | — | % | | — | % | | — | % | | 9 | % |
Operating Profits | 2 | % | | 3 | % | | — | % | | — | % | | (4 | )% |
The organic sales increase of 11% primarily reflects higher commercial aftermarket sales (6%), higher military sales (3%) and an increase in commercial OEM sales (2%). 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 (3%).
The operational profit increase of 2% was primarily driven by:
higher commercial aftermarket profit contribution (23%), driven by the sales increase noted above
higher military profit contribution (3%), driven by the sales increase noted above
These increases were partially offset by:
lower commercial OEM profit contribution (24%) primarily driven by higher negative engine margin
The 4% decrease in Other primarily reflects the unfavorable year-over-year impact of contract settlements (12%), and the absence of prior year licensing income (2%), partially offset by the adoption of the New Revenue Standard (8%), and the favorable year-over-year impact of divestitures (2%).
UTC Aerospace Systems –
Quarter Ended September 30, 2018 Compared with Quarter Ended September 30, 2017
|
| | | | | | | | | | | | | | |
| Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 9 | % | | — | % | | — | % | | — | % | | — | % |
Cost of Sales | 9 | % | | — | % | | — | % | | — | % | | — | % |
Operating Profits | 3 | % | | 1 | % | | — | % | | — | % | | 3 | % |
The organic sales growth of 9% primarily reflects higher commercial aftermarket andOEM sales (4%), higher military sales (combined 6%(4%), and higher commercial aerospace OEMaftermarket sales (3%(1%).
The increase in operational profit increase of 3%4% was primarily reflects:driven by:
higher commercial aftermarketOEM margin contribution (18%) primarily driven by continued year-over-year cost reduction and favorable mix on large commercial engine shipments
higher military profitmargin contribution (21%(4%) driven by the sales growthincrease noted above
higher commercial aerospace OEM profit contribution (6%) driven by the sales growth noted above and favorable mix
These increases were partially offset by:
higher warrantyresearch and development costs (11%(9%)
higher selling, general and administrative expenses (9%and other ramp-related costs (5%)
higher research and development spending (2%lower commercial aftermarket margin contribution (4%) primarily driven by net unfavorable changes in contract estimates
The 3% increase in Other reflects the operating profit impact of adopting the New Revenue Standard.
NineSix Months Ended SeptemberJune 30, 20182019 Compared with NineSix Months Ended SeptemberJune 30, 20172018
| | | Factors Contributing to Total % Change | Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other | Organic / Operational | | FX Translation* | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 7 | % | | 1 | % | | — | % | | — | % | | — | % | 11 | % | | (1 | )% | | — | % | | — | % | | — | % |
Cost of Sales | 6 | % | | 1 | % | | — | % | | — | % | | — | % | 11 | % | | (1 | )% | | — | % | | — | % | | — | % |
Operating Profits | 12 | % | | (2 | )% | | — | % | | (1 | )% | | (1 | )% | 6 | % | | — | % | | — | % | | (2 | )% | | 2 | % |
The organic sales growth of 7%11% primarily reflects higher commercial aftermarket andOEM sales (5%), higher military sales (combined 6%(5%), and higher commercial aftermarket sales of (1%).
The operational profit increase of 6% was primarily driven by:
higher military profit contribution (10%), driven by the sales increase noted above
higher OEM margin contribution (7%) primarily driven by continued year-over-year cost reduction, favorable mix on large commercial engine shipments, and lower customer support costs
These increases were partially offset by:
higher research and development costs (8%)
higher selling, general and administrative expenses and other ramp-related costs (3%)
The 2% increase in "Other" primarily reflects favorable year-over-year licensing income.
Collins Aerospace Systems –
Quarter Ended June 30, 2019 Compared with Quarter Ended June 30, 2018
|
| | | | | | | | | | | | | | |
| Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 9 | % | | — | % | | 57 | % | | — | % | | — | % |
Cost of Sales | 8 | % | | (1 | )% | | 53 | % | | (1 | )% | | — | % |
Operating Profits | 21 | % | | 2 | % | | 75 | % | | 3 | % | | 5 | % |
The organic sales growth of 9% primarily reflects higher commercial aerospace aftermarket sales (6%), and higher military OEM sales (1%(2%).
The increase in operational profit of 12%21% primarily reflects:
higher commercial aerospace aftermarket and military profitmargin contribution (22%) driven by the sales growth noted above, partially offset by lower commercial aerospace OEM margin contribution (net, 23%)
lower selling, general and administrative expenses (1%)
These increases were partially offset by:
higher research and development costs (4%)
The 5% increase in Other primarily reflects the absence of a prior year impairment of assets related to a previously acquired business.
Six Months Ended June 30, 2019 Compared with Six Months Ended June 30, 2018
|
| | | | | | | | | | | | | | |
| Factors Contributing to Total % Change |
| Organic / Operational | | FX Translation | | Acquisitions / Divestitures, net | | Restructuring Costs | | Other |
Net Sales | 10 | % | | (1 | )% | | 59 | % | | — | % | | — | % |
Cost of Sales | 10 | % | | (1 | )% | | 57 | % | | — | % | | — | % |
Operating Profits | 12 | % | | 2 | % | | 61 | % | | — | % | | — | % |
The organic sales increase of 10% primarily reflects higher commercial aerospace OEM and aftermarket sales (8%), and higher military sales (2%).
The operational profit increase of 12% primarily reflects:
higher commercial aerospace OEM profitaftermarket margin contribution (2%) driven by the sales growth noted above, partially offset by lower commercial aerospace OEM margin contribution (net, 19%)
These increases wereThis increase was partially offset by:
higher selling, general and administrative expenses (8%(3%)
higher warrantyresearch and development costs (4%(3%)
The 1% decrease in Other primarily reflects the impairment of long lived assets related to a previously acquired business (3%), partially offset by the operating profit impact of adopting the New Revenue Standard (2%).
Eliminations and other –
| | | Net Sales | | Operating Profits | Net Sales | | Operating Profits |
| Quarter Ended September 30, | | Quarter Ended September 30, | Quarter Ended June 30, | | Quarter Ended June 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Eliminations and other | $ | (337 | ) | | $ | (290 | ) | | $ | (102 | ) | | $ | 32 |
| $ | (402 | ) | | $ | (372 | ) | | $ | (239 | ) | | $ | (97 | ) |
General corporate expenses | — |
| | — |
| | (109 | ) | | (104 | ) | — |
| | — |
| | (124 | ) | | (126 | ) |
| | | Net Sales | | Operating Profits | Net Sales | | Operating Profits |
| Nine Months Ended September 30, | | Nine Months Ended September 30, | Six Months Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Eliminations and other | $ | (1,026 | ) | | $ | (813 | ) | | $ | (210 | ) | | $ | 9 |
| $ | (786 | ) | | $ | (689 | ) | | $ | (340 | ) | | $ | (108 | ) |
General corporate expenses | — |
| | — |
| | (339 | ) | | (312 | ) | — |
| | — |
| | (222 | ) | | (230 | ) |
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 for the quarter and ninesix months ended SeptemberJune 30, 2018,2019, as compared to the same periods of 2017,2018, reflects an increase in the amount of inter-segment eliminations, principally between our aerospace businesses. The decrease in operating profits for the quarter and nineended June 30, 2019 is primarily driven by costs associated with the Company's intention to separate its commercial businesses. The decrease in operating profits for the six months ended SeptemberJune 30, 2018 is primarily driven by higher inter-segment profit eliminations resulting from increased inter-segment activity amongst our aerospacecosts associated with the Company's intention to separate its commercial businesses and the absence of the favorable impact of prior year insurance settlements, partially offset by lower transaction costs related to the pending acquisition of Rockwell Collins and a strategic review of the Company's portfolio of businesses, and lower year-over-year gains on sales of securities.
Collins.
LIQUIDITY AND FINANCIAL CONDITION
| | (dollars in millions) | | September 30, 2018 | | December 31, 2017 | | September 30, 2017 | | June 30, 2019 | | December 31, 2018 | | June 30, 2018 |
Cash and cash equivalents | | $ | 13,799 |
| | $ | 8,985 |
| | $ | 8,523 |
| | $ | 6,819 |
| | $ | 6,152 |
| | $ | 11,068 |
|
Restricted cash designated for the acquisition of Rockwell Collins, Inc. | | 9,201 |
| | — |
| | — |
| |
Total debt | | 39,943 |
| | 27,485 |
| | 27,260 |
| | 45,251 |
| | 45,537 |
| | 28,309 |
|
Net debt (total debt less cash and cash equivalents and restricted cash) | | 16,943 |
| | 18,500 |
| | 18,737 |
| |
Net debt (total debt less cash and cash equivalents) | | | 38,432 |
| | 39,385 |
| | 17,241 |
|
Total equity | | 34,250 |
| | 31,421 |
| | 31,691 |
| | 42,977 |
| | 40,610 |
| | 33,346 |
|
Total capitalization (total debt plus total equity) | | 74,193 |
| | 58,906 |
| | 58,951 |
| | 88,228 |
| | 86,147 |
| | 61,655 |
|
Net capitalization (total debt plus total equity less cash and cash equivalents and restricted cash) | | 51,193 |
| | 49,921 |
| | 50,428 |
| |
Net capitalization (total debt plus total equity less cash and cash equivalents) | | | 81,409 |
| | 79,995 |
| | 50,587 |
|
| | Total debt to total capitalization | | 54 | % | | 47 | % | | 46 | % | | 51 | % | | 53 | % | | 46 | % |
Net debt to net capitalization | | 33 | % | | 37 | % | | 37 | % | | 47 | % | | 49 | % | | 34 | % |
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.flows. For 2018,2019, we expect cash flows from continuing operations, net of capital expenditures, to approximate $4.5 billion to $5.0 billion.billion, including $1.5 billion of one-time cash payments related to the portfolio separation. 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 SeptemberJune 30, 2018,2019, we had cash and cash equivalents of $13,799$6,819 million, of which approximately 31%76% 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. PriorThe Company no longer intends to enactment of the TCJA, with few exceptions, U.S. income taxes had not been provided onreinvest certain undistributed earnings of UTC'sits international subsidiaries as the Company had intended to reinvest such earnings permanently outsidethat have been previously taxed in the U.S. or to repatriateAs such, in the fourth quarter of 2018, it has recorded the taxes therewith. For the remainder of the Company’s undistributed international earnings, only when it wasunless tax effective to do so. The Company continuesrepatriate, UTC will continue to evaluatepermanently reinvest these earnings. We have repatriated approximately $1.3 billion of cash for the impact of the TCJA on its existing accounting position related to the undistributed earnings. Due to the inherent complexities in determining any incremental U.S. Federal and State taxes and the non-U.S. taxes that may be due if all of these earnings were remitted to the U.S., and as provided for by SAB 118, this evaluation has not been completed and no provisional amount has been recorded in regard to the undistributed amounts. After completing its evaluation, the Company will accrue any additional taxes due on previously undistributed earnings to be distributed in the future.six months ended June 30, 2019.
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 SeptemberJune 30, 20182019 and December 31, 2017,2018, the amount of such restricted cash was approximately $9.2 billion$37 million and $33$60 million, respectively. Restricted cash increased by $9.2 billion in the quarter ended September 30, 2018 due to the $11 billion of aggregate notes issued during the quarter of which $9.2 billion of net proceeds were specifically designated for the pending acquisition of Rockwell Collins, Inc.
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 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 of 54%51% at SeptemberJune 30, 2018, increased 7002019 is down 200 basis points from December 31, 20172018 and increased 500 basis points from June 30, 2018, primarily duereflecting additional borrowings used to finance the acquisition of Rockwell Collins as well as the acquisition of Rockwell Collins' outstanding debt.
At June 30, 2019, we had credit agreements with various banks permitting aggregate borrowings of up to $10.35 billion, including: a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement, both of which expire in August 2021; and a $2.0 billion revolving credit agreement and a $4.0 billion term credit agreement, both of which we entered into on March 15, 2019 and which will expire on March 15, 2021 or, if earlier, the date that is 180 days after the date on which each of the separations of Otis and Carrier have been consummated. On March 15, 2019, we terminated the $1.5 billion revolving credit agreement that we entered into on November 26, 2018. As of June 30, 2019, there were no borrowings under any of these agreements. The undrawn portions of these revolving credit agreements are also available to serve as backup facilities for the issuance of $11 billioncommercial paper.
As of aggregate notes for the pending Rockwell acquisition.June 30, 2019, our maximum commercial paper borrowing limit was $6.35 billion. Commercial paper borrowings at June 30, 2019 include approximately €750 million ($855 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 borrowingborrowings 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 September
We had no debt issuances during the six months ended June 30, 2018, we2019 and 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 September 30, 2018, 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 September 30, 2018, our maximum commercial paper borrowing limit was $4.35 billion.
Commercial paper borrowings at September 30, 2018 include approximately €750 million ($881 million) of euro-denominated commercial paper.
On August 16, 2018, we issued $1.0 billion aggregate principal amount of 3.350% notes due 2021, $2.25 billion aggregate principal amount of 3.650% notes due 2023, $1.5 billion aggregate principle amount of 3.950% notes due 2025, $3.0 billion aggregate principal amount of 4.125% notes due 2028, $750 million aggregate principal amount of 4.450% notes due 2038, $1.75 billion aggregate principal amount of 4.625% notes due 2048, and $750 million aggregate principal amount of floating rate notes due 2021. We expect to use the net proceeds received from the issuance of the notes due 2021, notes due 2023, notes due 2025, notes due 2028, notes due 2038 and the floating rate notes due 2021 to partially finance payment obligations with respect to the cash consideration and related fees, expenses and other amounts in connection with the acquisition of Rockwell Collins, Inc. We expect to use the proceeds of the notes due 2048 for general corporate purposes and/or the repaymentfollowing issuances of debt including outstanding commercial paper.in 2018:
On May 18, 2018, we issued €750 million aggregate principal amount of 1.150% notes due 2024, €500 million aggregate principal amount of 2.150% notes maturing 2030 and €750 million aggregate principal amount of floating rate notes maturing 2020. |
| | | | |
(dollars and Euro in millions) | | |
Issuance Date | Description of Notes | Aggregate Principal Balance |
August 16, 2018: | 3.350% notes due 20211 | $ | 1,000 |
|
| 3.650% notes due 20231 | 2,250 |
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| 3.950% notes due 20251 | 1,500 |
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| 4.125% notes due 20281 | 3,000 |
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| 4.450% notes due 20381 | 750 |
|
| 4.625% notes due 20482 | 1,750 |
|
| LIBOR plus 0.65% floating rate notes due 20211 | 750 |
|
| | |
May 18, 2018: | 1.150% notes due 20243 | € | 750 |
|
| 2.150% notes due 20303 | 500 |
|
| EURIBOR plus 0.20% floating rate notes due 20203 | 750 |
|
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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. |
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2 | The net proceeds from these debt issuances were used to fund the repayment of commercial paper and for other general corporate purposes. |
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3 | The net proceeds received from these debt issuances were used for general corporate purposes. |
We had no debt issuances were used for general corporate purposes.
On May 4, 2018, we repaid at maturity approximately $1.1 billion aggregate principal amount of 1.778% junior subordinated notes.
On February 1, 2018, we repaid at maturity the $99 million 6.80% notes and on February 22, 2018, we repaid at maturity the €750 million EURIBOR plus 0.80% floating rate notes.
On November 13, 2017, we issued €750 million aggregate principal amount of floating rate notes due 2019. The net proceeds from this debt issuance were used to fund the repayment of commercial paper and for other general corporate purposes.
On May 4, 2017, we issued $1.0 billion aggregate principal amount of 1.900% notes due 2020, $500 million aggregate principal amount of 2.300% notes due 2022, $800 million aggregate principal amount of 2.800% notes due 2024, $1.1 billion aggregate principal amount of 3.125% notes due 2027 and $600 million aggregate principal amount of 4.050% notes due 2047. 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.
Within the Business Overview of Management's Discussion and Analysis, we have described the pending acquisition of Rockwell Collins. The purchase consideration will be a combination of UTC shares and cash. We anticipate that approximately $15 billion will be required to pay the aggregate cash portion of the Merger Consideration which will be funded by cash on hand. We expect to assume approximately $7 billion of Rockwell Collins’ outstanding debt. To help manage the cash flow and liquidity impact resulting from the pending acquisition, we have suspended share repurchases, excluding activity relating to our equity award programs and employee savings plans. As we continue to assess the impacts of the TCJA, future opportunities for repatriation of our non-U.S. earnings, and accelerated de-leveraging, we may consider, in addition to investments in our operations, limited additional share repurchases to offset the effects of dilution related to our stock-based compensation programs. We have repatriated to the U.S. $5.2 billion of overseas cashpayments during the ninesix months ended SeptemberJune 30, 2018.2019 and had the following repayments of debt in 2018:
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| | | | |
(dollars and Euro 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
| $ | 482 |
|
May 4, 2018 | 1.778% junior subordinated notes | $ | 1,100 |
|
February 22, 2018 | EURIBOR plus 0.80% floating rate notes
| € | 750 |
|
February 1, 2018 | 6.80% notes
| $ | 99 |
|
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1 | This term loan was assumed in connection with the Rockwell Collins acquisition and subsequently repaid. |
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, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate.
Cash Flow - Operating Activities
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | 2019 | | 2018 |
Net cash flows provided by operating activities | $ | 4,317 |
| | $ | 3,110 |
| $ | 3,611 |
| | $ | 2,555 |
|
Cash generated from operating activities in the ninesix months ended SeptemberJune 30, 20182019 was $1,207$1,056 million higher than the same period in 2017.2018 largely due to higher net income. Cash outflows for working capital increased $285improved $33 million in the ninesix months ended SeptemberJune 30, 20182019 over the prior period to support higher top line organic growth.period. Factoring activity provided an increaseresulted in a decrease of approximately $1.2 billion in cash generatedflows from operating activities of approximately $168 million induring the ninesix months ended SeptemberJune 30, 2018,2019, as compared to the prior year. This increasedecline in factoring activity was primarily driven largely by Pratt & Whitney's temporary extension of contractual payment terms with certain commercial aerospace customers. This increaseWhitney partially offset by increased factoring at Collins Aerospace Systems. 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 paymentcollection cycle.
In the ninesix months ended SeptemberJune 30, 2019, cash outflows from working capital were $456 million. Contract assets, current increased $491 million due to work performed in excess of billings at Pratt & Whitney and Collins Aerospace Systems. Inventory increased $1.1 billion primarily driven by an increase to support higher sales volumes at Collins Aerospace Systems,
the Geared Turbofan at Pratt & Whitney, and seasonal build in the HVAC businesses at Carrier. These outflows were partially offset by decreases in Accounts receivable of $769 million primarily due to improved collections at Pratt & Whitney and increases in Contract liabilities, current of $381 million primarily driven by Pratt & Whitney billings in excess of work performed, higher advanced billings at Otis and by Collins Aerospace Systems.
In the six months ended June 30, 2018, cash outflows from working capital were $643 million, excluding the adoption impact of the New Revenue Standard.$489 million. Accounts receivablereceivables increased $2.4 billion due tofrom an increase in sales volume.volume driven by Carrier Residential & Commercial HVAC businesses, Collins Aerospace Systems and Pratt & Whitney. Contract assets current increased $892 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 UTC Climate, Controls & Security at Building Solution Systems.Carrier in Commercial HVAC. Inventory increased $991 millionin the quarter primarily driven by Carrier seasonal build and an increase in production work in process for the Geared Turbo FanTurbofan at Pratt & Whitney, seasonal build in the Residential & Commercial HVAC businesses at UTC Climate, Controls & Security, and increases at UTC Aerospace Systems.Whitney. These increases were partially offset by decreases in Other assets of $262 million primarily driven by a reduction in prepaid taxes, increases in Accountsaccounts payable and accrued liabilities, of approximately $3.0 billion, driven by the higher inventory purchasing activity and customer advances at Pratt & Whitney higher direct material purchases at UTC Aerospace Systems, and an increase in accrued interest, as well as an increase in Contractcurrent contract liabilities current of $313 million driven by seasonal advanced billings and progress payments on major contracts at Otis and seasonal advancedthe timing of billings at Otis.
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. Including the effects of this contribution, cash generated from operating activities of continuing operations in the nine months ended September 30, 2017 was $1,457 million lower than the same period in 2016. Cash outflows for working capital improved by $341 million in the nine months ended September 30, 2017 over the prior year period. In the nine months ended September 30, 2017, inventories increased approximately $1.2 billion, primarily in our aerospace businesses supporting an increase in forecasted OEM deliveries and relatedon aftermarket demand, and at UTC Climate, Controls & Security driven primarily by seasonal demand in our North American HVAC business and installation projects in process in our refrigeration businesses. These increases were more than offset by increases in accounts payable and accrued liabilities, primarily in the commercial engine businesscontracts at Pratt & Whitney. Accounts receivable increased primarily in our aerospace businesses, and were partially offset by increased customer advances at Pratt & Whitney and Otis. Factoring activity provided an increase of approximately $400 million in cash generated from operating activities of continuing operations in the nine months ended September 30, 2017, as compared to the prior year period. This increase in factoring was driven largely by Pratt & Whitney's temporary extension of contractual payment terms with certain commercial aerospace customers.
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 during the ninesix months ended SeptemberJune 30, 20182019 and 20172018 were approximately $72$79 million and $2,008$59 million, respectively. Although our domestic pension plans are approximately 104%99% funded on a projected benefit obligation basis as of SeptemberJune 30, 2018,2019, and we are not required to make additional contributions through the end of 2028,2024, we may elect to make discretionary contributions in 2018.2019. We expect to make total contributions of approximately $100$125 million to our global defined benefit pension plans in 2018.2019, including $25 million to our domestic pension plans. Contributions to our global defined benefit pension plans in 20182019 are expected to meet or exceed the current funding requirements.
Cash Flow - Investing Activities
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | 2019 | | 2018 |
Net cash flows used in investing activities | $ | (1,019 | ) | | $ | (1,658 | ) | $ | (1,217 | ) | | $ | (238 | ) |
Cash flows used in investing activities of continuing operations for the ninesix months ended SeptemberJune 30, 20182019 and 20172018 primarily reflect capital expenditures, cash investments in customer financing assets, investments/dispositions of businesses, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms, and settlements of derivative contracts. The $639$979 million decreaseincrease in cash flows used in investing activities in the ninesix months ended SeptemberJune 30, 20182019 compared to SeptemberJune 30, 20172018 primarily relates to the absence of $1 billion in proceeds from the sale of Taylor Company in June 2018 by UTC Climate, Controls & Security and $254 million in receipts from settlements of derivative contracts, partially offset by the absence of $136 million of proceeds for the sale of available for sale securities as of September 30, 2017 and $596 million in net proceeds received from UTC Climate, Controls & Security's sale of investments in Watsco, Inc. in the quarter ended March 31, 2017.Carrier.
Capital expenditures for the ninesix months ended SeptemberJune 30, 2018 ($1,122 million)2019 of $830 million primarily relaterelates to the Rockwell Merger as well as several projects at Collins Aerospace Systems and investments in production capacity at Pratt & Whitney, several small projects at UTC Aerospace Systems, and new facilities and investments in products and information technology at UTC Climate, Controls & Security.Whitney.
Cash investments in businesses in the ninesix months ended SeptemberJune 30, 2018 ($177 million) primarily2019 of $32 million consisted of an acquisitionsmall acquisitions at Pratt & Whitney. We do not expect to have additional significant acquisition spend, other than the pending acquisition of Rockwell Collins. However, actual acquisition spending may vary depending upon the timing, availability and
appropriate value of acquisition opportunities.Otis. Dispositions of businesses in the ninesix months ended SeptemberJune 30, 20182019 of $1.1 billion$133 million primarily relate toconsisted of the businesses held for sale of Taylor Company.associated with the Rockwell acquisition.
Customer financing activities in the ninesix months ended SeptemberJune 30, 20182019 were a net use of cash of $453$331 million, primarily driven by additional Geared Turbofan engines to support customer fleets. While we expect that 2018 customer financing activity will be a net use of funds, actual funding is subject to usage under existing customer financing commitments during the remainder of the year. We may also arrange for third-party investorsthird parties to assume a portion of our commitments. We had commercial aerospace financing and other contractual commitments of approximately $15.1$15.9 billion at SeptemberJune 30, 20182019 related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which up to $300 million$1.3 billion may be required to be disbursed during the remainder of 2018.2019. We had commercial aerospace financing and other contractual commitments of approximately $15.3$15.5 billion at December 31, 2017.2018.
During the ninesix months ended SeptemberJune 30, 2018,2019, our collaboration intangible assets increased by approximately $302$169 million, which primarily relates to payments made under our 2012 agreement to acquire Rolls-Royce's collaboration interest in IAE.
As discussed in Note 9 to the Condensed 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 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 settlement of these derivative instruments resulted in a net cash inflow of approximately $71$61 million during the ninesix months ended SeptemberJune 30, 2018 and2019 compared to a net cash outflowinflow of $183$82 million during the ninesix months ended SeptemberJune 30, 2017.
2018.
Cash Flow - Financing Activities
| | | Nine Months Ended September 30, | Six Months Ended June 30, |
(dollars in millions) | 2018 | | 2017 | 2019 | | 2018 |
Net cash flows provided by (used in) financing activities | $ | 10,839 |
| | $ | (293 | ) | |
Net cash flows used in financing activities | | $ | (1,766 | ) | | $ | (211 | ) |
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 byused in financing activities increased $11,132$1,555 million in the ninesix months ended SeptemberJune 30, 20182019 compared to the ninesix months ended SeptemberJune 30, 20172018, primarily due to an increase in debt of $9.4 billion for the funding of the pending Rockwell Collins acquisition, an increasea decrease in short term borrowings of $828$969 million, an increase in dividends paid on Common Stock of $149 million, and a reduction in common stock repurchasesnet debt issuances of $1.4 billion, partially offset by an increase in repayments of long-term debt of $506$346 million.
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 $1.4 billion$855 million of outstanding commercial paper at SeptemberJune 30, 2018.2019.
At SeptemberJune 30, 2018,2019, management had remaining authority to repurchase approximately $2.2$1.9 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 as required under our employee savings plan. Our ability to repurchase shares is subject to applicable law, including restrictions arising from the pending merger transaction with Raytheon. We made cash payments of approximately $72$69 million to repurchase approximately 574552 thousand shares of our common stock during the ninesix months ended SeptemberJune 30, 2018. In connection with the merger agreement with Rockwell Collins announced on September 4, 2017, we have suspended share repurchases, excluding activity required under our equity award programs and employee savings plans. As we continue to assess the impacts of the TCJA, future opportunities for repatriation of our non-U.S. earnings, and accelerated de-leveraging, we may consider, in addition to investments in our operations, limited additional share repurchases to offset the effects of dilution related to our stock-based compensation programs.2019.
We paid dividends on common stock of $0.70$0.735 per share in the first second and thirdsecond quarter of 2018,2019, totaling approximately $1,606$1,219 million in the aggregate for the ninesix months ended SeptemberJune 30, 2018.2019. On OctoberJune 10, 2018,2019, the Board of Directors declared a dividend of $0.735 per share payable DecemberSeptember 10, 20182019 to shareowners of record at the close of business on NovemberAugust 16, 2018.
2019.
We have an existingpreviously had a universal shelf registration statement filed with the SEC, which expired on April 29, 2019. Our ability to renew our shelf registration statement may be limited as a result of the separation transactions as well as our proposed merger with Raytheon; as noted above, we entered into a new $2.0 billion revolving credit agreement and a $4.0 billion term credit agreement on March 15, 2019 to be used for an indeterminate amountgeneral corporate purposes, including the repayment, repurchase or redemption of existing debt, and equity securities for future issuance, subject to our internal limitations on the amountserve as backup facilities to support additional issuances of debtcommercial paper. We expect to be issued under thisrenew our shelf registration statement.statement following the separation transactions or earlier, as appropriate.
Off-Balance Sheet Arrangements and Contractual Obligations
In our 20172018 Annual Report, incorporated by reference in our 2017 2018 Form 10-K, we disclosed our off-balance sheet arrangements and contractual obligations. As of SeptemberJune 30, 2018,2019, there have been no material changes to these off-balance sheet arrangements and contractual obligations outside the ordinary course of business. | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There has been no significant change in our exposure to market risk during the ninesix months ended SeptemberJune 30, 2018.2019. For discussion of our exposure to market risk, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," contained in our 20172018 Form 10-K.
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Item 4. | Controls and Procedures |
As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation under the supervision and with the participation of our management, including the Chairman, President and Chief Executive Officer (CEO), the Executive Vice President & Chief Financial Officer (CFO) and the Corporate Vice President, Controller (Controller), of the effectiveness of the design and operation of our disclosure controls and procedures as of SeptemberJune 30, 20182019. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our CEO, our CFO and our Controller have concluded that, as of SeptemberJune 30, 20182019, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our CEO, our CFO and our Controller, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial reporting during the ninesix months ended SeptemberJune 30, 2018,2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Cautionary Note Concerning Factors That May Affect Future Results
This Form 10-Q contains statements which, to the extent they are not statements of historical or present fact, constitute "forward-looking statements"“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"“believe,” “expect,” “expectations,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “will,” “should,” “see,” “guidance,” “outlook,” “confident,” “on track” and other words of similar meaning in connection with a discussion of future operating or financial performance.meaning. 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, andR&D spend, other measures of financial performance, or potential future plans, strategies or transactions, of United Technologies or the combined company following United Technologies’ pending acquisition of Rockwell Collins, thecredit ratings and net indebtedness, other anticipated benefits of the pending acquisition,Rockwell Merger, the proposed merger with Raytheon or the spin-offs by United Technologies of Otis and Carrier into separate independent companies (the “separation transactions”), including estimated synergies and customer cost savings resulting from the proposed merger, the expected timing of completion of the transactionproposed merger and 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 and Rockwell CollinsRaytheon 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;suppliers, and the risks associated with U.S. government sales (including changes or shifts in defense spending due to budgetary constraints, spending cuts resulting from sequestration, a government shutdown, or otherwise, and uncertain funding of programs);
challenges in the development, production, delivery, support, performance and realization of the anticipated benefits (including our expected returns under customer contracts) of advanced technologies and new products and services;
the scope, nature, impact or timing of the pending Rockwell Collinsproposed merger with Raytheon and the separation transactions and other merger, acquisition and other acquisition and divestiture or restructuring activity, including among other things the integration of acquired businesses into UTC's existingor with other businesses and realization of synergies and opportunities for growth and innovation;innovation and incurrence of related costs and expenses;
future timing and levels of indebtedness, including indebtedness that may be incurred by UTC in connection with the pending Rockwell Collins acquisition,proposed merger with Raytheon and the separation transactions, and capital spending and research and development spending, including in connection with the pending Rockwell Collins acquisition;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,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, including in connection with the pending acquisition of Rockwell Collins;
proposed merger with Raytheon;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;thereof (including the potential termination of U.S. government contracts and performance under undefinitized contract awards and the potential inability to recover termination costs);
new business and investment opportunities;
ourthe 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 and Rockwell CollinsRaytheon and our businesses each operate, including the effect of changes in U.S. trade policies or the U.K.'s’s pending withdrawal from the EU,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, which is commonly referred to as the Tax Cuts and Jobs Act of 2017), environmental, regulatory and other laws and regulations (including, among other things, import/export)export and import requirements such as the International Traffic in Arms Regulations and the Export Administration Regulations, anti-bribery and anti-corruption requirements, including the Foreign Corrupt Practices
Act, industrial cooperation agreement obligations, and procurement and other laws and regulationsregulations) in the U.S. and other countries in which we, Raytheon and Rockwell Collinsour businesses each operate;
negative effects of the announcement or pendency of the proposed merger with Raytheon or the separation transactions on the market price of our and/or Raytheon’s respective common stock and/or on our respective financial performance;
the ability of UTC and Rockwell CollinsRaytheon to receive the required regulatory approvals for the proposed merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the merger)transaction) and approvals of our shareowners and Raytheon’s shareholders and to satisfy the other conditions to the closing of the pending acquisitionmerger on a timely basis or at all;
the occurrence of events that may give rise to a right of one or both of UTC or Rockwell CollinsRaytheon to terminate the merger agreement;
negative effects of the announcement or the completion of the merger on the market price of UTC’s and/or Rockwell Collins’ common stock and/or on their respective financial performance;
risks related to Rockwell Collins and UTC being restricted in their operation of their businesses while the merger agreement is in effect;
risks relating to the value of the UTC’sour shares to be issued in connectionthe proposed merger with the pending Rockwell Collins acquisition,Raytheon, significant mergertransaction costs and/or unknown liabilities;
the possibility that the anticipated benefits from the proposed merger with Raytheon cannot be realized in full or at all or may take longer to realize than expected, including risks associated with third-partythird party contracts containing consent and/or other provisions that may be triggered by the Rockwell Collins merger agreement;proposed transaction;
risks associated with merger-related litigation;
the possibility that costs or difficulties related to the integration of UTC’s and Raytheon’s operations will be greater than expected;
risks relating to completed merger, acquisition and divestiture activity, including UTC’s 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;
the ability of each of UTC, Raytheon, the companies resulting from the separation transactions and Rockwell Collins, or the combined company to retain and hire key personnel.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 intended qualification of (i) the merger as a tax-free reorganization and (ii) the separation transactions as tax-free to UTC and UTC’s shareowners, in each case, for U.S. federal income tax purposes;
the possibility that any opinions, consents, approvals or rulings required in connection with the separation transactions will not be received or obtained within the expected time frame, on the expected terms or at all;
expected financing transactions undertaken in connection with the proposed merger with Raytheon and 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 separation transactions will exceed our estimates; and
the impact of the proposed merger and the separation transactions on the respective businesses of UTC and Raytheon and the risk that the separation transactions may be more difficult, time-consuming or costly than expected, including the impact on UTC’s resources, systems, procedures and controls and the impact on relationships with customers, suppliers, employees and other business counterparties.
In addition, this Form 10-Q 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 Condensed Consolidated Financial Statements" under the heading "Note 15: Contingent Liabilities," the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Business Overview," "Critical Accounting Estimates," "Results of Operations," and "Liquidity and Financial Condition," and "Critical Accounting Estimates," and the sections titled "Legal Proceedings" and "Risk Factors" in this Form 10-Q and in our 20172018 Annual Report and 20172018 Form 10-K. Additional important information as to these factors is included in our 20172018 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", in our 20172018 Form 10-K 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 our Form S-4 Registration StatementStatements (Registration No. 333-220883) and (Registrations No. 333-232696) under the heading "Risk Factors". 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.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Federal Securities Laws
737 MAX Aircraft Litigation
On January 2,Multiple lawsuits have been filed in U.S. courts relating to the October 29, 2018 Lion Air Flight 610 and/or the March 10, 2019 Ethiopian Airlines Flight 302 accidents. Certain of our Collins Aerospace businesses have been named as a purported shareowner filed a second amended complaintparty, among others, in the United States District Courtmany of these lawsuits. Collins Aerospace sold certain aircraft parts and systems to The Boeing Company for the Southern District of New York under the federal securities laws against the Company737 MAX aircraft involved in these accidents. We are also fully supporting all ongoing governmental investigations and certain of its current and former executives (Frankfurt-Trust Investment Luxemburg AG v. United Technologies Corporation et al.), which further amends a previously disclosed complaint that was filed on May 10, 2017. In the second amended complaint, the plaintiff purports to represent a class of shareowners who purchased the Company’s stock between December 11, 2014 and July 20, 2015. The second amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, related to alleged false and misleading statements and omissions of material fact made in connection with the Company’s 2015 earnings expectations. On September 28, 2018, the Court granted the defendants’ motion to dismiss the case in its entirety. On October 25, 2018, the plaintiff filed a Notice of Appealinquiries relating to the United States Courtaccidents. We do not expect that the lawsuits or governmental investigations or inquiries will have a material adverse effect on our financial position, results of Appeals for the Second Circuit.
DOJ/SEC Investigations
As previously disclosed, in December 2013 and January 2014, UTC made voluntary disclosures to the United States Department of Justice (DOJ), the Securities and Exchange Commission (SEC) Division of Enforcement and the United Kingdom’s Serious Fraud Office to report the status of its internal investigation regarding a non-employee sales representative retained by United Technologies International Operations, Inc. (UTIO) and IAE for the sale of Pratt & Whitney and IAE engines and aftermarket services, respectively, in China. On April 7, 2014, the SEC notified UTC that it was conducting a formal investigation and issued a subpoena to UTC. The SEC issued a second subpoena on March 9, 2015 seeking documents related to internal allegations of violations of anti-bribery laws from UTC’s aerospace and commercial businesses, including but not limited to Otis businesses in China. On March 7, 2018, the DOJ notified UTC that it had decided to close its investigation of this matter. In the third quarter of 2018, UTC reached a final civil administrative resolution with the SEC regarding this matter, including a payment to the SEC of $13.9 million. As part of the settlement, UTC did not admitoperations or deny the findings in the SEC’s final order, which was issued on September 12, 2018.cash flows.
See Note 15: Contingent Liabilities, for discussion regarding other legal proceedings.
Except as otherwise noted above, there have been no material developments in legal proceedings. For previously reported information about legal proceedings refer to Part I, Item 3, "Legal Proceedings," of our 20172018 Form 10-K and Part.Part II - Other Information, Item 1 "Legal Proceedings"1. Legal Proceedings of our 20182019 Form 10-Q (Q1) and 2018 Form 10-Q (Q2). for the quarter ended March 31, 2019.
ThereExcept as noted below, there have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A, Risk Factors, in our 20172018 Form 10-K.
Risks Relating to our Proposed Merger with Raytheon
We may not complete the combination with Raytheon or complete the combination within the time frame we anticipate; the combined business may underperform relative to our expectations; the combination may cause our financial results to differ from our expectations or the expectations of the investment community; we may not be able to achieve anticipated cost savings or other anticipated benefits.
The completion of the combination with Raytheon is subject to a number of conditions. The failure to satisfy all of the required conditions could delay the completion of the combination for a significant period of time or prevent it from occurring at all. Any delay in completing the combination could cause UTC not to realize some or all of the benefits that UTC expects to achieve if the combination is successfully completed within the expected timeframe, or could cause UTC to realize such benefits on a different timeline than expected. In addition, the terms and conditions of the required regulatory authorizations and consents for the combination that are granted, if any, may impose requirements, limitations or costs or place restrictions on the conduct of the combined company’s business or may materially delay the completion of the combination. Moreover, the completion of the combination is subject to the completion of the spin-offs of Otis and Carrier, which are themselves subject to a number of conditions (subject to UTC’s agreement to consummate the distributions pursuant to, and subject to the terms and conditions of, the Raytheon merger agreement). Any delay in or prevention of the completion of the spin-offs could delay or prevent the completion of the combination.
The success of the combination will depend, in part, on the combined company’s ability to successfully combine and integrate the businesses of UTC and Raytheon and realize the anticipated benefits, including synergies, cost savings, innovation opportunities and operational efficiencies, from the combination. If the combined company is unable to achieve these objectives within the anticipated time frame, or at all, the anticipated benefits may not be realized fully or at all, or may take longer to realize than expected, and the value of the combined company’s common stock may decline.
The integration of the two companies may result in material challenges, including, without limitation:
managing larger combined aerospace systems and defense businesses;
maintaining employee morale and retaining key management and other employees;
retaining existing business and operational relationships, including customers, suppliers and employees and other counterparties, as may be impacted by contracts containing consent and/or other provisions that may be triggered by the combination, and attracting new business and operational relationships;
the possibility of faulty assumptions underlying expectations regarding the integration process;
the possibility of significant costs involved in connection with completing the merger, including costs to achieve expected synergies;
consolidating corporate and administrative infrastructures and eliminating duplicative operations;
coordinating geographically separate organizations;
unanticipated issues in integrating information technology, communications and other systems; and
unforeseen expenses or delays associated with the combination.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
The following table provides information about our purchases during the quarter ended SeptemberJune 30, 20182019 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act.
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2018 | | Total Number of Shares Purchased (000's) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Program (000's) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (dollars in millions) |
July 1 - July 31 | | 60 |
| | $ | 131.20 |
| | 60 |
| | $ | 2,234 |
|
August 1 - August 31 | | 59 |
| | 132.41 |
| | 59 |
| | $ | 2,226 |
|
September 1 - September 30 | | 53 |
| | 138.11 |
| | 53 |
| | $ | 2,219 |
|
Total | | 172 |
| | $ | 133.75 |
| | 172 |
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2019 | | Total Number of Shares Purchased (000's) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Program (000's) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (dollars in millions) |
April 1 - April 30 | | 95 |
| | $ | 137.54 |
| | 95 |
| | $ | 1,919 |
|
May 1 - May 31 | | 104 |
| | 132.35 |
| | 104 |
| | $ | 1,905 |
|
June 1 - June 30 | | 97 |
| | 128.73 |
| | 97 |
| | $ | 1,893 |
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Total | | 296 |
| | $ | 132.82 |
| | 296 |
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On October 14, 2015, our Board of Directors authorized a share repurchase program for up to $12 billion of our common stock, replacing the program announced on July 19, 2015. At SeptemberJune 30, 2018,2019, the maximum dollar value of shares that may yet be purchased under this current program was approximately $2,219$1,893 million. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase (ASR) 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 as required under our employee savings plan. Our ability to repurchase shares is subject to applicable law, including restrictions arising from the pending merger transaction with Raytheon. No shares were reacquired in transactions outside the program during the quarter ended SeptemberJune 30, 2018.
In connection with the announcement of the merger with Rockwell Collins, we have suspended share repurchases, excluding activity required under our equity award programs and employee savings plans, to manage cash flow and liquidity.2019.
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Exhibit Number | | Exhibit Description |
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1210.1 | | |
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15 | | |
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31.1 | | |
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31.2 | | |
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31.3 | | |
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32 | | |
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101.INS | | XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.* (File name: utx-20180930.xml)utx-20190630.xml) |
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101.SCH | | XBRL Taxonomy Extension Schema Document.* (File name: utx-20180930.xsd)utx-20190630.xsd) |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document.* (File name: utx-20180930_cal.xml)utx-20190630_cal.xml) |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document.* (File name: utx-20180930_def.xml)utx-20190630_def.xml) |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document.* (File name: utx-20180930_lab.xml)utx-20190630_lab.xml) |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document.* (File name: utx-20180930_pre.xml)utx-20190630_pre.xml) |
Notes to Exhibits List:
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* | Submitted electronically herewith. |
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the quarterquarters and ninesix months ended SeptemberJune 30, 20182019 and 20172018, (ii) Condensed Consolidated Statements of Comprehensive Income for the quarterquarters and ninesix months ended SeptemberJune 30, 20182019 and 20172018, (iii) Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20182019 and December 31, 20172018, (iv) Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 2019 and 2018, (v) Condensed Consolidated Statement of Changes in Equity for the quarters and six months ended June 30, 2019 and 2018 and 2017, and (v)(vi) Notes to Condensed Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | UNITED TECHNOLOGIES CORPORATION (Registrant) |
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Dated: | OctoberJuly 26, 20182019 | by: | /s/ AKHIL JOHRI |
| | | Akhil Johri |
| | | Executive Vice President & Chief Financial Officer |
| | | |
| | | (on behalf of the Registrant and as the Registrant's Principal Financial Officer) |
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Dated: | OctoberJuly 26, 20182019 | by: | /s/ ROBERT J. BAILEY |
| | | Robert J. Bailey |
| | | Corporate Vice President, Controller |
| | | |
| | | (on behalf of the Registrant and as the Registrant's Principal Accounting Officer) |