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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

     For the fiscal year ended December 31, 2012

Commission file number 1-812

 

 

UNITED TECHNOLOGIES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   06-0570975

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

One Financial Plaza, Hartford, Connecticut  

06103

(Zip Code)

(Address of principal executive offices)  

Registrant’s telephone number, including area code (860) 728-7000

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock ($1 par value)   New York Stock Exchange
(CUSIP 913017 10 9)  

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   x     No   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes   ¨     No   x

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   x     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 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   x     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes   ¨     No   x

The aggregate market value of the voting Common Stock held by non-affiliates at June 30, 2012 was approximately $68,802,786,635, based on the New York Stock Exchange closing price for such shares on that date. For purposes of this calculation, the Registrant has assumed that its directors and executive officers are affiliates.

At January 31, 2013, there were 916,639,918 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts I, II and IV hereof incorporate by reference portions of the United Technologies Corporation 2012 Annual Report to Shareowners. Part III hereof incorporates by reference portions of the United Technologies Corporation Proxy Statement for the 2013 Annual Meeting of Shareowners.

 

 

 


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

Index to Annual Report

on Form 10-K for

Year Ended December 31, 2012

 

     Page  

PART I

  

Item 1. Business:

     3   

Cautionary Note Concerning Factors That May Affect Future Results

     11   

Item 1A. Risk Factors

     12   

Item 1B. Unresolved Staff Comments

     18   

Item 2. Properties

     19   

Item 3. Legal Proceedings

     19   

Item 4. Mine Safety Disclosures

     22   

PART II

  

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     22   

Item 6. Selected Financial Data

     22   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     22   

Item 8. Financial Statements and Supplementary Data

     22   

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     22   

Item 9A. Controls and Procedures

     23   

Item 9B. Other Information

     23   

PART III

  

Item 10. Directors, Executive Officers and Corporate Governance

     23   

Item 11. Executive Compensation

     25   

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     25   

Item 13. Certain Relationships and Related Transactions, and Director Independence

     25   

Item 14. Principal Accounting Fees and Services

     26   

PART IV

  

Item 15. Exhibits and Financial Statement Schedules

     26   

SIGNATURES

     31   

 

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UNITED TECHNOLOGIES CORPORATION

Annual Report on Form 10-K for

Year Ended December 31, 2012

Whenever reference is made in this Form 10-K to specific sections of United Technologies Corporation’s 2012 Annual Report to Shareowners (2012 Annual Report), those sections are incorporated herein by reference. 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 product 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-K are provided for convenience only. Information available through these web sites is not incorporated by reference into this Form 10-K.

PART I

 

Item 1. Business

General

United Technologies Corporation was incorporated in Delaware in 1934. UTC provides high technology products and services to the building systems and aerospace industries worldwide. Growth is attributable primarily to the internal development of our existing businesses and to acquisitions. The following description of our business should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Annual Report, including the information contained therein under the heading “Business Overview.”

In 2012, we implemented a new organizational structure that allows us to better serve customers, drive growth and achieve further efficiencies through greater integration across certain product lines. As part of this new structure, effective January 1, 2012, we formed the UTC Climate, Controls & Security segment, which is composed of the former Carrier and UTC Fire & Security segments.

On July 26, 2012, we acquired Goodrich Corporation (Goodrich) pursuant to a merger agreement dated September 21, 2011. As a result of the acquisition, Goodrich became a wholly-owned subsidiary of UTC and we combined the acquired Goodrich business and the legacy Hamilton Sundstrand business to form a new segment named UTC Aerospace Systems.

As part of our new organizational structure implemented in 2012, we also created UTC Propulsion & Aerospace Systems, a new organization consisting of the Pratt & Whitney and UTC Aerospace Systems segments. We continue to report the financial and operational results of Pratt & Whitney and UTC Aerospace Systems separately.

Our operating units include businesses with operations throughout the world. Otis and UTC Climate, Controls & Security (collectively referred to as the “commercial businesses”) serve customers in the commercial, government infrastructure and residential property sectors worldwide. UTC Climate, Controls & Security also serves industrial, transport refrigeration and food service equipment customers. Pratt & Whitney, UTC Aerospace Systems, and Sikorsky (collectively referred to as the “aerospace businesses”) primarily serve commercial and government customers in both the original equipment and aftermarket parts and services markets of the aerospace industry. Pratt & Whitney also serves customers in certain industrial markets. For 2012, our commercial and industrial sales (generated principally by our commercial businesses) were approximately 51 percent of our consolidated sales, and commercial aerospace and military aerospace sales (generated exclusively by our aerospace businesses) were approximately 28 percent and 21 percent, respectively, of our consolidated sales. Consolidated international sales for 2012, including U.S. export sales, were 60 percent of our consolidated sales.

This Form 10-K and our quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the Investor Relations section of our Internet website (http://www.utc.com) under the heading “SEC Filings” as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). Our SEC filings are also available for reading and copying at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) containing reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

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Description of Business by Segment

Our operations for the periods presented herein are classified into five principal segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems, and Sikorsky. Each segment groups similar operating companies and the management organization of each segment has general operating autonomy over a range of products and services. The principal products and services of each segment are as follows:

Otis —elevators, escalators, moving walkways and service.

UTC Climate, Controls & Security —heating, ventilating, air conditioning (HVAC) and refrigeration systems, controls, services and energy-efficient products for residential, commercial, industrial and transportation applications, fire and special hazard detection and suppression systems, firefighting equipment, security, monitoring and rapid response systems and service, and security personnel services.

Pratt & Whitney —commercial, military, business jet and general aviation aircraft engines, auxiliary power units, and parts and services.

UTC Aerospace Systems —aerospace products and aftermarket services, including electric power generation, management and distribution systems, flight control systems, engine control systems, intelligence, surveillance and reconnaissance systems, engine components, environmental control systems, fire protection and detection systems, propeller systems, aircraft nacelles, and interior, actuation, landing and electronic systems.

Sikorsky —military and commercial helicopters, helicopter and aircraft aftermarket parts and services.

Segment financial data for the years 2010 through 2012, including financial information about foreign and domestic operations and export sales, appears in Note 19 to the Consolidated Financial Statements in our 2012 Annual Report. Segment sales as discussed below include intercompany sales, which are ultimately eliminated within the “Eliminations and other” category as reflected in the segment financial data in Note 19 to the Consolidated Financial Statements in our 2012 Annual Report. Similarly, total segment backlog as discussed below includes fully-funded government and intercompany backlog.

Otis

Otis is the world’s largest elevator and escalator manufacturing, installation and service company. Otis designs, manufactures, sells and installs a wide range of passenger and freight elevators for low-, medium- and high-speed applications, as well as a broad line of escalators and moving walkways. In addition to new equipment, Otis provides modernization products to upgrade elevators and escalators as well as maintenance and repair services for both its products and those of other manufacturers. Otis serves customers in the commercial and residential property industries around the world. Otis sells directly to the end customer and through sales representatives and distributors.

Sales generated by Otis’ international operations were 82 percent and 83 percent of total Otis segment sales in 2012 and 2011, respectively. At December 31, 2012, Otis’ backlog was $14.8 billion as compared to $14.3 billion at December 31, 2011. Of the total Otis backlog at December 31, 2012, approximately $8.2 billion is expected to be realized as sales in 2013.

UTC Climate, Controls & Security

As described above, in 2012, we implemented a new organizational structure that allows us to better serve customers, drive growth and achieve further efficiencies through greater integration across certain product lines. As part of this new structure, effective January 1, 2012, we formed the UTC Climate, Controls & Security segment, which is composed of the former Carrier and UTC Fire & Security segments.

UTC Climate, Controls & Security is the leading provider of HVAC and refrigeration solutions, including controls for residential, commercial, industrial and transportation applications. These products and services are sold under the Carrier name and other brand names to building contractors and owners, homeowners, transportation companies, retail stores and food service companies. UTC Climate, Controls & Security is also a global provider of security and fire safety products and services. UTC Climate, Controls & Security provides electronic security products such as intruder alarms, access control systems and video surveillance systems and designs and manufactures a wide range of fire safety products including specialty hazard detection and fixed suppression products, portable fire extinguishers, fire detection and life safety systems, and other firefighting equipment. Services provided to the electronic security and fire safety industries include systems integration, video surveillance, installation, maintenance, and inspection services. In certain markets, UTC Climate, Controls & Security also provides monitoring, response and security personnel services, including cash-in-transit security, to complement its electronic security and fire safety businesses. Through its venture with Watsco, Inc., UTC Climate, Controls & Security distributes Carrier, Bryant, Payne and Totaline residential and light commercial HVAC products in the U.S. and selected territories in the Caribbean and Latin America. UTC Climate, Controls &

 

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Security sells directly to end customers and through manufacturers’ representatives, distributors, wholesalers, dealers and retail outlets. Certain of UTC Climate, Controls & Security’s HVAC businesses are seasonal and can be impacted by weather. UTC Climate, Controls & Security customarily offers its customers incentives to purchase products to ensure an adequate supply of its products in the distribution channels. The principal incentive program provides reimbursements to distributors for offering promotional pricing on UTC Climate, Controls & Security products. UTC Climate, Controls & Security products and services are used by governments, financial institutions, architects, building owners and developers, security and fire consultants, homeowners and other end-users requiring a high level of security and fire protection for their businesses and residences. UTC Climate, Controls & Security provides its security and fire safety products and services under Chubb, Kidde and other brand names and sells directly to customers as well as through manufacturer representatives, distributors, dealers and U.S. retail distribution.

In 2010, we completed the acquisition of the GE Security business from General Electric Company, strengthening UTC Climate, Controls & Security’s portfolio of security and fire safety technologies for commercial and residential applications, including fire detection and life safety systems, intrusion alarms, video surveillance and access control systems. In 2012, UTC Climate, Controls & Security continued to execute the portfolio transformation strategy it began in 2008 by completing divestitures of several non-core businesses and taking non-controlling equity interests in various ventures. This included the sale of a controlling interest in a Carrier manufacturing and distribution joint venture in Asia and the sale of a controlling interest in the Carrier Canadian distribution business. These 2012 actions marked the completion of the Carrier portfolio transformation. In 2012, UTC Climate, Controls & Security also completed a number of transactions related to its ongoing fire and security portfolio transformation, including the divestiture of a controlling stake in its U.S.-based fire and security branch operations.

Sales generated by UTC Climate, Controls & Security’s international operations, including U.S. export sales, were 62 percent and 65 percent of total UTC Climate, Controls & Security segment sales in 2012 and 2011, respectively. At December 31, 2012, UTC Climate, Controls & Security’s backlog was $3.0 billion as compared to $3.4 billion at December 31, 2011. Substantially all of the backlog at December 31, 2012 is expected to be realized as sales in 2013.

Pratt & Whitney

Pratt & Whitney is among the world’s leading suppliers of aircraft engines for the commercial, military, business jet and general aviation markets. Pratt & Whitney Commercial Engines provides maintenance, repair and overhaul services, including the sale of spare parts, as well as fleet management services for large commercial engines. Pratt & Whitney produces families of engines for wide- and narrow-body and large regional aircraft in the commercial market and for fighter and transport aircraft in the military market. Pratt & Whitney Canada (P&WC) is a world leader in the production of engines powering general and business aviation, as well as regional airline, utility and military, airplanes and helicopters, and provides related maintenance, repair and overhaul services, including the sale of spare parts, as well as fleet management services.

In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into collaboration arrangements in which sales, costs and risks are shared. At December 31, 2012, the interests of third party participants in Pratt & Whitney-directed commercial jet engine programs ranged from 14 percent to 48 percent. In addition, Pratt & Whitney has interests in other engine programs, including a 50 percent ownership interest in the Engine Alliance (EA), a joint venture with GE Aviation, which markets and manufactures the GP7000 engine for the Airbus A380 aircraft. Pratt & Whitney has entered into risk and revenue sharing arrangements with third parties for 40 percent of the products and services that Pratt & Whitney is responsible for providing to the EA. Pratt & Whitney accounts for its interests in the EA joint venture under the equity method of accounting. Pratt & Whitney continues to pursue additional collaboration partners.

As previously reported, on June 29, 2012, Pratt & Whitney, Rolls-Royce plc (Rolls-Royce), MTU Aero Engines AG (MTU), and Japanese Aero Engines Corporation (JAEC), participants in the IAE International Aero Engines AG (IAE) collaboration, which sells and supports V2500 engines for the Airbus A320 family of aircraft, completed a restructuring of their interests in IAE. Under the terms of the agreement, Rolls-Royce sold its ownership and collaboration interests in IAE to Pratt & Whitney, while also entering into an agreement to license its V2500 intellectual property to Pratt & Whitney. In exchange for the increased ownership and collaboration interests and intellectual property license, Pratt & Whitney paid Rolls-Royce $1.5 billion at closing with additional payments due to Rolls-Royce during the fifteen year period following closing of the purchase, conditional upon each hour flown by V2500-powered aircraft in service at the closing. Rolls-Royce will continue to support the program as a strategic supplier for the V2500 engine and continue to manufacture parts and assemble engines. As previously reported, Pratt & Whitney entered into a collaboration arrangement with MTU with respect to a portion of the collaboration interest in IAE acquired from Rolls-Royce for consideration of approximately $233 million with additional payments due to Pratt & Whitney in the future. As a result of these transactions, Pratt & Whitney holds a 61% net interest in the collaboration. Also as previously reported, on October 12, 2011, Pratt & Whitney and Rolls-Royce announced an agreement to form a new joint venture, subject to regulatory approval and other closing conditions, in which each will hold an equal share, to develop new engines to power the next generation of 120 to 230 passenger mid-size aircraft that will replace the existing fleet of mid-size aircraft currently in service or in development. On April 12, 2012, MTU and JAEC also agreed to participate in this new joint venture, in which the partners will focus on high-bypass ratio geared turbofan technology and will also collaborate on future studies of next generation propulsion systems.

 

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The development of new engines and improvements to current production engines present important growth opportunities. Pratt & Whitney is under contract with the U.S. Air Force to develop the F135 engine, a derivative of Pratt & Whitney’s F119 engine, to power the single-engine F-35 Lightning II aircraft being developed by Lockheed Martin. Pratt & Whitney achieved initial service release for the conventional take-off and landing/carrier variant and short take-off and vertical landing variant of the F135 engine in February 2010 and January 2011, respectively. These propulsion system configurations are now certified for production and cleared for flight on the Lockheed Martin F-35B stealth fighter jet, and are in use by the U.S. Air Force at Eglin Air Force Base and by the U.S. Marine Corps at Marine Corps Air Station Yuma. In addition, Pratt & Whitney is currently developing technology, including the PurePower PW1000G Geared TurboFan engine, intended to enable it to power both currently-proposed and future aircraft. The PurePower PW1000G engine targets a significant reduction in fuel burn and noise levels with lower environmental emissions and operating costs than current production engines. In December 2010, Airbus announced that it will offer a version of the PurePower PW1000G engine as a new engine option to power its A320neo family of aircraft scheduled to enter into service in 2015. In November 2012, Pratt & Whitney commenced testing on this new engine, the PW1100G-JM, being developed as part of a collaboration with MTU and JAEC. Additionally, PurePower PW1000G engine models have been selected by Bombardier to power the new CSeries passenger aircraft, by Mitsubishi Aircraft Corporation to power the new Mitsubishi Regional Jet, and by Irkut Corporation of Russia to power the proposed new Irkut MC-21 passenger aircraft. These aircraft are scheduled to enter into service in 2013, 2015 and 2017, respectively. Further, on January 8, 2013, Embraer announced the selection of the PurePower engine to exclusively power the next generation of Embraer’s E-Jet family of aircraft scheduled to enter service in 2018. The success of these aircraft and the PurePower PW1000G family of engines is dependent upon many factors including technological challenges, aircraft demand, and regulatory approval. Based on these factors, as well as the level of success of aircraft program launches by aircraft manufacturers and other conditions, additional investment in the PurePower program may be required. P&WC has developed or is developing the PW210 engine family for helicopters manufactured by Sikorsky, AgustaWestland and The Eurocopter Group and is developing the PurePower PW800 engine for the new generation of long-range and heavy business jets. Pratt & Whitney continues to enhance its programs through performance improvement measures and product base expansion.

Pratt & Whitney’s products are sold principally to aircraft manufacturers, airlines and other aircraft operators, aircraft leasing companies and the U.S. and foreign governments. Pratt & Whitney’s products and services must adhere to strict regulatory and market-driven safety and performance standards. The frequently changing nature of these standards, along with the long duration of aircraft engine development, production and support programs, creates uncertainty regarding engine program profitability. The vast majority of sales are made directly to the end customer and, to a limited extent, through independent distributors and foreign sales representatives. Sales to Airbus (Pratt & Whitney’s largest non-governmental customer by sales) were 25 percent and 16 percent of total Pratt & Whitney segment sales in 2012 and 2011, respectively, before taking into account discounts or financial incentives offered to customers. Sales to the U.S. Government were 27 percent and 24 percent of total Pratt & Whitney segment sales in 2012 and 2011, respectively.

Sales generated by Pratt & Whitney’s international operations, including U.S. export sales, were 57 percent of total Pratt & Whitney segment sales in 2012 and 2011. At December 31, 2012, Pratt & Whitney’s backlog was $43.6 billion, including $4.3 billion of U.S. Government-funded contracts and subcontracts. At December 31, 2011, these amounts were $21.3 billion and $4.3 billion, respectively. This backlog increase is primarily due to the consolidation of IAE and the incorporation of certain fleet maintenance aftermarket agreements in Pratt & Whitney’s backlog. Of the total Pratt & Whitney backlog at December 31, 2012, approximately $5.4 billion is expected to be realized as sales in 2013. Pratt & Whitney’s backlog includes certain contracts for which actual costs may ultimately exceed total sales. Pratt & Whitney’s backlog excludes orders for new commercial engines that have not yet achieved full aviation authority certification. See Note 1 to the Consolidated Financial Statements in our 2012 Annual Report for a description of our accounting for long-term contracts.

As described above, in 2012 we implemented a new organizational structure that allows us to better serve customers, drive growth and achieve further efficiencies through greater integration across certain product lines. As part of this new structure, we created UTC Propulsion & Aerospace Systems, a new organization consisting of Pratt & Whitney and UTC Aerospace Systems. We continue to report the financial and operational results of Pratt & Whitney and UTC Aerospace Systems separately.

UTC Aerospace Systems

As described above, on July 26, 2012, we acquired Goodrich pursuant to a merger agreement dated September 21, 2011. As a result of the acquisition, Goodrich became a wholly-owned subsidiary of UTC and we combined the acquired Goodrich business and the legacy Hamilton Sundstrand business to form a new segment named UTC Aerospace Systems. UTC Aerospace Systems is also part of UTC Propulsion & Aerospace Systems, a new organization consisting of the Pratt & Whitney and UTC Aerospace Systems segments. We continue to report the financial and operational results of Pratt & Whitney and UTC Aerospace Systems separately.

UTC Aerospace Systems is among the world’s leading suppliers of technologically advanced aerospace products and aftermarket services for diversified industries worldwide. UTC Aerospace Systems’ aerospace products include electric power generation, management and distribution systems, flight control systems, engine control systems, intelligence, surveillance and

 

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reconnaissance systems, engine components, environmental control systems, fire protection and detection systems, propeller systems, aircraft nacelles, and interior, actuation, landing and electronic systems. UTC Aerospace Systems products serve commercial, military, regional, business and general aviation, as well as military ground vehicle, space and undersea applications. Aftermarket services include spare parts, overhaul and repair, engineering and technical support and fleet maintenance programs. UTC Aerospace Systems sells aerospace products to airframe manufacturers, the U.S. and foreign governments, aircraft operators, maintenance, repair and overhaul providers, and independent distributors. Sales to Boeing (UTC Aerospace Systems’ largest non-governmental customer by sales) were 13 percent and 14 percent of total UTC Aerospace Systems segment sales in 2012 and 2011, respectively. Sales to the U.S. Government were 24 percent and 25 percent of total UTC Aerospace Systems segment sales in 2012 and 2011, respectively.

UTC Aerospace Systems is engaged in numerous commercial and military development programs including the Boeing 787 aircraft, the Bombardier CSeries aircraft, the Mitsubishi Regional Jet, the Airbus A350 and A320neo aircraft, the Irkut MC-21 aircraft, the COMAC C919 aircraft, the CH-53K next generation heavy lift helicopter for the U.S. Marine Corps and the Lockheed Martin F-35 Lightning II military aircraft and the Airbus A400M military aircraft. UTC Aerospace Systems is also the operations support prime contractor for NASA’s space suit/life support system and produces environmental monitoring and control, life support, mechanical systems, power generation, management, and distribution and thermal control systems for the International Space Station and the Orion crew exploration vehicle.

Sales generated by UTC Aerospace Systems’ international operations, including U.S. export sales, were 49 percent and 44 percent of total UTC Aerospace Systems segment sales in 2012 and 2011, respectively. At December 31, 2012, UTC Aerospace Systems’ backlog was $10.1 billion, including $2.5 billion of U.S. Government-funded contracts and subcontracts. At December 31, 2011, these amounts were $4.9 billion and $846 million, respectively. This backlog increase is primarily due to additional backlog incorporated as a result of the Goodrich acquisition. Of the total UTC Aerospace Systems backlog at December 31, 2012, approximately $7.1 billion is expected to be realized as sales in 2013. See Note 1 to the Consolidated Financial Statements in our 2012 Annual Report for a description of our accounting for long-term contracts.

Sikorsky

Sikorsky is one of the world’s largest helicopter companies. Sikorsky manufactures military and commercial helicopters and also provides aftermarket helicopter and aircraft parts and services.

Current major production programs at Sikorsky include the UH-60M Black Hawk medium-transport helicopters and HH-60M Medevac helicopters for the U.S. and foreign governments, the S-70 Black Hawk for foreign governments, the MH-60S and MH-60R helicopters for the U.S. Navy, the International Naval Hawk for multiple naval missions, and the S-76 and S-92 helicopters for commercial operations. The UH-60M helicopter is the latest and most modern in a series of Black Hawk variants that Sikorsky has been delivering to the U.S. Army since 1978. In July 2012, the U.S. Government and Sikorsky signed a five-year multi-service contract for approximately 650 H-60 helicopters. Actual production quantities will be determined year-by-year over the life of the program based on funding allocations set by Congress and the U.S. Department of Defense acquisition priorities, as well as the U.S. Foreign Military Sales program. Sikorsky is also developing the CH-53K next generation heavy lift helicopter for the U.S. Marine Corps and the CH-148 derivative of the H-92 helicopter, a military variant of the S-92 helicopter, for the Canadian Government. The latter is being developed under a fixed-price contract that provides for the development and production of 28 helicopters, and a related support contract that provides for logistical support through March 2028. Sikorsky currently anticipates that its revenues under these contracts will be approximately $4.3 billion. Revenues are subject to changes in underlying variables such as future flight hours as well as fluctuations in foreign currency exchange rates. This is the largest and most expansive fixed-price development contract in Sikorsky’s history. Sikorsky and the Canadian Government have a number of disputes relating to the contract, including responsibility for delay of delivery of the fully configured and tested aircraft beyond the current contract delivery schedule and other disputes relating to development, production and logistical support. No aircraft were delivered in 2012. Sikorsky intends to continue discussions with the Canadian Government aimed at resolving these open disputes and establishing a revised delivery schedule. However, as a result of ongoing delays with delivery of aircraft and given the outstanding contractual disputes in connection with this program still to be resolved, Sikorsky has taken a $157 million charge in the quarter ended December 31, 2012, as further described in our 2012 Annual Report under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Sikorsky’s aftermarket business includes spare parts sales, mission equipment, overhaul and repair services, maintenance contracts and logistics support programs for helicopters and other aircraft. Sales are principally made to the U.S. and foreign governments, and commercial helicopter operators. Sikorsky is increasingly engaging in logistics support programs and partnering with its government and commercial customers to manage and provide logistics, maintenance and repair services.

Sales to the U.S. Government were 66 percent and 68 percent of total Sikorsky segment sales in 2012 and 2011, respectively. Sales generated by Sikorsky’s international operations, including U.S. export sales, were 32 percent and 34 percent of total Sikorsky segment sales in 2012 and 2011, respectively. At December 31, 2012, Sikorsky’s backlog was $14.4 billion, including $6.4 billion of U.S. Government-funded contracts and subcontracts. At December 31, 2011, these amounts were $9.4 billion and $4.1 billion,

 

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respectively. This backlog increase is primarily due to increased firm commitments resulting from the five-year multi-service contract with the U.S. Government for UH-60M helicopters referenced above. Of the total Sikorsky backlog at December 31, 2012, approximately $5.5 billion is expected to be realized as sales in 2013.

Other

On March 14, 2012, the Board of Directors of the Company approved a plan for the divestiture of a number of our non-core businesses. Cash generated from these divestitures has been and will be used to repay the debt issued to finance the Goodrich acquisition. These non-core businesses include the legacy Hamilton Sundstrand industrial businesses, which manufacture air compressors, metering pumps and heavy duty process pumps for industries involved with chemical and hydrocarbon processing, oil and gas production, water and wastewater treatment, and construction, Clipper Windpower plc (Clipper), a California-based wind turbine manufacturer, Pratt & Whitney Rocketdyne, a leader in the design, development and manufacture of sophisticated space propulsion systems for military and commercial applications, and Pratt & Whitney Power Systems, which sells aero-derivative engines for industrial applications. The sale of Clipper was completed in the third quarter of 2012 and the sale of the legacy Hamilton Sundstrand industrial businesses was completed in the fourth quarter of 2012. On July 23, 2012, we announced an agreement to sell Pratt & Whitney Rocketdyne to GenCorp Inc. for $550 million, and on December 12, 2012 we announced an agreement to sell Pratt & Whitney Power Systems to Mitsubishi Heavy Industries. The closings of the Pratt & Whitney Rocketdyne and Pratt & Whitney Power Systems transactions are subject to customary closing conditions, including regulatory approvals.

On June 29, 2012, management of the Company approved a plan for the divestiture of UTC Power, a world leader in the application of fuel cell technology for stationary and transportation applications. On December 22, 2012, we announced an agreement to sell our UTC Power unit to ClearEdge Power, subject to customary closing conditions.

The results of operations for the remaining divestitures of Pratt & Whitney Rocketdyne and UTC Power, including the net gains/losses expected on disposition, and the related cash flows which result from these non-core businesses have been reclassified to “Discontinued Operations” in our Consolidated Statement of Operations and our Consolidated Statement of Cash Flows for all periods presented. The sale of Pratt & Whitney Power Systems was not reclassified to “Discontinued Operations” due to our expected level of continuing involvement in the business post disposition. The remaining assets and liabilities of Pratt & Whitney Rocketdyne, UTC Power and Pratt & Whitney Power Systems have been reclassified to “Assets held for sale” and “Liabilities held for sale” in our Consolidated Balance Sheet as of December 31, 2012.

Other Matters Relating to Our Business as a Whole

Competition and Other Factors Affecting Our Businesses

As worldwide businesses, our operations can be affected by a variety of economic, industry and other factors, including those described in this section, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2012 Annual Report, in Item 1, “Cautionary Note Concerning Factors That May Affect Future Results,” and in Item 1A, “Risk Factors” in this Form 10-K. Each business unit is subject to significant competition from a large number of companies in the U.S. and other countries, and each competes on the basis of price, delivery schedule, product performance and service.

Our aerospace businesses are subject to substantial competition from domestic manufacturers, foreign manufacturers (whose governments sometimes provide research and development assistance, marketing subsidies and other assistance for certain of their commercial products) and companies that obtain regulatory agency approval to manufacture spare parts. In particular, Pratt & Whitney experiences intense competition for new commercial airframe/engine combinations. Engine suppliers may offer substantial discounts and other financial incentives, performance and operating cost guarantees, participation in financing arrangements and maintenance agreements. For information regarding customer financing commitments, participation in guarantees of customer financing arrangements and performance and operating cost guarantees of Pratt & Whitney, see Notes 5, 15 and 16 to the Consolidated Financial Statements in our 2012 Annual Report. Customer selections of engines and components can also have a significant impact on later sales of parts and services. In addition, the U.S. Government’s and other governments’ policies of purchasing parts from suppliers other than the original equipment manufacturer affect military spare parts sales. Significant elements of our aerospace businesses, such as spare parts sales for engines and aircraft in service, have short lead times. Therefore, backlog information may not be indicative of future demand. Pratt & Whitney’s major competitors in the sale of engines are GE Aviation, Rolls-Royce, Honeywell, Turbomeca, and CFM International.

Research and Development

Because changes in technology can have a significant impact on our operations and competitive position, we spend substantial amounts of our own funds on research and development. These expenditures, which are charged to expense as incurred, were $2.4 billion or 4.1 percent of total sales in 2012, as compared with $2.0 billion or 3.5 percent of total sales in 2011 and $1.7 billion or 3.2 percent of total sales in 2010. We also perform research and development work under contracts funded by the U.S. Government and other customers. This contract research and development, which is performed in our aerospace businesses, amounted

 

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to $1.7 billion in 2012, as compared to $1.5 billion in 2011 and $1.5 billion in 2010. These contract research and development costs include amounts that are expensed as incurred, through cost of products sold, and amounts that are capitalized into inventory to be subsequently recovered through production shipments. Of the total contract research and development costs, $1.7 billion, $1.4 billion and $1.5 billion were expensed in 2012, 2011 and 2010, respectively. The remaining costs have been capitalized.

U.S. Government Contracts

Contracting with the U.S. Government entails certain unique risks. U.S. Government contracts are subject to termination by the government, either for the convenience of the government or for default as a result of our failure to perform under the applicable contract. In the case of a termination for convenience, we would normally be entitled to reimbursement for our allowable costs incurred, plus termination costs and a reasonable profit. If terminated by the government as a result of our default, we could be liable for additional costs the government incurs in acquiring undelivered goods or services from another source and any other damages it suffers. Most of our U.S. Government sales are made under fixed-price type contracts, while approximately $1.8 billion or 3.2 percent of our total sales for 2012 were made under cost-reimbursement type contracts.

Our contracts with the U.S. Government are also subject to audits. Like many defense contractors, we have received audit reports from the U.S. Government that recommend that we reduce certain contract prices because cost or pricing data we submitted in negotiation of the contract prices or cost accounting practices may not have conformed to government regulations. Some of these audit reports have recommended substantial reductions. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and continue to litigate certain cases. For further discussion of risks related to government contracting, see the discussion in Item 1A, “Risk Factors” and Item 3, “Legal Proceedings,” in this Form 10-K and Note 18 to the Consolidated Financial Statements in our 2012 Annual Report for further discussion.

Compliance with Environmental and Other Government Regulations

Our operations are subject to and affected by environmental regulation by federal, state and local authorities in the U.S. and regulatory authorities with jurisdiction over our foreign operations. We have incurred and will likely continue to incur liabilities under various government statutes for the cleanup of pollutants previously released into the environment. We do not anticipate that compliance with current provisions relating to the protection of the environment or that any payments we may be required to make for cleanup liabilities will have a material adverse effect upon our cash flows, competitive position, financial condition or results of operations. Environmental matters are further addressed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 1 and 18 to the Consolidated Financial Statements in our 2012 Annual Report.

Most of the U.S. laws governing environmental matters include criminal provisions. If we were convicted of a violation of the federal Clean Air Act or Clean Water Act, the facility or facilities involved in the violation would be ineligible to be used in performing any U.S. Government contract we are awarded until the Environmental Protection Agency thereafter certifies that the condition giving rise to the violation had been corrected.

In addition, we could be affected by future laws or regulations imposed in response to concerns over climate change. Changes in climate change concerns, or in the regulation of such concerns, including greenhouse gas emissions, could subject us to additional costs and restrictions, including compliance costs and increased energy and raw materials costs.

We conduct our businesses through subsidiaries and affiliates worldwide. Changes in legislation or government policies can affect our worldwide operations. For example, governmental regulation of refrigerants and energy efficiency standards and fire safety regulations are important to our UTC Climate, Controls & Security businesses, and elevator safety codes are important to the businesses of Otis, while government safety and performance regulations, restrictions on aircraft engine noise and emissions and government procurement practices can impact our aerospace businesses.

U.S. laws, regulations, orders, and other measures concerning the export or re-export of products, software, services and technology to, and other trade-related activities involving, non-U.S. countries and parties affect the operations of UTC and its affiliates. These measures include U.S. economic sanctions targeting Iran.

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA) added a new subsection (r) to section 13 of the Exchange Act, requiring a public reporting issuer to disclose in its annual or quarterly reports whether it or any of its affiliates have knowingly engaged in specified activities or transactions relating to Iran, including activities not prohibited by U.S. law and conducted outside the U.S. by non-U.S. affiliates in compliance with local law. Issuers must also file a notice with the SEC if any disclosable activities under ITRA have been included in the annual or quarterly report. Upon receiving such a notice, the SEC is required under ITRA to transmit the notice to the President, the House Committees on Foreign Affairs and Financial Services and the Senate Committees on Foreign Relations and Banking, Housing and Urban Affairs and is required to make these separate notices publicly available on its website.

 

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The following activities are disclosed as required by Section 13(r)(1)(D)(iii) of the Exchange Act as transactions or dealings with the government of Iran that have not been specifically authorized by a U.S. federal department or agency:

UTC Climate, Controls & Security. In 2009, UTC adopted a corporate policy prohibiting new business in or with Iran. In 2012, two of our non-U.S. affiliates engaged in activities related to the orderly winding down of legacy business involving the sale of fire safety equipment through procurement agents to entities owned by the government of Iran. This business was pursuant to contracts entered into by Simtronics AS (Simtronics), a Norwegian company and its subsidiary Water Mist Engineering AS (WME) prior to UTC Climate, Controls & Security’s acquisition of these two entities in April 2011. Both companies were acquired following the adoption by UTC in 2009 of the corporate policy prohibiting all new business in or with Iran, and both companies became subject to that policy upon acquisition.

During 2012 and pursuant to five legacy contracts, Simtronics and WME received payments and provided certain fire detection and fire suppression equipment for end-use by the Pars Oil & Gas Company, which has been designated by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) as an entity owned or controlled by the government of Iran. These legacy contracts were not prohibited by applicable law when they were executed, nor was the wind down of these contractual arrangements prohibited by UTC’s policy at the time of acquisition. Simtronics and WME have halted all fulfillment activities related to these legacy contracts, but may seek clearance from OFAC in order to resolve a dispute over termination of a third-party agency agreement associated with these contracts and to complete certain remaining wind-down activities. Simtronics and WME do not otherwise intend to continue or enter into any Iran-related activity. The fire suppression products WME supplied incorporated a small amount of U.S.-origin springs, which are non-critical components, and an appropriate disclosure has been filed with OFAC.

The gross revenue and net profits attributable to these activities in 2012 for Simtronics were $960,000 and $70,000, respectively, and for WME were $2,550,000 and $560,000, respectively.

Otis . In 2012, non-U.S. affiliates of Otis conducted service, maintenance and/or modernization activities on elevators previously installed at Iranian diplomatic premises in France, Kuwait and Hungary under pre-existing contracts. The Hungarian contract was undertaken with a local construction company (not the Iranian Government). All of the contracts in question have been terminated by these Otis affiliates.

The following activities are disclosed as required by Section 13(r)(1)(D)(i) and (ii) of the Securities Exchange Act of 1934, as amended by ITRA, as transactions or dealings with certain designated parties:

One of the payments received in 2012 by the French affiliate of Otis for work at the Iranian embassy in Paris was drawn on a local office of Bank Melli of Iran, which was previously designated as subject to sanctions under Executive Order 13382. In 2012, an Otis affiliate in Germany performed elevator maintenance and repair services to support the Frankfurt premises of Bank Saderat of Iran, which was designated as subject to sanctions in October 2007 under Executive Order 13224.

All of these elevator service and modernization contracts were permissible under applicable law when they were executed. These Otis affiliates have ceased performance under these contracts and do not intend to continue or enter into any new Iran-related activity. An Otis employee who is a U.S. person (for OFAC purposes) stationed outside the U.S. provided unauthorized advice to the Otis affiliate in Kuwait with respect to ending its contract for services at Iranian diplomatic premises in Kuwait, and an appropriate disclosure has been filed with OFAC.

The gross revenues and net profits attributable to the activities of these Otis affiliates in 2012 with respect to the Iranian diplomatic premises in France, Kuwait and Hungary were approximately $70,000 (including the single payment of approximately $1,500 drawn on Bank Melli) and $4,000, respectively, and were $4,500 and $1,500, respectively, with respect to Bank Saderat.

Intellectual Property and Raw Materials and Supplies

We maintain a portfolio of patents, trademarks, licenses and franchises related to our businesses. While this portfolio is cumulatively important to our business, we do not believe that the loss of any one or group of related patents, trademarks, licenses or franchises would have a material adverse effect on our cash flows, competitive position, financial condition or results of operations.

        We believe we have adequate sources for our purchases of materials, components, services and supplies used in our manufacturing. We work continuously with our supply base to ensure an adequate source of supply and to reduce costs. We pursue cost reductions through a number of mechanisms, including consolidating our purchases, reducing the number of suppliers, strategic global sourcing and using bidding competitions among potential suppliers. In some instances, we depend upon a single source of supply or participate in commodity markets that may be subject to allocations of limited supplies by suppliers. Like other users in the U.S., we are largely dependent upon foreign sources for certain raw materials requirements such as cobalt (Finland, Norway, Russia and Canada), tantalum (Australia and Canada), chromium (South Africa, Kazakhstan, Zimbabwe and Russia) and rhenium (Chile, Kazakhstan and Germany). We have a number of ongoing programs to manage this dependence and the accompanying risk, including long-term agreements and the conservation of materials through scrap reclamation and new manufacturing processes. We believe that our supply management practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. Although at times high prices for some raw materials important to our businesses (for example, steel, copper, aluminum, titanium and nickel) have caused margin and cost pressures, we do not foresee near term unavailability of materials, components or supplies that

 

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would have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. For further discussion of the possible effects of the cost and availability of raw materials on our business, see Item 1A, “Risk Factors” in this Form 10-K.

Employees and Employee Relations

At December 31, 2012, our total number of employees was approximately 218,000, approximately 62 percent of which represents employees based outside the U.S. During 2012, we negotiated or concluded 18 domestic collective bargaining agreements, the largest of which covered certain workers at Otis and UTC Climate, Controls & Security. In 2013, numerous collective bargaining agreements are subject to renegotiation, the largest of which cover certain workers at UTC Aerospace Systems and Pratt & Whitney. Although some previous contract renegotiations have had a significant impact on our financial condition or results of operations, particularly at Sikorsky, we do not anticipate that the renegotiation of these contracts in 2013 will have a material adverse effect on our cash flows, competitive position, financial condition or results of operations. For discussion of the effects of our restructuring actions on employment, see Item 1A, “Risk Factors” and Item 3, “Legal Proceedings” in this Form 10-K and under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 13 to the Consolidated Financial Statements in our 2012 Annual Report.

For a discussion of other matters which may affect our cash flows, competitive position, financial condition or results of operations, including the risks of our international operations, see the further discussion under the headings “General” and “Description of Business by Segment” in this section, Item 1A, “Risk Factors” in this Form 10-K, and under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Annual Report.

Cautionary Note Concerning Factors That May Affect Future Results

This Form 10-K contains statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements” under the securities laws. From time to time, oral or written forward-looking statements may also be included in other materials 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,” “confident” and other words of similar meaning in connection with a discussion of future operating or financial performance. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash and other measures of financial performance. All forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Such risks, uncertainties and other factors include, without limitation:

 

   

the effect of economic conditions in the industries and markets in which we operate in the U.S. and globally and any changes therein, including financial market conditions, fluctuations in commodity prices, interest rates and foreign currency exchange rates, levels of end market demand in construction and in both the commercial and defense segments of the aerospace industry, levels of air travel, financial difficulties (including bankruptcy) of commercial airlines, the impact of weather conditions and natural disasters and the financial condition of our customers and suppliers;

 

   

our ability to integrate the acquired Goodrich operations and to realize synergies and opportunities for growth and innovation;

 

   

our ability to realize the intended benefits of recently announced organizational changes;

 

   

future levels of indebtedness and capital spending and research and development spending;

 

   

future availability of credit and factors that may affect such availability, including credit market conditions and our capital structure;

 

   

delays and disruption in delivery of materials and services from suppliers;

 

   

new business opportunities;

 

   

cost reduction efforts and restructuring costs and savings and other consequences thereof;

 

   

the scope, nature or impact of other acquisition and divestiture activity, including integration of acquired businesses into our existing businesses;

 

   

the development, production, delivery, support, performance and anticipated benefits of advanced technologies and new products and services;

 

   

the anticipated benefits of diversification and balance of operations across product lines, regions and industries;

 

   

the impact of the negotiation of collective bargaining agreements and labor disputes;

 

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the outcome of legal proceedings and other contingencies;

 

   

future repurchases of our common stock;

 

   

pension plan assumptions and future contributions; and

 

   

the effect of changes in tax, environmental and other laws and regulations or political conditions in the U.S. and other countries in which we operate.

In addition, this Form 10-K includes important information as to risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. See the “Notes to Consolidated Financial Statements” under the heading “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 the section titled “Risk Factors.” This Form 10-K also includes important information as to these factors in the “Business” section under the headings “General,” “Description of Business by Segment” and “Other Matters Relating to Our Business as a Whole,” and in the “Legal Proceedings” section. Additional important information as to these factors is included in our 2012 Annual Report in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Environmental Matters” and “Restructuring Costs.” 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.

Item 1A. Risk Factors

Our business, financial condition, operating results and cash flows can be impacted by the factors set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results.

Our Global Growth Is Subject to a Number of Economic Risks.

Over the past few years, market and economic conditions in the U.S. and globally have been highly challenging with tighter credit conditions and slower economic growth. The U.S. economy has experienced a recession and faces continued concerns about the systemic impacts of adverse economic conditions such as the growing U.S. deficit, high energy costs, geopolitical issues, the availability and cost of credit, and an unstable real estate market. In 2012, the global economy improved as compared to 2011 and continued to show signs of a gradual recovery from the significant downturn of 2008 and 2009 when the global economy experienced widespread recessionary conditions, record levels of unemployment, significant distress of financial institutions, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. However, despite positive economic indicators seen since the beginning of 2011, uncertainty continues to exist as to the overall rate and stability of the recovery. Despite a recent slowdown in growth rates in China and other emerging economies, global gross domestic product growth continues to be led by emerging markets, particularly Brazil, Russia, India and China. In the developed economies, particularly in Europe, recovery remains uncertain due to persistent high unemployment in the U.S. and Europe, a slow recovery of the U.S. and European housing markets, government budget reduction plans, the unwinding of fiscal stimuli, and concerns over the continuing European sovereign debt crisis. Further disruptions in Europe or in other economies could affect our sales or liquidity.

Although consumer confidence in the U.S. has improved since the economic downturn, it still remains low, while, as mentioned above, unemployment remains high and the housing market remains depressed. There can be no assurance that any of the recent economic improvements will be broad-based and sustainable, or that they will enhance conditions in markets relevant to us. Further, there can be no assurance that we will not experience further adverse effects that may be material to our cash flows, competitive position, financial condition, results of operations, or our ability to access capital. While these economic developments have not impaired our ability to access credit markets and finance our operations to date, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies. These economic developments affect businesses such as ours in a number of ways. The tightening of credit in financial markets adversely affects the ability of our customers and suppliers to obtain financing for significant purchases and operations and could result in a decrease in or cancellation of orders for our products and services as well as impact the ability of our customers to make payments. Similarly, this tightening of credit may adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy. Our global business is also adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending, air travel, construction activity, the financial strength of airlines and business jet operators, and government procurement. Strengthening of the rate of exchange for the U.S. Dollar against certain major currencies such as the Euro, the Canadian Dollar and other currencies also adversely affects our results, as the majority of our sales are non-U.S. based.

 

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Our Financial Performance Is Dependent on the Conditions of the Construction and Aerospace Industries.

The results of our commercial and industrial businesses, which generated approximately 51 percent of our consolidated sales in 2012, 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, the tightening of global credit markets and other global and political factors. For example, a slowdown in building and remodeling activity can adversely affect the financial performance of Otis and UTC Climate, Controls & Security. In addition, the financial performance of UTC Climate, Controls & Security can also be influenced by production and utilization of transport equipment and, particularly in its residential business, weather conditions.

The results of our commercial and military aerospace businesses, which generated approximately 49 percent of our consolidated sales in 2012, are directly tied to the economic conditions in the commercial aviation and defense industries, which are cyclical in nature. Although the operating environment currently faced by commercial airlines has shown signs of gradual improvement since 2011, uncertainty continues to exist. As a result, financial difficulties, including bankruptcy, of one or more of the major commercial airlines could result in significant cancellations of orders, reductions in our aerospace sales and losses under existing contracts. In addition, capital spending and demand for aircraft engines, aerospace products and component aftermarket parts and service by commercial airlines, aircraft operators and aircraft manufacturers are influenced by a wide variety of factors, including current and predicted traffic levels, load factors, aircraft fuel pricing, labor issues, worldwide airline profits, airline consolidation, competition, the retirement of older aircraft, regulatory changes, terrorism and related safety concerns, general economic conditions, corporate profitability, and backlog levels, all of which could also reduce the aftermarket sales and margins of our aerospace businesses. Other factors, including future terrorist actions, pandemic health issues or major natural disasters could also dramatically reduce both the demand for air travel, which could negatively impact the aftermarket sales and margins of our aerospace businesses. Additionally, because a substantial portion of the backlog for commercial aerospace customers is scheduled for delivery beyond 2013, changes in economic conditions may cause customers to request that firm orders be rescheduled or canceled. At times, our aerospace businesses also enter into firm fixed-price development contracts, which may require us to bear cost overruns related to unforeseen technical and design challenges that arise during the development stage of the program. In addition, our aerospace businesses face intense competition from domestic and foreign manufacturers of new equipment and spare parts. The defense industry is also affected by a changing global political environment, continued pressure on U.S. and global defense spending and U.S. foreign policy and the level of activity in military flight operations. Spare parts sales and aftermarket service trends are affected by similar factors, including usage, pricing, technological improvements, regulatory changes and the retirement of older aircraft. Furthermore, because of the lengthy research and development cycle involved in bringing products in these business segments to market, we cannot predict the economic conditions that will exist when any new product is complete. A reduction in capital spending in the commercial aviation or defense industries could have a significant effect on the demand for our products, which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Our Business May Be Affected by Government Contracting Risks.

U.S. Government contracts are subject to termination by the government, either for the convenience of the government or for default as a result of our failure to perform under the applicable contract. If terminated by the government as a result of our default, we could be liable for additional costs the government incurs in acquiring undelivered goods or services from another source and any other damages it suffers. 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 relating to certain of our U.S. Government contracts. If we or one of our business units were charged with wrongdoing as a result of any U.S. Government investigation (including violation of certain environmental or export laws, as further described below), 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 subject us to fines, penalties, repayments and treble and other damages, and bar us from bidding on or receiving new awards of U.S. Government contracts. The U.S. Government could void any contracts found to be tainted by fraud. 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. Debarment generally does not exceed three years.

We are also sensitive to U.S. military budgets, which may be impacted by numerous economic and political factors and which may fluctuate based on the policies of the current administration or Congress. In addition, the specific government programs in which we participate, or in which we may seek to participate in the future, compete with other programs for consideration during the budget formulation and appropriation processes. One or more of the programs that we currently support could be phased-out or terminated. Reductions in these existing programs, unless offset by other programs and opportunities, could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Our International Operations Subject Us to Economic Risk As Our Results of Operations May Be Adversely Affected by Changes in Foreign Currency Fluctuations, Economic Conditions and Changes in Local Government Regulation.

We conduct our business on a global basis, with approximately 60 percent of our 2012 consolidated sales derived from international operations, including U.S. export sales. Changes in local and regional economic conditions, including fluctuations in exchange rates, may affect product demand and reported profits in our non-U.S. operations (primarily the commercial businesses), where transactions are generally denominated in local currencies. In addition, currency fluctuations may affect the prices we pay

 

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suppliers for materials used in our products. As a result, our operating margins may also be negatively impacted by worldwide currency fluctuations that result in higher costs for certain cross border transactions. Our financial statements are denominated in U.S. Dollars. Accordingly, fluctuations in exchange rates may also give rise to translation gains or losses when financial statements of non-U.S. operating units are translated into U.S. Dollars. Given that the majority of our sales are non-U.S. based, a strengthening of the U.S. Dollar against other major foreign currencies could adversely affect our results of operations.

The majority of sales in the aerospace businesses are transacted in U.S. Dollars, consistent with established industry practice, while the majority of costs at locations outside the U.S. are incurred in the applicable local currency (principally the Euro, the Canadian Dollar, and the Polish Zloty). For operating units with U.S. Dollar sales and local currency costs, there is foreign currency exposure that could impact our results of operations depending on market changes in the exchange rate of the U.S. Dollar against the applicable foreign currencies. To manage certain exposures, we employ long-term hedging strategies associated with U.S. Dollar sales. See Note 1 and Note 14 to the Consolidated Financial Statements in our 2012 Annual Report for a discussion of our hedging strategies.

Our international sales and operations are subject to risks associated with changes in local government laws, regulations and policies, including those related to tariffs and trade barriers, investments, taxation, exchange controls, capital controls, employment regulations, and repatriation of earnings. Our international sales and operations are also sensitive to changes in foreign national priorities, including government budgets, as well as to political and economic instability. International transactions may involve increased financial and legal risks due to differing legal systems and customs in foreign countries. For example, as a condition of sale or award of a contract, some international customers require us to agree to offset arrangements, which may include in-country purchases, manufacturing and financial support arrangements. The contract may provide for penalties in the event we fail to perform in accordance with the offset requirements.

In addition, as part of our globalization strategy, we have invested in certain countries, including Argentina, Brazil, China, India, Mexico, Russia, South Africa and countries in the Middle East, that carry high levels of currency, political and economic risk. We expect that sales to emerging markets will continue to account for a significant portion of our sales as our business evolves and as these and other developing nations and regions around the world increase their demand for our products. Emerging market operations can present many risks, including cultural differences (such as employment and business practices), volatility in gross domestic product, economic and government instability, and the imposition of exchange controls and capital controls. While these factors and their impact are difficult to predict, any one or more of them could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

We Use a Variety of Raw Materials, Supplier-Provided Parts, Components, Sub-Systems and Third Party Contract Manufacturing Services in Our Businesses, and Significant Shortages, Supplier Capacity Constraints, Supplier Production Disruptions or Price Increases Could Increase Our Operating Costs and Adversely Impact the Competitive Positions of Our Products.

Our reliance on suppliers, third party contract manufacturing and commodity markets to secure raw materials, parts, components and sub-systems used in our products exposes us to volatility in the prices and availability of these materials. In many instances, we depend upon a single source of supply, manufacturing or assembly or participate in commodity markets that may be subject to allocations of limited supplies by suppliers. A disruption in deliveries from our suppliers or third party contract manufacturers, supplier capacity constraints, supplier and third party contract manufacturer production disruptions, closing or bankruptcy of our suppliers, price increases, or decreased availability of raw materials or commodities, could have a material adverse effect on our ability to meet our commitments to customers or increase our operating costs. We believe that our supply management and production practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. Nonetheless, price increases, supplier capacity constraints, supplier production disruptions or the unavailability of some raw materials may have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

We Engage in Acquisitions and Divestitures, and May Encounter Difficulties Integrating Acquired Businesses with, or Disposing of Divested Businesses from, Our Current Operations; Therefore, We May Not Realize the Anticipated Benefits of these Acquisitions and Divestitures.

        We seek to grow through strategic acquisitions in addition to internal growth. In the past several years, we have made various acquisitions and have entered into joint venture arrangements intended to complement and expand our businesses, and expect to do so in the future. For example, on June 29, 2012, Pratt & Whitney acquired Rolls-Royce’s ownership and collaboration interests in IAE, and on July 26, 2012, we completed our acquisition of Goodrich. Further, on October 12, 2011 Pratt & Whitney and Rolls-Royce announced an agreement, subject to regulatory approval and other closing conditions, to form a new joint venture to develop new engines to power the next generation of 120 to 230 passenger mid-size aircraft that will replace the existing fleet of mid-size aircraft currently in service or in development. Our due diligence reviews may not identify all of the material issues necessary to accurately estimate the cost and potential loss contingencies of a particular transaction, including potential exposure to regulatory sanctions resulting from an acquisition target’s previous activities. We may incur unanticipated costs or expenses, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation, and other liabilities. We also may encounter difficulties in integrating acquisitions with our operations, applying our internal controls processes to these acquisitions, or in

 

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managing strategic investments. Additionally, we may not realize the degree or timing of benefits we anticipate when we first enter into a transaction. Any of the foregoing could adversely affect our business and results of operations. In addition, accounting requirements relating to business combinations, including the requirement to expense certain acquisition costs as incurred, may cause us to incur greater earnings volatility and generally lower earnings during periods in which we acquire new businesses. Furthermore, we make strategic divestitures from time to time. For example, on December 13, 2012, we completed the sale of the legacy Hamilton Sundstrand industrial businesses to BC Partners and The Carlyle Group. Our divestitures may result in continued financial involvement in the divested businesses, such as through guarantees or other financial arrangements, following the transaction. Under these arrangements, nonperformance by those divested businesses could result in obligations imposed on us and could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

The Acquired Goodrich Business May Underperform Relative to Our Expectations; The Transaction 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 Synergies.

The success of the Goodrich acquisition will depend, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from the integration of Goodrich with our existing businesses. The integration process is complex, costly and time-consuming. The potential difficulties of integrating the operations of Goodrich and realizing our expectations for the acquisition include, among others:

 

   

failure to implement our business plan for the combined business;

 

   

unanticipated issues in integrating manufacturing, logistics, information, communications and other systems;

 

   

unanticipated changes in applicable laws and regulations;

 

   

operating risks inherent in the Goodrich business and our business;

 

   

retaining key customers, suppliers and employees;

 

   

retaining and obtaining required regulatory approvals, licenses and permits;

 

   

unanticipated changes in the combined business due to potential divestitures or other requirements imposed by antitrust regulators; and

 

   

the impact on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002.

Our Debt Has Increased As A Result of the Goodrich Acquisition and Will Increase if We Incur Additional Debt in the Future and Do Not Retire Existing Debt.

We have outstanding debt and other financial obligations and significant unused borrowing capacity. We have incurred substantial additional debt as a result of the Goodrich acquisition. As of December 31, 2012, we had approximately $23.2 billion of total debt on a consolidated basis. Our debt level and related debt service obligations could have negative consequences, including, among others:

 

   

requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which would reduce the funds we have available for other purposes, such as acquisitions;

 

   

reducing our flexibility in planning for or reacting to changes in our business and market conditions; and

 

   

exposing us to interest rate risk since a portion of our debt obligations are at variable rates.

We may incur significantly more debt in the future. If we add new debt and do not retire existing debt, the risks described above could increase.

Our global and domestic revolving credit facilities impose restrictions on us, including certain restrictions on our ability to incur liens on our assets. Our revolving credit facilities are available for general corporate purposes. There are currently no amounts outstanding under these credit facilities. Our long-term debt obligations include covenants that may adversely affect our ability to incur certain secured indebtedness or engage in certain types of sale and leaseback transactions. Our ability to comply with these restrictions and covenants may be affected by events beyond our control. If we breach any of these restrictions or covenants and do not obtain a waiver from the lenders, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable.

 

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We Design, Manufacture and Service Products that Incorporate Advanced Technologies; The Introduction of New Products and Technologies Involves Risks and We May Not Realize the Degree or Timing of Benefits Initially Anticipated.

We seek to achieve growth through the design, development, production, sale and support of innovative products that incorporate advanced technologies. The product, program and service needs of our customers change and evolve regularly, and we invest substantial amounts in research and development efforts to pursue advancements in a wide range of technologies, products and services. Our ability to realize the anticipated benefits of these advancements depends on a variety of factors, including meeting development, production, certification and regulatory approval schedules; execution of internal and external performance plans; availability of supplier- and internally-produced parts and materials; performance of suppliers and subcontractors; hiring and training of qualified personnel; achieving cost and production efficiencies; identification of emerging technological trends in our target end-markets; validation of innovative technologies; the level of customer interest in new technologies and products; and customer acceptance of our products and products that incorporate technologies we develop. For example, certain of our aerospace products are incorporated into larger systems and end products manufactured by our customers. These systems and end products may incorporate additional advanced technologies manufactured by third parties that involve additional risks and uncertainties. As a result, the performance and market acceptance of these larger systems and end products could affect the level of customer interest and acceptance of our own products in the marketplace.

Any development efforts divert resources from other potential investments in our businesses, and these efforts may not lead to the development of new technologies or products on a timely basis or meet the needs of our customers as fully as competitive offerings. In addition, the markets for our products or products that incorporate our technologies may not develop or grow as we anticipate. We, or our customers, suppliers or subcontractors may encounter difficulties in developing and producing new products and services, and may not realize the degree or timing of benefits initially anticipated or may otherwise suffer significant adverse financial consequences. Due to the design complexity of our products, we may in the future experience delays in completing the development and introduction of new products. Any delays could result in increased development costs or deflect resources from other projects. In particular, we cannot predict with certainty whether, when and in what quantities our aerospace businesses will produce and sell aircraft engines, helicopters, aircraft systems and components and other products currently in development or pending required certifications. Our contracts are typically awarded on a competitive basis. Our bids are based upon, among other items, the cost to provide the products and services. To generate an acceptable return on our investment in these contracts, we must be able to accurately estimate our costs to provide the services required by the contract and to be able to complete the contracts in a timely manner. If we fail to accurately estimate our costs or the time required to complete a contract, the profitability of our contracts may be materially and adversely affected. Some of our contracts provide for liquidated damages in the event that we are unable to perform and deliver in accordance with the contractual specifications and schedule. Furthermore, we cannot be sure that our competitors will not develop competing technologies which gain market acceptance in advance of or instead of our products. The possibility exists that our competitors might develop new technology or offerings that might cause our existing technology and offerings to become obsolete. Any of the foregoing could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Exports of Certain of Our Products Are Subject to Various Export Control Regulations and May Require a License From the U.S. Department of State, the U.S. Department of Commerce or the U.S. Department of the Treasury.

As an exporter, we must comply with various laws and regulations relating to the export of products, services and technology from the U.S. and other countries having jurisdiction over our operations. In the U.S., these laws include, among others, the U.S. Export Administration Regulations (EAR) administered by the U.S. Department of Commerce, Bureau of Industry and Security, the International Traffic in Arms Regulations (ITAR) administered by the U.S. Department of State, Directorate of Defense Trade Controls (DTCC), and trade sanctions, regulations and embargoes administered by the U.S. Department of Treasury, Office of Foreign Assets Control. Certain of our products have military or strategic applications and are on the munitions list of the ITAR, or represent so-called “dual use” items governed by the EAR. As a result, these products require individual validated licenses in order to be exported to certain jurisdictions. Any failures to comply with these laws and regulations could result in civil or criminal penalties, fines, investigations, adverse publicity and restrictions on our ability to export our products, and repeat failures could carry more significant penalties. As previously disclosed, on June 28, 2012 we entered into a consent agreement with the DTCC and a deferred prosecution agreement with the U.S. Department of Justice regarding separate but related export licensing compliance violations, both of which impose significant continuing obligations. Any changes in export regulations may further restrict the export of our products. The length of time required by the licensing processes can vary, potentially delaying the shipment of products and the recognition of the corresponding revenue. Any restrictions on the export of our products or product lines could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

We Are Subject to Litigation, Tax, Environmental and Other Legal Compliance Risks.

We are subject to a variety of litigation, tax and other legal compliance risks. These risks include, among other things, possible liability relating to product liability matters, personal injuries, intellectual property rights, contract-related claims, government contracts, taxes, environmental matters and compliance with U.S. and foreign laws, competition laws and laws governing improper business practices. We or one of our business units could be charged with wrongdoing as a result of such matters. If convicted or found liable, we could be subject to significant fines, penalties, repayments or other damages (in certain cases, treble damages). As a global business, we are subject to complex laws and regulations in the U.S. and other countries in which we operate. Those laws and regulations may be interpreted in different ways. They may also change from time to time, as may related interpretations and other guidance. Changes in laws or regulations could result in higher expenses and payments, and uncertainty relating to laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights. Changes in environmental and climate change laws or regulations, including laws relating to greenhouse gas emissions, could lead to

 

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new or additional investment in product designs and could increase environmental compliance expenditures. Changes in climate change concerns, or in the regulation of such concerns, including greenhouse gas emissions, could subject us to additional costs and restrictions, including increased energy and raw materials costs.

In the area of taxes, changes in tax laws and regulations, as well as changes in related interpretations and other tax guidance could materially impact our tax receivables and liabilities and our deferred tax assets and deferred tax liabilities. Additionally, in the ordinary course of business we are subject to examinations by various authorities, including tax authorities. In addition to ongoing investigations, there could be additional investigations launched in the future by governmental authorities in various jurisdictions, and existing investigations could be expanded. The global and diverse nature of our operations means that these risks will continue to exist and additional legal proceedings and contingencies will arise from time to time. Our results may be affected by the outcome of legal proceedings and other contingencies that cannot be predicted with certainty.

For non-income tax risks, we estimate material loss contingencies and establish reserves as required by generally accepted accounting principles based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time. Subsequent developments in legal proceedings may affect our assessment and estimates of the loss contingency recorded as a liability or as a reserve against assets in our financial statements and could result in a material adverse effect on our results of operations in the period in which a liability would be recognized or cash flows for the period in which damages would be paid. For a description of current legal proceedings, see Part I, Item 3 “Legal Proceedings,” in this Form 10-K. For income tax risks, we recognize tax benefits based on our assessment that a tax benefit has a greater than 50 percent likelihood of being sustained upon ultimate settlement with the applicable taxing authority that has full knowledge of all relevant facts. For those income tax positions where we assess that there is not a greater than 50 percent likelihood that such tax benefits will be sustained, we do not recognize a tax benefit in our financial statements. Subsequent events may cause us to change our assessment of the likelihood of sustaining a previously-recognized benefit which could result in a material adverse effect on our financial condition or results of operations in the period in which any such event occurs or on our cash flows in the period in which the ultimate settlement with the applicable taxing authority occurs.

In addition, the U.S. Foreign Corrupt Practices Act (FCPA) and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable for actions taken by strategic or local partners or representatives. The FCPA also imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments. Certain of our customer relationships outside of the U.S. are with governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. Despite meaningful measures that we undertake to facilitate lawful conduct, which include training and internal control policies, these measures may not always prevent reckless or criminal acts by our employees or agents. As a result, we could be subject to criminal and civil penalties, disgorgement, further changes or enhancements to our procedures, policies and controls, personnel changes or other remedial actions. Violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction and result in a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

We May Be Unable to Realize Expected Benefits From Our Cost Reduction and Restructuring Efforts and Our Profitability May Be Hurt or Our Business Otherwise Might Be Adversely Affected.

In order to operate more efficiently and control costs, we announce from time to time restructuring plans, which include workforce reductions as well as global facility consolidations and other cost reduction initiatives. These plans are intended to generate operating expense savings through direct and indirect overhead expense reductions as well as other savings. We may undertake further workforce reductions or restructuring actions in the future. These types of cost reduction and restructuring activities are complex. If we do not successfully manage our current restructuring activities, or any other restructuring activities that we may undertake in the future, expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. Risks associated with these actions and other workforce management issues include delays in implementation of anticipated workforce reductions, additional unexpected costs, changes in restructuring plans that increase or decrease the number of employees affected, adverse effects on employee morale and the failure to meet operational targets due to the loss of employees, any of which may impair our ability to achieve anticipated cost reductions or may otherwise harm our business, which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

 

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Our Financial Performance May Be Adversely Affected By Information Technology and Other Business Disruptions.

Our business may be impacted by disruptions, including information technology attacks or failures, threats to physical security, as well as damaging weather or other acts of nature, pandemics or other public health crises. Cybersecurity attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. We have experienced cybersecurity attacks in the past and may experience them in the future, potentially with more frequency. We believe that we have adopted appropriate measures to mitigate potential risks to our technology and our operations from these information technology-related and other potential disruptions. However, given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

We Depend On Our Intellectual Property, and Have Access to Certain Intellectual Property and Information of Our Customers and Suppliers; Infringement or Failure to Protect Our Intellectual Property Could Adversely Affect Our Future Growth and Success.

We rely on a combination of patents, trademarks, copyrights, trade secrets, nondisclosure agreements, information technology security systems and other measures to protect our proprietary intellectual property. We also rely on nondisclosure agreements, information technology security systems and other measures to protect certain customer and supplier information and intellectual property that we have in our possession or to which we have access. Our efforts to protect intellectual property and proprietary rights may not be sufficient. We cannot be sure that our pending patent applications will result in the issuance of patents to us, that patents issued to or licensed by us in the past or in the future will not be challenged or circumvented by competitors, or that these patents will be found to be valid or sufficiently broad to preclude our competitors from introducing technologies similar to those covered by our patents and patent applications. In addition, our ability to enforce and protect our intellectual property rights may be limited in certain countries outside the U.S., which could have a negative impact on sales volume. We may also be subject to disruptions, losses and liability resulting from various cybersecurity attacks or information technology failures, as described above.

Any of these events or factors could diminish or cause us to lose the competitive advantages associated with our intellectual property, subject us to judgments, penalties and significant litigation costs or temporarily or permanently disrupt our sales and marketing of the affected products or services. Any of the foregoing could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

 

     Number of Facilities - Owned  

Location

   Otis      UTC
Climate,
Controls &
Security
     Pratt &
Whitney
     UTC
Aerospace
Systems
     Sikorsky      Other      Total  

Manufacturing:

                    

North America

     1        13        29        42        5        —          90  

Europe & Middle East

     7        13        3        30        1        —          54  

Asia

     2        1        6        3        —          —          12  

Emerging Markets*

     11        17        8        4        —          —          40  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     21        44        46        79        6        —          196  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Manufacturing:

                    

North America

     4        15        32        —           4        13        68  

Europe & Middle East

     15        11        —          —           —          —          26  

Asia

     1        5        1        —           1        —          8  

Emerging Markets*

     3        11        2        —           —          —          16  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     23        42        35        —           5        13        118  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Number of Facilities - Leased  

Location

   Otis      UTC
Climate,
Controls &
Security
     Pratt &
Whitney
     UTC
Aerospace
Systems
     Sikorsky      Other      Total  

Manufacturing:

                    

North America

     —           5        13        31        11        1        61  

Europe & Middle East

     —           6        1        12        —          —          19  

Asia

     —           —           5        3        —          —          8  

Emerging Markets*

     5        9        —          10        —          —          24  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     5        20        19        56        11        1        112  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Manufacturing:

                    

North America

     5        37        13        2        13        8        78  

Europe & Middle East

     9        43        1        1        —          —          54  

Asia

     4        9        1        —           —          —          14  

Emerging Markets*

     8        14        1        —           —          —          23  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     26        103        16        3        13        8        169  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

*

For purposes of this table, our definition of emerging markets is developed using the countries included in the MSCI Emerging Markets Index SM .

Our fixed assets as of December 31, 2012 include manufacturing facilities and non-manufacturing facilities such as warehouses set forth in the tables above and a substantial quantity of machinery and equipment, most of which are general purpose machinery and equipment using special jigs, tools and fixtures and in many instances having automatic control features and special adaptations. The facilities, warehouses, machinery and equipment in use as of December 31, 2012 are in good operating condition, are well-maintained and substantially all are in regular use.

 

Item 3. Legal Proceedings

F100 Engine Litigation

As previously disclosed, the U.S. Department of Justice (DOJ) sued us in 1999 in the U.S. District Court for the Southern District of Ohio, claiming that Pratt & Whitney violated the civil False Claims Act and common law. This lawsuit relates to the “Fighter Engine Competition” between Pratt & Whitney’s F100 engine and General Electric’s F110 engine. The DOJ alleges that the government overpaid for F100 engines under contracts awarded by the U.S. Air Force in fiscal years 1985 through 1990 because Pratt & Whitney inflated its estimated costs for some purchased parts and withheld data that would have revealed the overstatements. At trial of this matter, completed in December 2004, the government claimed Pratt & Whitney’s liability to be $624 million. On August 1, 2008, the trial court judge held that the Air Force had not suffered any actual damages because Pratt & Whitney had made

 

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significant price concessions. However, the trial court judge found that Pratt & Whitney violated the False Claims Act due to inaccurate statements contained in its 1983 offer. In the absence of actual damages, the trial court judge awarded the DOJ the maximum civil penalty of $7.09 million, or $10,000 for each of the 709 invoices Pratt & Whitney submitted in 1989 and later under the contracts. In September 2008, both the DOJ and UTC appealed the decision to the Sixth Circuit Court of Appeals. In November 2010, the Sixth Circuit affirmed Pratt & Whitney’s liability under the False Claims Act and remanded the case to the trial court for further proceedings.

On June 18, 2012, the trial court found that Pratt & Whitney had breached other obligations imposed by common law based on the same conduct with respect to which the court previously found liability under the False Claims Act. Under the common law claims, the U.S. Air Force may seek damages for events occurring before March 3, 1989, which are not recoverable under the False Claims Act. Further proceedings at the trial court will determine the damages, if any, relating to the False Claims Act and common law claims. The government continues to seek damages of $624 million, plus interest. Pratt & Whitney continues to contend that the government suffered no actual damages. The parties have submitted briefs and await a decision from the trial court. Should the government ultimately prevail, the outcome of this matter could result in a material adverse effect on our results of operations in the period in which a liability would be recognized or cash flows for the period in which damages would be paid.

Department of Defense Cost Accounting Standards Claim

As previously disclosed, in December 2008, the Department of Defense (DOD) issued a contract claim against Sikorsky to recover overpayments the DOD alleges it has incurred since January 2003 in connection with cost accounting changes approved by the DOD and implemented by Sikorsky in 1999 and 2006. These changes relate to the calculation of material overhead rates in government contracts. The DOD claims that Sikorsky’s liability is approximately $94 million (including interest through December 2012). We believe this claim is without merit and Sikorsky filed an appeal in December 2009 with the U.S. Court of Federal Claims. Trial in the matter concluded in January 2013 and we await a decision from the court. We do not believe the resolution of this matter will have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Export Violations

A significant portion of our activities are subject to export control regulation by the U.S. Department of State (State Department) under the U.S. Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR). From time to time, we identify, investigate, remediate and voluntarily disclose to the DTCC potential violations of the AECA and ITAR. DTCC administers the State Department’s authority under the AECA and ITAR to impose civil penalties and other administrative sanctions for violations, including debarment from engaging in the export of defense articles or defense services. Most of our voluntary disclosures are resolved without the imposition of penalties or other sanctions. However, as previously disclosed, in November 2011, DTCC informed us that it was reviewing certain of our voluntary disclosures filed since 2005 and believed some of these disclosures could constitute deficiencies warranting penalties and sanctions. In connection with the above, on June 28, 2012, we entered into a Consent Agreement (CA) with DTCC to resolve a Proposed Charging Letter that references approximately 45 of our previous disclosures. The CA has a four-year term, and provides that we will: (1) pay a civil penalty of $55 million, up to $20 million of which can be suspended based on qualifying compliance investments made by us prior to or during the term of the CA; (2) appoint, subject to DTCC approval, an outside Special Compliance Official (SCO) to oversee our compliance with the CA and the AECA and ITAR; (3) continue and undertake additional remedial actions to strengthen AECA and ITAR compliance, with emphasis on human resources and organization, training, automation, and security of electronic data; and (4) sponsor two Company-wide outside compliance audits during the term of the CA.

The voluntary disclosures addressed in the CA include disclosures made in 2006 and 2007 regarding the export by legacy Hamilton Sundstrand to P&WC of certain modifications to dual-use electronic engine control software, and the re-export by P&WC of those software modifications and subsequent P&WC-developed modifications to China during the period 2002-2004 for use in the development of the Z-10 Chinese military helicopter. As previously disclosed, the DOJ separately conducted a criminal investigation of the matters addressed in these disclosures, as well as the accuracy, adequacy, and timeliness of the disclosures. We cooperated with the DOJ’s investigation. On June 28, 2012, the U.S. Attorney for the District of Connecticut filed a three-count criminal information alleging: (1) that in 2002-2003, P&WC caused legacy Hamilton Sundstrand to export ITAR-controlled software modifications to Canada and re-exported them to China without the required license; (2) that in 2006, P&WC, legacy Hamilton Sundstrand and UTC made false statements in disclosures to DTCC regarding these AECA and ITAR violations; and (3) that P&WC and legacy Hamilton Sundstrand violated a separate provision of the AECA and ITAR by failing timely to notify DTCC of the unlicensed software shipments to China. P&WC pleaded guilty to violating the AECA and the ITAR and making false statements as alleged, and was sentenced to probation and to pay fines and forfeitures totaling $6.9 million. P&WC, legacy Hamilton Sundstrand and UTC (the UTC Entities) entered into a Deferred Prosecution Agreement (DPA) regarding the remaining offenses charged with respect to each UTC Entity. The DPA has a two-year term, and provides that the UTC Entities will: (1) pay an additional penalty of $13.8 million; (2) appoint, subject to DOJ approval, an independent monitor (who may be the same person as the SCO appointed under the CA) to oversee compliance with the DPA; (3) provide annual senior officer certifications that all known violations of the AECA and ITAR, Export Administration Regulations and sanctions regimes implemented under the International Emergency Economic Powers Act occurring after the execution date of the

 

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DPA have been reported by UTC, its subsidiaries, and its majority-owned or controlled affiliates to the appropriate official(s) of the U.S. Government; (4) cooperate with law enforcement in specified areas; and (5) implement specified compliance training initiatives.

We believe the previously disclosed potential liability recognized as of March 31, 2012 of $55 million will be sufficient to discharge all amounts due under the CA and DPA.

On June 28, 2012, by reason of P&WC’s guilty plea to a criminal violation of the AECA and the ITAR, DTCC imposed a partial statutory debarment on P&WC with respect to obtaining new or renewed ITAR license privileges. The debarment does not affect existing ITAR licenses/authorities, nor does it extend to programs supporting: (1) the U.S. Government; (2) NATO allies; or (3) “major non-NATO allies” (as defined in the ITAR). P&WC may seek “transaction exception” approvals on a case-by-case basis for new or renewed ITAR licensing in other cases during the period of debarment. P&WC may apply for full reinstatement of ITAR privileges after one year. On December 20, 2012, UTC entered into an administrative agreement with the Department of the Army Suspension and Debarment Official, where Army officials determined that the UTC Entities are presently responsible and that further action is not necessary to protect the U.S. Government’s interests pursuant to the Federal Acquisition Regulation and the National Defense Appropriations Act. The agreement with the Department of the Army Suspension and Debarment Official completes the Department of Defense review of the UTC Entities’ present responsibility under the Federal Acquisition Regulation and P&WC’s eligibility to receive funds appropriated for fiscal year 2012 under the National Defense Appropriations Act.

Shareholder Derivative Litigation

On October 31, 2012, a shareholder filed a stockholder derivative action in the Delaware Court of Chancery against all of UTC’s current directors. The complaint centers on the above-referenced June 28, 2012 guilty plea of P&WC to violations of the AECA and ITAR, and making false statements in connection with its illegal export to China of U.S.-origin military software used in the development of a Chinese military attack helicopter, the Z-10. The complaint alleges, among other things, that UTC’s directors breached their fiduciary duties owed to UTC and its shareholders and committed “corporate waste” by failing to oversee adequately UTC’s export control compliance. The complaint also alleges that UTC’s directors “failed to ensure” that there were adequate internal controls to assure compliance. The complaint seeks declaratory and injunctive relief against UTC, including an order removing and replacing the directors, and asserts a claim for unspecified money damages against only the directors. UTC and the directors plan to vigorously contest the claims. We do not believe the resolution of this matter will have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

German Tax Office Appeal

As previously disclosed, UTC has been involved in administrative review proceedings with the German Tax Office, which concern 203 million (approximately $270 million) of tax benefits that we have claimed related to a 1998 reorganization of the corporate structure of Otis operations in Germany. A portion of these tax benefits were disallowed by the local German Tax Office on July 5, 2012, as a result of the audit of tax years 1999 to 2000. The legal and factual issues relating to the denial of the tax benefits center on the interpretation and application of a German tax law. On August 3, 2012, the Company filed suit in the local German tax court and intends to litigate vigorously the matter to conclusion. We do not believe the resolution of this matter will have a material adverse effect on our results of operations, cash flows or financial condition.

Pratt & Whitney Grand Jury Subpoena

Pratt & Whitney is conducting an internal investigation in response to a subpoena issued to it in May 2012 by a federal grand jury in Connecticut. The subpoena requests documents related to Pratt & Whitney’s use in certain military engines of titanium procured from suppliers that potentially did not conform to underlying contract specifications. Pratt & Whitney has been cooperating fully with the government’s investigation. While we are unable to predict the final outcome of this matter at this time, we do not believe the ultimate resolution will have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Asbestos Litigation

Like many other industrial companies in recent years, we or our subsidiaries are named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos integrated into certain of our products or 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 covered by insurance or other forms of indemnity or have been dismissed without payment. The remainder of the closed cases have been resolved for amounts that are not material individually or in the aggregate. Based on the information currently available, we do not believe that resolution of these asbestos-related matters will have a material adverse effect upon our competitive position, results of operations, cash flows, or financial condition.

Other

We are also subject to a number of routine lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the ordinary course of our business. 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.

Except as otherwise noted above, we do not believe that resolution of any of the legal matters discussed above will have a material adverse effect upon our competitive position, results of operations, cash flows, or financial condition. A further discussion of government contracts and related investigations, as well as a discussion of our environmental liabilities, can be found under the heading “Other Matters Relating to Our Business as a Whole – Compliance with Environmental and Other Government Regulations” in Item 1, “Business,” and in Item 1A, “Risk Factors,” in this Form 10-K.

 

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Item 4. Mine Safety Disclosures

Not applicable.

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Performance Graph and Comparative Stock Data appearing in our 2012 Annual Report, filed as Exhibit 13 to this Form 10-K, containing the following data relating to our common stock: shareholder return, principal market, quarterly high and low sales prices, approximate number of shareowners and frequency and amount of dividends, are incorporated herein by reference. The information required by Item 5 with respect to securities authorized for issuance under equity compensation plans is incorporated herein by reference to Part III, Item 12 of this Form 10-K.

Issuer Purchases of Equity Securities

During the three months ended December 31, 2012, we did not make any repurchases of our common stock under the share repurchase program approved by the Board of Directors in March 2010. In connection with the Goodrich acquisition, we previously announced a suspension of share repurchases until January 1, 2013, and a significant reduction in repurchases for two years thereafter. On February 4, 2013, the Board of Directors approved a new share repurchase program authorizing the repurchase of up to 60 million shares of our common stock. This current authorization replaces the share repurchase program approved in March 2010. Approximately 6,937,000 shares of our common stock available for purchase under the March 2010 share repurchase program became unavailable as of February 4, 2013 upon the authorization of the current program. Under this current share repurchase program, shares may be purchased on the open market, in privately negotiated transactions and under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended. These repurchases are included within the scope of our overall repurchase program discussed above. We may also reacquire shares outside the program from time to time in connection with the surrender of shares to cover taxes on the vesting of restricted stock. Approximately 3,000 shares were reacquired in transactions outside the program during the quarter ended December 31, 2012.

 

Item 6. Selected Financial Data

The Five-Year Summary appearing in our 2012 Annual Report, filed as Exhibit 13 to this Form 10-K, is incorporated herein by reference. See “Notes to Consolidated Financial Statements” in our 2012 Annual Report for a description of any accounting changes and acquisitions or dispositions of businesses materially affecting the comparability of the information reflected in the Five-Year Summary.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information set forth in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Annual Report, filed as Exhibit 13 to this Form 10-K, is incorporated herein by reference.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

For information concerning market risk sensitive instruments, see discussion under the heading “Market Risk and Risk Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Annual Report, filed as Exhibit 13 to this Form 10-K, and under the heading “Foreign Exchange and Hedging Activity” in Note 1 and in Note 14 to the Consolidated Financial Statements in our 2012 Annual Report, filed as Exhibit 13 to this Form 10-K.

 

Item 8. Financial Statements and Supplementary Data

The 2012 and 2011 Consolidated Balance Sheet, and other consolidated financial statements for the years 2012, 2011 and 2010, together with the report thereon of PricewaterhouseCoopers LLP dated February 7, 2013 in our 2012 Annual Report, filed as Exhibit 13 to this Form 10-K, are incorporated herein by reference. The 2012 and 2011 unaudited Selected Quarterly Financial Data appearing in our 2012 Annual Report, filed as Exhibit 13 to this Form 10-K, is incorporated herein by reference.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

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Item 9A. Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended, we carried out an evaluation under the supervision and with the participation of our management, including the Chairman & Chief Executive Officer (CEO), the Senior Vice President and Chief Financial Officer (CFO) and the Vice President, Controller (Controller), of the effectiveness of the design and operation of our disclosure controls and procedures. 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, CFO and Controller concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, 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, CFO and Controller, as appropriate, to allow timely decisions regarding required disclosure.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the U.S. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control – Integrated Framework, released in 1992. Our management has concluded that based on its assessment, our internal control over financial reporting was effective as of December 31, 2012. The effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears in our 2012 Annual Report.

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

None.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

The information required by Item 10 with respect to directors, the Audit Committee of the Board of Directors and audit committee financial experts is incorporated herein by reference to the sections of our Proxy Statement for the 2013 Annual Meeting of Shareowners titled “Election of Directors” (under the subheading “Nominees”) and “Corporate Governance” (including under the subheadings “Board Committees,” “Audit Committee” and “Committee on Nominations and Governance”).

 

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Executive Officers of the Registrant

The following persons are executive officers of United Technologies Corporation:

 

Name

  

Title

  

Other Business Experience Since 1/1/2008

   Age as of
2/7/2013
Elizabeth B. Amato    Senior Vice President, Human Resources and Organization, United Technologies Corporation (since August 2012)    Vice President, Human Resources, UTC Climate, Controls & Security; Vice President, Human Resources, Carrier Corporation; Vice President, Human Resources, Pratt & Whitney    56
Alain M. Bellemare    President & Chief Executive Officer, UTC Propulsion & Aerospace Systems (since July 2012)    President & Chief Operating Officer, UTC Propulsion & Aerospace Systems; President, Hamilton Sundstrand Corporation; President, Pratt & Whitney Canada; Executive Vice President, Group Strategy & Development, Pratt & Whitney    51
Louis R. Chênevert    Director (since 2006), Chairman (since 2010), President (since 2006) & Chief Executive Officer, United Technologies Corporation (since 2008)    President and Chief Operating Officer, United Technologies Corporation    55
Geraud Darnis    President & Chief Executive Officer, UTC Climate, Controls & Security (since 2011)    President, Carrier Corporation    53
Charles D. Gill    Senior Vice President and General Counsel, United Technologies Corporation (since 2007)    ___    48
Gregory J. Hayes    Senior Vice President and Chief Financial Officer, United Technologies Corporation (since 2008)    Vice President, Accounting and Finance, United Technologies Corporation    52
David P. Hess    President, Pratt & Whitney (since 2009)    President, Hamilton Sundstrand Corporation    57
Peter F. Longo    Vice President, Controller, United Technologies Corporation (since 2011)    Vice President, Finance, Hamilton Sundstrand Corporation    53
Michael B. Maurer    President, Sikorsky Aircraft (since July 2012)    President, Sikorsky Military Systems, Sikorsky Aircraft    52
Thomas I. Rogan    Vice President, Treasurer, United Technologies Corporation (since 2001)    ___    60
Pedro Sainz De Baranda Riva    President, Otis Elevator Company (since February 2012)    President, Otis South Europe and Middle East Area, Otis Elevator Company; Managing Director, Otis Spain    49

All of the officers serve at the pleasure of the Board of Directors of United Technologies Corporation or the subsidiary designated.

Information concerning Section 16(a) compliance is incorporated herein by reference to the section of our Proxy Statement for the 2013 Annual Meeting of Shareowners titled “Other Information” under the heading “Section 16(a) Beneficial Ownership Reporting.” We have adopted a code of ethics that applies to all our directors, officers, employees and representatives. This code is publicly available on our website at http://www.utc.com/Governance/Ethics/Code+of+Ethics. Amendments to the code of ethics and any grant of a waiver from a provision of the code requiring disclosure under applicable SEC rules will be disclosed on our website. Our Corporate Governance Guidelines and the charters of our Board of Directors’ Audit Committee, Finance Committee, Committee on Nominations and Governance, Public Issues Review Committee and Committee on Compensation and Executive Development are

 

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available on our website at http://www.utc.com/Governance/Board+of+Directors. These materials may also be requested in print free of charge by writing to our Investor Relations Department at United Technologies Corporation, United Technologies Building, Investor Relations, Hartford, CT 06101.

 

Item 11. Executive Compensation

The information required by Item 11 is incorporated herein by reference to the sections of our Proxy Statement for the 2013 Annual Meeting of Shareowners titled “Executive Compensation,” “Compensation of Directors,” and “Report of Committee on Compensation and Executive Development.”

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information relating to security ownership of certain beneficial owners and management and the Equity Compensation Plan Information required by Item 12 is incorporated herein by reference to the sections of our Proxy Statement for the 2013 Annual Meeting of Shareowners titled “Stock Ownership Information.”

Equity Compensation Plan Information

The following table provides information as of December 31, 2012 concerning Common Stock issuable under UTC’s equity compensation plans.

 

Plan category

   Number of securities
to be issued upon exercise

of outstanding options,
warrants and rights

(a)
    Weighted-average
exercise price of
outstanding options,
warrants and  rights

(b)
     Number of securities
remaining available for

future issuance under
equity compensation plans
(excluding securities
reflected in column (a))

(c)
 

Equity compensation plans approved by shareowners

     54,028,000 (1)     $ 64.82         43,546,000 (2)  

Equity compensation plans not approved by shareowners

     2,274,000 (3)     $ 47.82         0   

Total

     56,302,000      $ 64.09         43,546,000   

 

(1) Consists of: (i) shares of Common Stock issuable upon the exercise of stock options awarded under the 1989 Long-Term Incentive Plan (1989 LTIP), the 2005 Long-Term Incentive Plan, as amended (2005 LTIP) and the Non-Employee Director Stock Option Plan (Non-Employee Director Plan); and (ii) shares of Common Stock issuable pursuant to outstanding restricted share, restricted share unit and performance share unit awards, assuming vesting performance at the target level. This amount includes 985,000 restricted shares and restricted share units and 2,792,000 performance share units at the target level. Up to an additional 2,792,000 shares could be issued if performance goals are achieved above target. The weighted average exercise price of outstanding options, warrants and rights shown in column (b) takes into account only the shares identified in clause (i).

 

(2) Represents the maximum number of shares of Common Stock available to be awarded as of December 31, 2012. Full Share Awards will result in a reduction in the number of shares of UTC Common Stock available for delivery under the 2005 LTIP in an amount equal to 4.03 times the number of shares to which the award corresponds. Stock options and stock appreciation rights do not constitute Full Share Awards and will result in a reduction in the number of shares of UTC Common Stock available for delivery under the 2005 LTIP on a one-for-one basis.

 

(3) Consists of stock options awarded under the UTC Employee Stock Option Plan. This Plan authorized the award of non-qualified stock options to employees below the executive level considered to have the potential to contribute to the long-term success of UTC. These options have a fixed option price equal to the fair market value of Common Stock on the date the stock option was granted. Options vested three years after the grant date and have a ten-year term. Effective April 14, 2005, all equity incentive compensation awards have been provided under the shareowner-approved 2005 LTIP.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is incorporated herein by reference to the sections of our Proxy Statement for the 2013 Annual Meeting of Shareowners titled “Election of Directors” (under the subheading “Nominees”), “Corporate Governance” (under the subheading “Director Independence”), and “Other Information” (under the subheading “Transactions with Related Persons”).

 

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Item 14. Principal Accounting Fees and Services

The information required by Item 14 is incorporated by reference to the section of our Proxy Statement for the 2013 Annual Meeting of Shareowners titled “Appointment of a Firm of Independent Registered Public Accountants to Serve as Independent Auditor for 2013,” including the information provided in that section with regard to “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and “All Other Fees.”

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

  (a) Financial Statements, Financial Statement Schedules and Exhibits

 

  (1) Financial Statements (incorporated herein by reference to the 2012 Annual Report) :

 

     Page Number in
Annual Report
 

Report of Independent Registered Public Accounting Firm

     30   

Consolidated Statement of Operations for the three years ended December 31, 2012

     31   

Consolidated Statement of Comprehensive Income for the three years ended December 31, 2012

     32   

Consolidated Balance Sheet as of December 31, 2012 and 2011

     33   

Consolidated Statement of Cash Flows for the three years ended December 31, 2012

     34   

Consolidated Statement of Changes in Equity for the three years ended December 31, 2012

     35   

Notes to Consolidated Financial Statements

     37   

Selected Quarterly Financial Data (Unaudited)

     72   

 

  (2) Financial Statement Schedule for the three years ended December 31, 2012 :

 

     Page Number in
Form 10-K
 

SCHEDULE I—Report of Independent Registered Public Accounting Firm on Financial Statement Schedule

     S-I   

SCHEDULE II—Valuation and Qualifying Accounts

     S-II   

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.

 

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  (3) Exhibits :

The following list of exhibits includes exhibits submitted with this Form 10-K as filed with the SEC and those incorporated by reference to other filings.

 

Exhibit

Number

   
   2.1     Agreement and Plan of Merger, among United Technologies Corporation, Charlotte Lucas Corporation, and Goodrich Corporation, dated as of September 21, 2011, incorporated by reference to Exhibit 2.1 to UTC’s Current Report on Form 8-K (Commission file number 1-812) filed with the SEC on September 23, 2011.
  3(i)     Restated Certificate of Incorporation, restated as of May 5, 2006, incorporated by reference to Exhibit 3(i) to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2006.
  3(ii)     Bylaws as amended and restated effective December 10, 2008, incorporated by reference to Exhibit 3(ii) to UTC’s Current Report on Form 8-K (Commission file number 1-812) filed with the SEC on December 12, 2008.
  4.1    Amended and Restated Indenture, dated as of May 1, 2001, between UTC and The Bank of New York, as trustee, incorporated by reference to Exhibit 4(a) to UTC’s Registration Statement on Form S-3 (Commission file number 333-60276) filed with the SEC on May 4, 2001. UTC hereby agrees to furnish to the Commission upon request a copy of each other instrument defining the rights of holders of long-term debt of UTC and its consolidated subsidiaries and any unconsolidated subsidiaries.
10.1     United Technologies Corporation Annual Executive Incentive Compensation Plan, incorporated by reference to Exhibit A to UTC’s Proxy Statement for the 1975 Annual Meeting of Shareowners, Amendment No. 1 thereto, effective January 1, 1995, incorporated by reference to Exhibit 10.2 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 1995, and Amendment No. 2 thereto, effective January 1, 2009, incorporated by reference to Exhibit 10.1 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2008.
10.2     United Technologies Corporation Executive Estate Preservation Program, incorporated by reference to Exhibit 10(iv) to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 1992.
10.3     United Technologies Corporation Pension Preservation Plan, as amended and restated, effective December 31, 2009, incorporated by reference to Exhibit 10.3 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2009.
10.4     United Technologies Corporation Senior Executive Severance Plan, incorporated by reference to Exhibit 10(vi) to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 1992, as amended by Amendment thereto, effective December 10, 2003, incorporated by reference to Exhibit 10.4 of UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2003, and Amendment thereto, effective June 11, 2008, incorporated by reference to Exhibit 10.4 of UTC’s Quarterly Report on Form 10-Q (Commission file number 1-812) for the quarterly period ended June 30, 2008, and Amendment thereto, dated February 4, 2011, incorporated by reference to Exhibit 10.4 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2010.
10.5     United Technologies Corporation Deferred Compensation Plan, as amended and restated, effective January 1, 2005, incorporated by reference to Exhibit 10.5 of UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2008.
10.6     United Technologies Corporation Long Term Incentive Plan, incorporated by reference to Exhibit 10.11 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 1989, as amended by Amendment No. 1, incorporated by reference to Exhibit 10.11 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 1995, and Amendment No. 2, incorporated by reference to Exhibit 10.6 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2003.
10.7     Schedule of Terms for Nonqualified Stock Option and Dividend Equivalent Awards relating to the United Technologies Corporation Long Term Incentive Plan, as amended (referred to above in Exhibit 10.6), incorporated by reference to Exhibit 10.15 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2004.
10.8     Schedule of Terms and Form of Award for Restricted Stock Awards relating to the United Technologies Corporation Long Term Incentive Plan, as amended (referred to above in Exhibit 10.6), incorporated by reference to Exhibit 10.1 to UTC’s Quarterly Report on Form 10-Q (Commission file number 1-812) for the quarterly period ended September 30, 2004.
10.9     Schedule of Terms and Form of Award for Nonqualified Stock Option Awards relating to the United Technologies Corporation Long Term Incentive Plan, as amended (referred to above in Exhibit 10.6), incorporated by reference to Exhibit 10.2 to UTC’s Quarterly Report on Form 10-Q (Commission file number 1-812) for the quarterly period ended September 30, 2004.
10.10   Schedule of Terms and Forms of Award for Continuous Improvement Incentive Program Non-qualified Stock Option and Dividend Equivalent Awards relating to the United Technologies Corporation Long Term Incentive Plan, as amended (referred to above in Exhibit 10.6), incorporated by reference to Exhibit 10.6 to UTC’s Quarterly Report on Form 10-Q (Commission file number 1-812) for the quarterly period ended September 30, 2004.

 

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10.11    United Technologies Corporation Executive Leadership Group Program, as amended and restated, effective June 10, 2009, incorporated by reference to Exhibit 10.7 to UTC’s Quarterly Report on Form 10-Q (Commission file number 1-812) for the quarterly period ended September 30, 2009.
10.12    Schedule of Terms for Restricted Share Unit Retention Awards relating to the United Technologies Corporation Executive Leadership Group Program (referred to above in Exhibit 10.11), effective December 22, 2010, incorporated by reference to Exhibit 10.12 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2010.
10.13    Form of Award Agreement for Restricted Share Unit Retention Awards relating to the United Technologies Corporation Executive Leadership Group Program (referred to above in Exhibit 10.11), incorporated by reference to Exhibit 10.2 to UTC’s Current Report on Form 8-K (Commission file number 1-812) filed with the SEC on March 24, 2006.
10.14    United Technologies Corporation Board of Directors Deferred Stock Unit Plan, incorporated by reference to Exhibit 10.14 to UTC’s Quarterly Report on Form 10-Q (Commission file number 1-812) for the quarterly period ended September 30, 2010, as amended by an Amendment thereto, effective February 1, 2013.*
10.15    Retainer Payment Election Form for United Technologies Corporation Board of Directors Deferred Stock Unit Plan (referred to above in Exhibit 10.14), incorporated by reference to Exhibit 10.1 to UTC’s Current Report on Form 8-K (Commission file number 1-812) filed with the SEC on April 18, 2006.
10.16    Form of Deferred Restricted Stock Unit Award relating to the United Technologies Corporation Board of Directors Deferred Stock Unit Plan (referred to above in Exhibit 10.14), incorporated by reference to Exhibit 10.16 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2009.
10.17    United Technologies Corporation Nonemployee Director Stock Option Plan, incorporated by reference to Exhibit 10.12 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 1995, as amended by Amendment No. 1, incorporated by reference to Exhibit 10(iii)(A)(2) to UTC’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000, Amendment No. 2, incorporated by reference to Exhibit 10(iii)(A)(1) to UTC’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001, Amendment No. 3, incorporated by reference to Exhibit 10.17 to UTC’s Annual Report on Form 10-K for the fiscal year ending December 31, 2001, Amendment No. 4, incorporated by reference to Exhibit 10.12 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ending December 31, 2002 and Amendment No. 5, incorporated by reference to Exhibit 10.12 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2003.
10.18    Form of Nonqualified Stock Option Award relating to the United Technologies Corporation Nonemployee Director Stock Option Plan, as amended (referred to above in Exhibit 10.17), incorporated by reference to Exhibit 10.4 to UTC’s Quarterly Report on Form 10-Q (Commission file number 1-812) for the quarterly period ended September 30, 2004.
10.19    United Technologies Corporation 2005 Long-Term Incentive Plan, as amended and restated effective April 13, 2011, incorporated by reference to Exhibit 10.1 to UTC’s Current Report on Form 8-K (Commission file number 1-812) filed with the SEC on April 19, 2011.
10.20    Schedule of Terms for restricted stock awards relating to the United Technologies Corporation 2005 Long-Term Incentive Plan (referred to above in Exhibit 10.19), incorporated by reference to Exhibit 10.1 to UTC’s Current Report on Form 8-K (Commission file number 1-812) filed with the SEC on September 20, 2005.
10.21    Form of Award Agreement for restricted stock awards relating to the United Technologies Corporation 2005 Long-Term Incentive Plan (referred to above in Exhibit 10.19), incorporated by reference to Exhibit 10.2 to UTC’s Current Report on Form 8-K (Commission file number 1-812) filed with the SEC on September 20, 2005.
10.22    Schedule of Terms for non-qualified stock option awards relating to the United Technologies Corporation 2005 Long-Term Incentive Plan (referred to above in Exhibit 10.19), incorporated by reference to Exhibit 10.3 to UTC’s Current Report on Form 8-K (Commission file number 1-812) filed with the SEC on September 20, 2005.
10.23    Form of Award Agreement for non-qualified stock option awards relating to the United Technologies Corporation 2005 Long-Term Incentive Plan (referred to above in Exhibit 10.19), incorporated by reference to Exhibit 10.4 to UTC’s Current Report on Form 8-K (Commission file number 1-812) filed with the SEC on September 20, 2005.
10.24    Schedule of Terms for performance share unit awards relating to the United Technologies Corporation 2005 Long-Term Incentive Plan (referred to above in Exhibit 10.19), incorporated by reference to Exhibit 10.28 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2008.
10.25    Schedule of Terms for stock appreciation rights awards relating to the United Technologies Corporation 2005 Long-Term Incentive Plan (referred to above in Exhibit 10.19), incorporated by reference to Exhibit 10.29 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2008.
10.26    Form of Award Agreement for performance share unit and stock appreciation rights awards relating to the United Technologies Corporation 2005 Long-Term Incentive Plan (referred to above in Exhibit 10.19), incorporated by reference to Exhibit 10.1 to UTC’s Current Report on Form 8-K filed with the SEC on October 16, 2006.

 

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  10.27    Form of Award Agreement for performance share unit and stock appreciation rights awards relating to the United Technologies Corporation 2005 Long-Term Incentive Plan (referred to above in Exhibit 10.19), incorporated by reference to Exhibit 10.1 to UTC’s Current Report on Form 8-K (Commission file number 1-812) filed with the SEC on December 20, 2005.
  10.28    United Technologies Corporation LTIP Performance Share Unit Deferral Plan, relating to the 2005 Long-Term Incentive Plan (referred to above in Exhibit 10.19), incorporated by reference to Exhibit 10.36 of UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2008.
  10.29    United Technologies Corporation International Deferred Compensation Replacement Plan, effective January 1, 2005, incorporated by reference to Exhibit 10.35 of UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2008.
  10.30    United Technologies Corporation Company Automatic Excess Plan, effective January 1, 2010, incorporated by reference to Exhibit 10.30 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2009.
  10.31    United Technologies Corporation Savings Restoration Plan, effective January 1, 2010, incorporated by reference to Exhibit 10.31 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2009.
  10.32    Bridge Credit Agreement, among United Technologies Corporation, the Lenders (as defined therein), JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, HSBC Securities (USA) Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, dated as of November 8, 2011, incorporated by reference to Exhibit 10.33 to UTC’s Annual Report on Form 10-K (Commission file number 1-812) for the fiscal year ended December 31, 2011.
  10.33    Term Loan Credit Agreement, among United Technologies Corporation, JPMorgan Chase Bank, M.A., J.P. Morgan Securities LLC, Citigroup Global Markets Inc., HSBC Securities (USA) Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bank of America, N.A., Citibank, N.A. and HSBC Bank USA, National Association, dated April 24, 2012, incorporated by reference to Exhibit 10.34 to UTC’s Quarterly Report on Form 10-Q (Commission file number 1-812) for the quarterly period ended March 30, 2012.
11    Statement Re: Computations of Per Share Earnings.*
12    Statement Re: Computation of Ratios.*
13    Excerpts from UTC’s 2012 Annual Report to Shareowners for the year ended December 31, 2012.*
14   

Code of Ethics. The UTC Code of Ethics may be accessed via UTC’s website at

http://www.utc.com/Governance/Ethics/Code+of+Ethics.

21    Subsidiaries of the Registrant.*
23    Consent of PricewaterhouseCoopers LLP.*
24    Powers of Attorney of John V. Faraci, Jean-Pierre Garnier, Jamie S. Gorelick, Edward A. Kangas, Ellen J. Kullman, Marshall O. Larsen, Richard D. McCormick, Harold W. McGraw III, Richard B. Myers, H. Patrick Swygert, André Villeneuve and Christine Todd Whitman.*
31    Rule 13a-14(a)/15d-14(a) Certifications.*
32    Section 1350 Certifications.*
101.INS   

XBRL Instance Document.*

(File name: utx-20121231.xml)

101.SCH   

XBRL Taxonomy Extension Schema Document.*

(File name: utx-20121231.xsd)

101.CAL   

XBRL Taxonomy Calculation Linkbase Document.*

(File name: utx-20121231_cal.xml)

101.DEF   

XBRL Taxonomy Definition Linkbase Document.*

File name: : utx-20121231_def.xml)

101.LAB   

XBRL Taxonomy Label Linkbase Document.*

(File name: utx-20121231_lab.xml)

101.PRE   

XBRL Taxonomy Presentation Linkbase Document.*

(File name: utx-20121231_pre.xml)

 

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Notes to Exhibits List:

 

* Submitted electronically herewith.

Exhibits 10.1 through 10.31 are contracts, arrangements or compensatory plans filed as exhibits pursuant to Item 15(b) of the requirements for Form 10-K reports.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Operations for the three years ended December 31, 2012, (ii) Consolidated Statement of Comprehensive Income for the three years ended December 31, 2012, (iii) Consolidated Balance Sheet as of December 31, 2012 and 2011, (iv) Consolidated Statement of Cash Flows for the three years ended December 31, 2012, (v) Consolidated Statement of Changes in Equity for the three years ended December 31, 2012, (vi) Notes to Consolidated Financial Statements, and (vii) Financial Schedule of Valuation and Qualifying Accounts.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

30


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

UNITED TECHNOLOGIES CORPORATION
(Registrant)

By:

  /s/ G REGORY J. H AYES
  Gregory J. Hayes
  Senior Vice President and Chief Financial Officer
 

By:

  /s/ P ETER F. L ONGO
  Peter F. Longo
  Vice President, Controller

Date: February 7, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

/s/ L OUIS R. C HÊNEVERT

(Louis R. Chênevert)

  Director, Chairman & Chief Executive Officer (Principal Executive Officer)   February 7, 2013

/s/ G REGORY J. H AYES

(Gregory J. Hayes)

  Senior Vice President and Chief Financial Officer (Principal Financial Officer)   February 7, 2013

/s/ P ETER F. L ONGO

(Peter F. Longo)

  Vice President, Controller (Principal Accounting Officer)   February 7, 2013

/s/ J OHN V. F ARACI *

(John V. Faraci)

  Director  

/s/ J EAN -P IERRE G ARNIER *

(Jean-Pierre Garnier)

  Director  

/s/ J AMIE S. G ORELICK *

(Jamie S. Gorelick)

  Director  

/s/ E DWARD A. K ANGAS *

(Edward A. Kangas)

  Director  

/s/ E LLEN J. K ULLMAN *

(Ellen J. Kullman)

  Director  

/s/ M ARSHALL O. L ARSEN *

(Marshall O. Larsen)

  Director  

/s/ R ICHARD D. M C C ORMICK *

(Richard D. McCormick)

  Director  

/s/ H AROLD W. M C G RAW III *

(Harold W. McGraw III)

  Director  

 

31


Table of Contents

Signature

  

Title

  

Date

/s/ R ICHARD B. M YERS *

(Richard B. Myers)

   Director     

/s/ H. P ATRICK S WYGERT *

(H. Patrick Swygert)

   Director   

/s/ A NDRÉ V ILLENEUVE *

(André Villeneuve)

   Director   

/s/ C HRISTINE T ODD W HITMAN *

(Christine Todd Whitman)

   Director   

 

*By:   /s/    C HARLES D. G ILL
 

Charles D. Gill

Senior Vice President and

General Counsel, as Attorney-in-Fact

Date: February 7, 2013

 

32


Table of Contents

SCHEDULE I

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

FINANCIAL STATEMENT SCHEDULE

To the Board of Directors

of United Technologies Corporation:

Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 7, 2013 appearing in the 2012 Annual Report to Shareowners of United Technologies Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

February 7, 2013

 

S-I


Table of Contents

SCHEDULE II

UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES

Valuation and Qualifying Accounts

Three Years Ended December 31, 2012

(Millions of Dollars)

 

Allowances for Doubtful Accounts and Other Customer Financing Activity:

  

Balance December 31, 2009

   $ 451  

Provision charged to income

     58  

Doubtful accounts written off (net)

     (47

Other adjustments

     (14
  

 

 

 

Balance December 31, 2010

     448  

Provision charged to income

     88  

Doubtful accounts written off (net)

     (38

Other adjustments

     (42
  

 

 

 

Balance December 31, 2011

     456  

Provision charged to income

     72  

Doubtful accounts written off (net)

     (23

Other adjustments

     12  
  

 

 

 

Balance December 31, 2012

   $ 517  
  

 

 

 

Future Income Tax Benefits—Valuation allowance:

  

Balance December 31, 2009

   $ 903  

Additions charged to income tax expense

     93  

Reductions charged to goodwill, due to acquisitions

     (3

Reductions credited to income tax expense

     (44

Other adjustments

     (38
  

 

 

 

Balance December 31, 2010

     911  

Additions charged to income tax expense

     130  

Reductions credited to income tax expense

     (27

Other adjustments

     (37
  

 

 

 

Balance December 31, 2011

     977  

Additions charged to income tax expense

     124  

Additions charged to goodwill, due to acquisitions

     71  

Reductions credited to income tax expense

     (245

Other adjustments

     (23
  

 

 

 

Balance December 31, 2012

   $ 904  
  

 

 

 

 

S-II

EXHIBIT 10.14

AMENDMENT TO THE

UNITED TECHNOLOGIES CORPORATION

BOARD OF DIRECTORS DEFERRED STOCK UNIT PLAN

As Amended Effective February 1, 2013

WHEREAS, the United Technologies Corporation Board of Directors (the “Board”) has directed that the United Technologies Corporation Board of Directors Deferred Stock Unit Plan (the “Plan”) be amended for the purposes of revising the annual retainer and deferred stock unit award amounts provided for in the Plan, effective April 29, 2013;

WHEREAS, the Board has directed that each of the Senior Vice President and General Counsel and the Senior Vice President, Human Resources and Organization are authorized to amend the Plan to effect the foregoing change and to take such other actions as they deem necessary or appropriate to implement the foregoing change to the Plan;

NOW, THEREFORE, the Board hereby amends the Plan as follows:

 

1. Section 3.01(a) is amended and restated to read as follows:

3.01 Annual Retainer

(a) Annual Retainer Amount. Effective April 29, 2013, subject to subsections (b) and (c) of this Section 3.01, the Annual Retainer shall be as follows: $120,000 for the Audit Committee Chair and the Lead Director; $116,000 for members of the Audit Committee; $112,000 for the Chair of the Committee on Compensation and Executive Development; $110,000 for any other Committee Chair; and $104,000 for all other Participants. The Annual Retainer is subject to change from time to time at the discretion of the Committee.

 

2. Section 3.02(a) is amended and restated to read as follows:

3.02 Annual Deferred Stock Unit Award

(a) Annual Deferred Stock Unit Award. Effective April 29, 2013, each Participant will receive an annual award of Deferred Stock Units, the following amounts to be credited to the Participant’s Account: $180,000 for the Audit Committee Chair and the Lead Director; $174,000 for members of the Audit Committee; $168,000 for the Chair of the Committee on Compensation and Executive Development; $165,000 for any other Committee Chair; and $156,000 for all other Participants. The Annual Deferred Stock Unit Award is subject to change from time to time at the discretion of the Committee.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of February 1, 2013.

UNITED TECHNOLOGIES CORPORATION

Exhibit 11

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS

 

     Full year  

(Dollars in millions, except per share amounts)

   2012      2011      2010      2009      2008  

Net income from continuing operations

   $ 4,847      $ 4,831      $ 4,195      $ 3,719      $ 4,534  

Net income from discontinued operations

     283        148        178        111        156  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to common shareowners

   $ 5,130      $ 4,979      $ 4,373      $ 3,830      $ 4,690  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income from continuing operations

   $ 4,847      $ 4,831      $ 4,195      $ 3,719      $ 4,534  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings for period

   $ 4,847      $ 4,831      $ 4,195      $ 3,719      $ 4,534  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings for period

   $ 4,847      $ 4,831      $ 4,195      $ 3,719      $ 4,534  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic average number of shares outstanding during the period (thousands)

     895,200        892,300        907,900        917,400        937,800  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Stock awards (thousands)

     11,400        14,500        14,800        11,400        18,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted average number of shares outstanding during the period (thousands)

     906,600        906,800        922,700        928,800        956,400  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 5.41      $ 5.41      $ 4.62      $ 4.05      $ 4.83  

Diluted earnings per common share

   $ 5.35      $ 5.33      $ 4.55      $ 4.00      $ 4.74  

Net income attributable to common shareowners

   $ 5,130      $ 4,979      $ 4,373      $ 3,830      $ 4,690  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings for period

   $ 5,130      $ 4,979      $ 4,373      $ 3,830      $ 4,690  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings for period

   $ 5,130      $ 4,979      $ 4,373      $ 3,830      $ 4,690  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic average number of shares outstanding during the period (thousands)

     895,200        892,300        907,900        917,400        937,800  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Stock awards (thousands)

     11,400        14,500        14,800        11,400        18,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted average number of shares outstanding during the period (thousands)

     906,600        906,800        922,700        928,800        956,400  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 5.73      $ 5.58      $ 4.82      $ 4.17      $ 5.00  

Diluted earnings per common share

   $ 5.66      $ 5.49      $ 4.74      $ 4.12      $ 4.90  

Exhibit 12

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

 

     Full year  

(Dollars in millions)

   2012     2011     2010     2009     2008  

Fixed Charges:

          

Interest expense 1

   $ 893      $ 673      $ 751      $ 705     $ 689  

Interest capitalized

     19       20       17       18       19  

One-third of rents 2

     152       151       148       154       168  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed charges

   $ 1,064      $ 844     $ 916      $ 877     $ 876  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings:

          

Income from continuing operations before income taxes

   $ 6,911      $ 7,350      $ 6,248     $ 5,575     $ 6,692  

Fixed charges per above

     1,064       844       916        877       876  

Less: capitalized interest

     (19     (20     (17     (18     (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     1,045       824       899        859       857  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortization of interest capitalized

     13       17       17       17       9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earnings

   $ 7,969      $ 8,191     $ 7,164      $ 6,451     $ 7,558  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of earnings to fixed charges

     7.49       9.70       7.82        7.36       8.63  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1  

Pursuant to the guidance in the Income Taxes Topic of the FASB ASC, interest related to unrecognized tax benefits recorded was approximately $40 million, $23 million, $27 million, $21 million and $39 million for the years 2012, 2011, 2010, 2009 and 2008, respectively. The ratio of earnings to fixed charges would have been 7.82, 10.00, 8.10, 7.56 and 9.08 for the years 2012, 2011, 2010, 2009 and 2008, respectively, if such interest were excluded from the calculation.

2  

Reasonable approximation of the interest factor.

 

    1  

 

Exhibit 13

Five-Year Summary

 

 

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)   2012     2011     2010     2009     2008  
         

For The Year

                   
Net sales   $ 57,708     $ 55,754     $ 52,275     $ 50,469     $ 56,824  
Research and development 5     2,371       1,951       1,656       1,460       1,650  
Restructuring costs     590       315       387       787       328  
Net income from continuing operations     5,200       5,216       4,523       4,060       4,890  
Net income from continuing operations attributable to common shareowners     4,847       4,831       4,195       3,719       4,534  
Basic earnings per share—Net income from continuing operations attributable to common shareowners     5.41       5.41       4.62       4.05       4.83  
Diluted earnings per share—Net income from continuing operations attributable to common shareowners     5.35       5.33       4.55       4.00       4.74  
Cash dividends per common share     2.03       1.87       1.70       1.54       1.35  
Average number of shares of Common Stock outstanding:                    

Basic

    895       892       908       917       938  

Diluted

    907       907       923       929       956  
Cash flows provided by operating activities of continuing operations     6,605       6,460       5,720       5,083       5,962  
Capital expenditures     1,389       929       838       773       1,137  
Acquisitions, including debt assumed 4     18,620       372       2,781       676       1,408  
Repurchases of Common Stock 6           2,175       2,200       1,100       3,160  
Dividends paid on Common Stock 1     1,752       1,602       1,482       1,356       1,210  
         

At Year End

                   
Working capital   $ 5,174     $ 7,142     $ 5,778     $ 5,281     $ 4,665  
Total assets     89,409       61,452       58,493       55,762       56,837  
Long-term debt, including current portion     22,718       9,630       10,173       9,490       10,453  
Total debt     23,221       10,260       10,289       9,744       11,476  

Total debt to total capitalization

    46%        31%        32%        32%        41%   
Total equity     27,069       22,820       22,323       20,999       16,681  
Number of employees 3, 4       218,300         199,900         208,200         206,700         223,100  
                                         

Amounts presented for 2008-2011 have been restated to reflect results from continuing operations consistent with 2012 presentation, where applicable. Refer to “Business Overview” section for additional information.

 

Note 1 Excludes dividends paid on Employee Stock Ownership Plan Common Stock.  

 

Note 2 The decrease in the 2009 debt to total capitalization ratio, as compared to 2008, reflects the reversal of unrealized losses in our pension plans of approximately $1.1 billion, the beneficial impact of foreign exchange rate movement of approximately $1.0 billion, and the reduction of approximately $1.7 billion of total debt. The increase in the 2012 debt to total capitalization ratio, as compared to 2011, reflects the issuance of $9.8 billion in long-term debt, $1.1 billion in equity units and the assumption of approximately $3 billion in long-term debt in connection with the acquisition of Goodrich. In connection with a cash tender offer, approximately $635 million ($761 million fair value) of principal amount of legacy Goodrich debt was retired in the fourth quarter 2012.  

 

Note 3 The decrease in 2011, as compared with 2010, includes the impact of divestitures primarily within the UTC Climate, Controls & Security segment, as well as net workforce reductions associated with restructuring actions across UTC.  

 

Note 4 The increase in 2012, as compared with 2011, includes the net impact of acquisitions and divestitures across the Company, most notably the 2012 acquisition of Goodrich and divestiture of the legacy Hamilton Sundstrand Industrial business, both within the UTC Aerospace Systems segment, as well as the impact of other acquisitions and dispositions and restructuring actions across UTC.  

 

Note 5 The increase in 2012, as compared with 2011, includes approximately $250 million incremental research and development spending related to the Goodrich businesses that were acquired during 2012, and approximately $65 million at Pratt & Whitney to further advance development of multiple geared turbo fan platforms.  

 

Note 6 In connection with the acquisition of Goodrich, repurchases of common stock under our share repurchase program were suspended for 2012.  


 

  2    

 

Management’s Discussion and Analysis

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

BUSINESS OVERVIEW

We are a global provider of high technology products and services to the building systems and aerospace industries. Our operations for the periods presented herein are classified into five principal business segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems and Sikorsky. Otis and UTC Climate, Controls & Security are referred to as the “commercial businesses,” while Pratt & Whitney, UTC Aerospace Systems and Sikorsky are collectively referred to as the “aerospace businesses.” Certain reclassifications have been made to the prior year amounts to conform to the current year presentation.

In 2012, we implemented a new organizational structure that allows us to better serve customers, drive growth and achieve further efficiencies through greater integration across certain product lines. As part of this new structure, effective January 1, 2012, we formed the UTC Climate, Controls & Security segment, which combines the former Carrier and UTC Fire & Security segments.

On July 26, 2012, we acquired Goodrich Corporation (Goodrich) pursuant to a merger agreement dated September 21, 2011 for approximately $18.3 billion including $1.9 billion of net debt assumed. As a result of the acquisition, Goodrich became a wholly-owned subsidiary of UTC in the largest acquisition in UTC’s history. The acquired Goodrich business and the legacy Hamilton Sundstrand business have been combined to form a new segment named UTC Aerospace Systems. This segment and our Pratt & Whitney segment are separately reportable segments although they are both included within the newly formed UTC Propulsion & Aerospace Systems organizational structure. The increased scale, financial strength and complementary products of the new combined business are expected to continue to strengthen our position in the aerospace and defense industry. Further, we expect that this acquisition will enhance our ability to support our customers with more integrated systems. The results of the acquired Goodrich business have been included in UTC’s financial statements only for periods subsequent to the completion of the acquisition. As a result, the consolidated financial results for the year ended December 31, 2012 do not reflect a full year of legacy Goodrich operations. The acquisition resulted in the inclusion of Goodrich’s assets and liabilities as of the acquisition date at their respective fair values. Accordingly, the Goodrich acquisition materially affected UTC’s results of operations and financial position.

On June 29, 2012, Pratt & Whitney, Rolls-Royce plc (Rolls-Royce), MTU Aero Engines AG (MTU) and Japanese Aero Engines Corporation (JAEC), participants in the IAE International Aero Engines AG (IAE) collaboration, completed a restructuring of their interests in IAE. Under the terms of the agreement, Rolls-Royce sold its ownership and collaboration interests in IAE to Pratt & Whitney, while also entering into a license for its V2500 intellectual property with Pratt & Whitney. In exchange for the

increased ownership and collaboration interests and intellectual property license, Pratt & Whitney paid Rolls-Royce $1.5 billion at closing with additional payments due to Rolls-Royce during the fifteen year period following closing of the purchase, conditional upon each hour flown by V2500-powered aircraft in service at the closing. Pratt & Whitney entered into a collaboration arrangement with MTU with respect to a portion of the collaboration interest in IAE acquired from Rolls-Royce for consideration of approximately $233 million with additional payments due to Pratt & Whitney in the future. As a result of these transactions, Pratt & Whitney has a 61% net interest in the collaboration and a 49.5% ownership interest in IAE, which has been consolidated by Pratt & Whitney post-transaction.

On March 14, 2012, the Board of Directors of the Company approved a plan for the divestiture of a number of non-core businesses. Cash generated from these divestitures has been and will be used to repay the debt issued to finance the acquisition of Goodrich. These divestitures are expected to generate approximately $3 billion in net cash, on an after-tax basis, when complete. In the first quarter of 2012, the legacy Hamilton Sundstrand Industrial businesses, Pratt & Whitney Rocketdyne (Rocketdyne) and Clipper Windpower (Clipper) all met the “held-for-sale” criteria. On June 29, 2012, management of the Company approved a plan for the divestiture of UTC Power. The results of operations, including the net gains/losses expected on disposition, and the related cash flows which result from these non-core businesses have been reclassified to Discontinued Operations in our Consolidated Statements of Operations and Cash Flows for all periods presented. The sale of the legacy Hamilton Sundstrand Industrial businesses was completed in the fourth quarter of 2012, while the sale of Clipper was completed in the third quarter of 2012. On July 23, 2012, we announced an agreement to sell our Rocketdyne unit to GenCorp Inc. for $550 million. On December 22, 2012, we announced an agreement to sell our UTC Power unit to ClearEdge Power. Although the Pratt & Whitney Power Systems business was also approved for sale by the Board of Directors of the Company, it was not reclassified to Discontinued Operations due to the level of expected continuing involvement in the business post-sale. The sales of the remaining non-core businesses identified for disposition are expected to be completed in the first half of 2013.

In accordance with conditions imposed for regulatory approval of UTC’s acquisition of Goodrich, UTC must dispose of the electric power systems and the pumps and engine controls businesses of Goodrich. These businesses have been held separate from UTC’s and Goodrich’s ongoing businesses pursuant to regulatory obligations since the acquisition of Goodrich by UTC. On October 16, 2012, we announced an agreement to sell the electric power systems business for $400 million to Safran, and on January 18, 2013, we announced an agreement to sell the pumps and engine controls business to Triumph Group Inc. Closings of both sales are expected by the end of the first quarter of 2013 and are subject to regulatory approvals and other customary closing conditions.

 


 

    3  

 

In addition to the divestiture of certain non-core businesses, we also issued $9.8 billion in long-term debt, $3.2 billion in commercial paper, a $2.0 billion term loan and $1.1 billion of equity units to fund the acquisition of Goodrich. As of December 31, 2012, we have repaid all of the term loan and nearly all of the commercial paper issued to finance the acquisition.

Our consolidated net sales were derived from the commercial and aerospace businesses as follows (sales from Pratt & Whitney’s industrial markets are included in “commercial and industrial”):

 

       2012      2011      2010  
Commercial and industrial      51%         57%         57%   
Military aerospace and space      21%         20%         21%   
Commercial aerospace      28%         23%         22%   
     100%         100%         100%   
                            

The significant shift in sales from Commercial and industrial to Commercial aerospace largely reflects the Goodrich and IAE transactions. In 2012, approximately 57% of our consolidated sales were original equipment and 43% were aftermarket parts and services, while in 2011 the amounts were 56% and 44%, respectively. The amounts in 2010 were 57% and 43%, respectively.

Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. To limit the impact of any one industry, or the economy of any single country on our consolidated operating results, our strategy has been, and continues to be, the maintenance of a balanced and diversified portfolio of businesses. 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 & Security and in our commercial aerospace aftermarket businesses, and longer cycles at Otis and in our aerospace OEM businesses. Our customers include companies in the private sector and governments, and our businesses reflect an extensive geographic diversification that has evolved with the continued globalization of world economies. The composition of net sales from outside the U.S., including U.S. export sales to these regions, in U.S. Dollars and as a percentage of total segment sales, is as follows:

 

(DOLLARS IN MILLIONS)   2012     2011     2010     2012     2011     2010  
Europe   $ 11,823     $ 12,344     $ 11,678       20%        22%        22%   
Asia Pacific     8,733       9,016       7,658       15%        16%        15%   
Other Non-U.S.     4,964       5,376       5,369       9%        10%        10%   
U.S. Exports     9,201       7,721       7,102       16%        14%        14%   
International segment sales   $   34,721     $   34,457     $   31,807       60%        62%        61%   
                                                 

As part of our growth strategy, we invest in businesses in certain countries that carry high levels of currency, political and/or

economic risk, such as Argentina, Brazil, China, India, Mexico, Russia, South Africa and countries in the Middle East. At December 31, 2012, the net assets in any one of these countries did not exceed 5% of consolidated shareowners’ equity.

As in the previous year, our short cycle shipments and order rates were mixed across our businesses. In 2012, as compared with 2011, commercial aerospace spares orders at Pratt & Whitney decreased 12%, excluding additional orders due primarily to the consolidation of IAE, and UTC Aerospace Systems’ commercial aerospace orders decreased 4%, excluding additional orders from Goodrich. Ongoing economic uncertainty and high oil prices have led to continued cash conservation and constrained spending by major airlines. Strength in UTC Aerospace Systems commercial and military aerospace OEM business and military OEM sales at Pratt & Whitney, were offset by fewer deliveries for foreign military operations at Sikorsky. Conversely, UTC Climate, Controls & Security’s North American residential HVAC orders increased approximately 8% in 2012, while Otis’ new equipment orders in 2012 were consistent with 2011 order levels. While Otis new equipment orders in China declined early in 2012, order rates increased late in the year with fourth quarter orders in China 19% higher than the fourth quarter of 2011. Although uncertainty surrounding the resolution of the fiscal debate in the U.S. and the European debt crisis, together with the slowdown in China and other emerging economies drove volatility in financial markets during 2012, the economic environment in Europe has recently begun to stabilize while the U.S. and China continue gradual recoveries. The 2013 global GDP forecast is 2.5%, with growth expected to be slower in the first half of the year and uneven across the globe. We continue to expect growth rates in emerging markets, particularly in China and India, to outpace the rest of the world. Further, the gradual commercial construction recovery in North America throughout 2012 is expected to continue in 2013.

We had no organic sales growth during 2012. We expect organic sales growth in 2013 to be 3% to 5%.

Although we expect an increase in organic growth, which, if realized, would contribute to operating profit growth, we also continue to invest in new platforms and new markets to position us for additional growth, while remaining focused on structural cost reduction, operational improvements and disciplined cash redeployment. These actions contributed to our earnings during 2012 and positioned us for future earnings growth as the global economy recovers. We undertook a significant restructuring initiative in 2012 to reduce structural and overhead costs across all of our businesses. Restructuring costs in continuing operations totaled $590 million, $315 million and $387 million in 2012, 2011 and 2010, respectively. Segment operating margin decreased 110 basis points from 15.1% in 2011 to 14.0% in 2012. This year-over-year decrease is primarily due to a 50 basis point adverse impact of restructuring charges and non-recurring items and a 70 basis point adverse impact from higher research and development expenses.

 


 

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As discussed below in “Results of Operations,” operating profit in both 2012 and 2011 includes the impact from non-recurring items such as the adverse effect of asset impairment charges and the beneficial impact of gains from business divestiture activities, primarily those related to UTC Climate, Controls & Security’s ongoing portfolio transformation. Our earnings growth strategy contemplates earnings from organic sales growth, including growth from new product development and product improvements, structural cost reductions, operational improvements, and incremental earnings from our investments in acquisitions. We invested $18.6 billion (including debt assumed of $2.6 billion) and $372 million (including debt assumed of $15 million) in the acquisition of businesses across the entire company in 2012 and 2011, respectively. Our investment in businesses in 2012 principally reflected the Goodrich and IAE transactions. Acquisitions completed in 2011 consisted principally of a number of smaller acquisitions in both our aerospace and commercial businesses.

Both acquisition and restructuring costs associated with business combinations are expensed as incurred. Depending on the nature and level of acquisition activity, earnings could be adversely impacted due to acquisition and restructuring actions initiated in connection with the integration of the businesses acquired.

For additional discussion of acquisitions and restructuring, see “Liquidity and Financial Condition,” “Restructuring Costs” and Notes 2 and 13 to the Consolidated Financial Statements.

RESULTS OF OPERATIONS

Net Sales

 

(DOLLARS IN MILLIONS)    2012      2011      2010  
Net sales    $   57,708      $   55,754      $   52,275  
Percentage change year-over-year      3.5%         6.7%         3.6%   
                            

The factors contributing to the total percentage change year-over-year in total net sales are as follows:

 

         2012        2011  
Organic volume        –                5%   
Foreign currency translation        (2)%           2%   
Acquisitions and divestitures, net        6 %           –       
Total % Change        4 %           7%   
                       

Organic sales growth during 2012, at UTC Aerospace Systems (7%) and Pratt & Whitney (2%) was offset by organic sales contraction at Sikorsky (8%). The organic sales growth at UTC Aerospace Systems was primarily attributable to higher aerospace OEM volume, while the organic sales growth at Pratt & Whitney was a result of higher military engine deliveries and aftermarket sales. The organic sales contraction at Sikorsky was driven primarily by fewer aircraft deliveries to the U.S. Government and foreign military

operations. There was no organic sales growth within the commercial businesses in 2012. The sales increase from net acquisitions and divestitures is a result of Goodrich and IAE sales, partially offset by the ongoing portfolio transformation initiatives at UTC Climate, Controls & Security.

All segments experienced organic sales growth during 2011, led by Sikorsky (10%), UTC Aerospace Systems (8%), and UTC Climate, Controls & Security (7%). The organic sales growth at Sikorsky was primarily attributable to higher military OEM and aftermarket sales, while the organic sales growth at UTC Aerospace Systems was a result of higher volumes in the aerospace OEM and aftermarket businesses. UTC Climate, Controls & Security’s organic sales growth was driven primarily by the recovery in the transport refrigeration market. The organic sales growth in the remaining businesses reflected higher commercial sales and aftermarket volume at Pratt & Whitney and higher new equipment volumes in emerging markets for Otis.

Cost of Products and Services Sold

 

(DOLLARS IN MILLIONS)   2012     2011     2010  
Cost of products sold   $   31,094     $   29,252     $   27,513  
Percentage of product sales     76.3%        75.2%        75.1%   
Cost of services sold   $ 11,059     $ 11,117     $ 10,441  
Percentage of service sales     65.1%        65.9%        66.7%   
Total cost of products and services sold   $ 42,153     $ 40,369     $ 37,954  
Percentage change year-over-year     4.4%        6.4%        1.5%   
                         

The factors contributing to the total percentage change year-over-year in total cost of products and services sold are as follows:

 

         2012        2011  
Organic volume        –                5 %   
Foreign currency translation        (2)%           2 %   
Acquisitions and divestitures, net        6 %           (1)%   
Total % Change        4 %           6 %   
                       

Total cost of products and services sold increased (4%) at a rate consistent with sales growth (4%) in 2012 as compared with 2011. The increase in cost of products and services sold is a result of the Goodrich and IAE transactions (8%) partially offset by lower cost of products and services sold as a result of the UTC Climate, Controls & Security portfolio transformation (3%) and the beneficial impact of foreign currency exchange translation (2%).

Total cost of products and services sold increased organically (5%) at a rate consistent with organic sales growth (5%) in 2011 as compared with 2010. The beneficial impact of cost reductions and productivity gains were partially offset by higher commodity, pension, and warranty costs in 2011.

Gross Margin

 

(DOLLARS IN MILLIONS)    2012      2011      2010  
Gross margin    $   15,555      $   15,385      $   14,321  
Percentage of net sales      27.0%         27.6%         27.4%   
                            
 


 

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Gross margin as a percentage of sales decreased 60 basis points, in 2012 as compared with 2011, driven primarily by the adverse impact of the Goodrich and IAE transactions (40 basis points), higher restructuring expense in 2012 (30 basis points), and a loss provision recorded by Sikorsky for a contract with the Canadian Government (30 basis points), all of which was partially offset by benefits from the disposition of lower margin businesses in connection with the UTC Climate, Controls & Security portfolio transformation (30 basis points).

Gross margin as a percentage of sales increased 20 basis points, in 2011 as compared with 2010, driven primarily by increased volumes and lower cost of sales resulting from continued focus on cost reductions, savings from previously initiated restructuring actions and net operational efficiencies. The beneficial impacts of the absence of asset impairment charges (10 basis points) recorded at UTC Climate, Controls & Security and UTC Aerospace Systems in 2010 and lower year-over-year restructuring charges (20 basis points) were partially offset by higher warranty costs at UTC Aerospace Systems in 2011.

Research and Development

 

(DOLLARS IN MILLIONS)    2012      2011      2010  
Company-funded    $   2,371      $   1,951      $   1,656  
Percentage of net sales      4.1%         3.5%         3.2%   
     
Customer-funded    $ 1,670      $ 1,419      $ 1,460  
Percentage of net sales      2.9%         2.5%         2.8%   
                            

Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year variations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses and relates largely to the next generation product family at Pratt & Whitney, the C-Series, Airbus A350, and Boeing 787 programs at UTC Aerospace Systems, and various programs at Sikorsky. The year-over-year increase in company-funded research and development in 2012, compared with 2011, primarily reflects increases at UTC Aerospace Systems as a result of incremental research and development spending related to the Goodrich businesses (13%) and at Pratt & Whitney to further advance development of multiple geared turbo fan platforms and military engines (5%). The increase in company-funded research and development in 2011, compared with 2010, primarily reflects increases at Pratt & Whitney associated with the next generation product family.

Company-funded research and development spending for 2013 is expected to increase by approximately $225 million over 2012 levels primarily due to the added spending as a result of the Goodrich acquisition.

The increase in customer-funded research and development in 2012, as compared with the prior year, reflects spending related to the Goodrich businesses (24%) partially offset by a

decrease at Sikorsky (4%) related to a reduction in development spending on U.S. Government military platforms. The decrease in customer-funded research and development in 2011, as compared with 2010, was primarily driven by a decrease at Pratt & Whitney related to a reduction in development spending on the Joint Strike Fighter program.

Selling, General and Administrative

 

(DOLLARS IN MILLIONS)    2012      2011      2010  
Selling, general and administrative    $   6,452      $   6,161      $   5,798  
Percentage of net sales      11.2%         11.1%         11.1%   
                            

The increase in selling, general and administrative expenses in 2012, as compared with 2011, is due primarily to the impact of acquisitions, net of divestitures, completed over the preceding twelve months (3%) and higher restructuring costs (2%). Higher pension costs (1%) were offset by favorable foreign exchange translation.

The increase in selling, general and administrative expenses in 2011, as compared with 2010, is due primarily to the impact of acquisitions completed over the year, including the acquisition of the GE Security business in March 2010, adverse foreign exchange translation, and higher pension related costs.

Other Income, Net

 

(DOLLARS IN MILLIONS)    2012      2011      2010  
Other income, net    $   952      $   573      $   31  
                            

Other income, net includes the operational impact of equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses as well as other ongoing and non-recurring items. The year-over-year change in other income, net in 2012, as compared with 2011, largely reflects an approximately $46 million net year-over-year increased gain resulting from UTC Climate, Controls & Security’s ongoing portfolio transformation, a $34 million gain on the fair value re-measurement of the Company’s previously held shares of Goodrich, a $46 million gain resulting from the effective settlement of a pre-existing claim in connection with the acquisition of Goodrich, an $81 million increase in income from joint ventures, as well as the absence of both a $66 million other-than-temporary impairment charge on an equity investment at UTC Climate, Controls & Security, and $45 million of reserves established for legal matters. The remaining increase in other income, net is attributable to net gains recognized on miscellaneous asset sales and normal recurring operational activity as disclosed above.

The year-over-year change in other income, net in 2011, as compared with 2010, largely reflects an approximately $55 million net year-over-year increased gain resulting from UTC Climate, Controls & Security’s ongoing portfolio transformation, a $41 million gain from the sale of an equity investment at Pratt & Whitney, a $73 million gain on the contribution of a Sikorsky business into a new

 


 

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venture in the United Arab Emirates, a $122 million increase in income from joint ventures, and $79 million in other, net gains from divestitures, all of which was partially offset by a $66 million other-than-temporary impairment charge on an equity investment at UTC Climate, Controls & Security, and $45 million of reserves established for legal matters.

Interest Expense, Net

 

(DOLLARS IN MILLIONS)   2012     2011     2010  
Interest expense   $    893     $    673     $    751  
Interest income     (120     (177     (101
Interest expense, net   $ 773     $ 496     $ 650  
Average interest expense rate during the year on:            

Short-term borrowings

    0.9%        2.0%        1.8%   

Total debt

    4.1%        5.6%        5.6%   
                         

Interest expense increased in 2012, as compared with 2011, primarily as a result of higher average debt balances in 2012 associated with the financing of our acquisition of Goodrich. Financing for the Goodrich acquisition included a total of $9.8 billion of long-term debt, $1.1 billion of equity units which bear contract adjustment payments at a rate of 5.95% per year, and $3.2 billion from the issuance of commercial paper. We also entered into a term loan credit agreement for $2 billion and borrowed the full amount available under this facility. In connection with the acquisition of Goodrich, we assumed long term debt of approximately $3.0 billion, which bears interest at rates ranging from 3.6% to 7.1%. Subsequent to the acquisition in 2012, we repaid approximately $635 million of principal ($761 million fair value) of the assumed Goodrich debt, the entire $2.0 billion term loan, and nearly all of the commercial paper issued to finance the acquisition.

Interest expense on our long-term debt decreased in 2011 as a result of the repayment at maturity in May 2010 of our $600 million of 4.375% notes due 2010, the early redemption in June 2010 of the entire $500 million outstanding principal amount of our 7.125% notes that would have otherwise been due November 2010, the early redemption in September 2010 of the entire $500 million outstanding principal amount of our 6.350% notes that would have otherwise been due March 2011, and as a result of the early redemption in December 2011 of the entire $500 million outstanding principal amount of our 6.100% notes that would otherwise have been due May 15, 2012. This impact was partially offset by the full year impact from the issuance of two series of fixed rate long-term notes totaling $2.25 billion in February 2010. Lower interest charges related to our deferred compensation plan and lower interest accrued on unrecognized tax benefits also contributed to the overall interest expense decline. Interest income increased in 2011, as compared with 2010, as a result of favorable pre-tax interest adjustments of approximately $89 million related to the settlement of U.S. federal income tax refund claims for years

prior to 2004, partially offset by the absence of a favorable pre-tax interest adjustment of approximately $24 million associated with the resolution of an uncertain temporary tax item in the second quarter of 2010.

The decline in the weighted-average interest rates for short-term borrowings was due to the mix of our borrowings with a greater percentage of short-term borrowings at lower interest rates in 2012 than the percentage of short-term borrowings in 2011. At December 31, 2012 and 2011, we had commercial paper borrowings outstanding of $320 million and $455 million, respectively. The three month LIBOR rate as of December 31, 2012, 2011 and 2010 was 0.3%, 0.6% and 0.3%, respectively. The decline in the average interest rate on total debt is due to the redemptions of higher rate debt as discussed above and the low interest rates obtained on the debt issued to fund the Goodrich acquisition.

Income Taxes

 

       2012      2011      2010  
Effective income tax rate      24.8%         29.0%         27.6%   
                            

The effective income tax rates for 2012, 2011 and 2010 reflect tax benefits associated with lower tax rates on international earnings, which we intend to permanently reinvest outside the United States. The 2012 effective tax rate reflects a favorable non-cash income tax adjustment of approximately $203 million related to the conclusion of the IRS’s examination of the Company’s 2006 – 2008 tax years, as well as a reduction in tax expense of $34 million related to the favorable resolution of disputed tax matters with the Appeals division of the IRS for the tax years 2004 and 2005. Also included in the 2012 effective tax rate is the favorable income tax impact of $225 million related to the release of non-U.S. valuation allowances resulting from internal legal entity reorganizations.

The 2011 effective tax rate reflects approximately $63 million of favorable income tax adjustments related to the settlement of two refund claims for years prior to 2004, as well as a favorable tax impact of $17 million related to a U.K. tax rate reduction enacted in 2011. These favorable tax adjustments are partially offset by non-deductible charges accrued in 2011.

The 2010 effective income tax rate reflects a non-recurring tax expense reduction associated with management’s decision to repatriate additional high tax dividends from 2010 earnings to the U.S. as a result of U.S. tax legislation enacted in 2010. This was partially offset by the non-deductibility of impairment charges, the adverse impact from the health care legislation related to the Medicare Part D program and other increases to UTC’s effective income tax rate.

We estimate our full year annual effective income tax rate in 2013 to be approximately 29%, absent one-time adjustments. We anticipate some variability in the tax rate quarter to quarter in 2013. In addition, the Company expects to record a one-time favorable tax adjustment of $80 million in the first quarter of 2013 related to

 


 

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the legislative corporate tax extenders enacted in January 2013, as part of the American Taxpayer Relief Act of 2012. This adjustment relates to the 2012 retroactive impact of the new law.

For additional discussion of income taxes, see “Critical Accounting Estimates—Income Taxes” and Note 11 to the Consolidated Financial Statements.

Net Income Attributable to Common Shareowners from Continuing Operations

 

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)    2012      2011      2010  
Net income attributable to common shareowners from continuing operations    $   4,847      $   4,831      $   4,195  
Diluted earnings per share from continuing operations    $ 5.35      $ 5.33      $ 4.55  
                            

Foreign currency translation, including hedging at Pratt & Whitney Canada (P&WC) generated a net adverse impact of $0.17 per diluted share on our operational performance in 2012. To help mitigate the volatility of foreign currency exchange rates on our operating results, we maintain foreign currency hedging programs, the majority of which are entered into by P&WC. In 2011, foreign currency generated a net positive impact on our operational results of $0.11 per diluted share, while in 2010 foreign currency had a favorable impact of $0.12 per diluted share. For additional discussion of foreign currency exposure, see “Market Risk and Risk Management—Foreign Currency Exposures.”

Diluted earnings per share from continuing operations for 2012 include a net charge of $0.01 per share from net restructuring and non-recurring items. Besides the restructuring charges of $590 million, non-recurring items included approximately $218 million of favorable pre-tax interest and income tax adjustments related to the conclusion of the IRS examination of the 2006 – 2008 tax years, approximately $59 million of favorable pre-tax interest and income tax adjustments related to the resolution of disputes with the Appeals division of the IRS for the 2004 – 2005 tax years, approximately $157 million of net gains resulting from UTC Climate, Controls & Security’s ongoing portfolio transformation, and an approximately $34 million non-cash gain recognized on the re-measurement to fair value of our previously held shares of Goodrich stock resulting from our acquisition of the company.

Net Income Attributable to Common Shareowners from Discontinued Operations

 

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)    2012      2011      2010  
Net income attributable to common shareowners from discontinued operations    $   283      $   148      $   178  
Diluted earnings per share from discontinued operations    $ 0.31      $ 0.16      $ 0.19  
                            

Diluted earnings per share from discontinued operations for 2012 includes $0.82 per share of goodwill and net asset impairment charges related to Rocketdyne, Clipper and UTC Power, and $1.01 per share gain on the disposition of the legacy Hamilton

Sundstrand Industrial businesses. A $0.16 per share benefit from the results of operations of discontinued entities was partially offset by the $0.07 per share Clipper warranty charge.

RESTRUCTURING COSTS

We recorded net pre-tax restructuring costs totaling $614 million in 2012 and $336 million in 2011 for new and ongoing restructuring actions. We recorded these charges in the segments as follows:

 

(DOLLARS IN MILLIONS)    2012      2011  
Otis    $   164      $   73  
UTC Climate, Controls & Security      143        126  
Pratt & Whitney      96        52  
UTC Aerospace Systems      115        11  
Sikorsky      53        53  
Eliminations and other      19         
Restructuring costs recorded within continuing operations      590        315  
Restructuring costs recorded within discontinued operations      24        21  
Total    $   614      $   336  
                   

Restructuring charges incurred in 2012 and 2011 were recorded as follows:

 

(DOLLARS IN MILLIONS)    2012      2011  
Cost of sales    $   340      $   164  
Selling, general and administrative      249        149  
Other income, net      1        2  
Restructuring costs recorded within continuing operations      590        315  
Restructuring costs recorded within discontinued operations      24        21  
Total    $ 614      $ 336  
                   

As described below, the 2012 charges relate primarily to actions initiated during 2012 and 2011, while the 2011 charges relate primarily to actions initiated during 2011 and 2010. The 2012 restructuring costs reflected in Eliminations and other largely reflect curtailment charges required under our domestic pension plans due to the headcount reductions associated with the various restructuring actions.

Restructuring actions are an essential component of our operating margin improvement efforts and relate to both existing operations and those recently acquired. We expect to incur additional restructuring costs in 2013 of approximately $300 million, including trailing costs related to prior actions, associated with our continuing cost reduction efforts and to the integration of acquisitions. The expected adverse impact on earnings in 2013 from anticipated additional restructuring costs is expected to be offset by the beneficial impact from non-recurring items. Although no specific plans for significant actions have been finalized at this time, we

 


 

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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.

2012 Actions. During 2012, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and consolidation of manufacturing operations. We recorded net pre-tax restructuring charges totaling $576 million as follows:

 

(DOLLARS IN MILLIONS)    2012  
Otis    $   146  
UTC Climate, Controls & Security      123  
Pratt & Whitney      94  
UTC Aerospace Systems      121  
Sikorsky      47  
Eliminations and other      19  
Restructuring costs recorded within continuing operations      550  
Restructuring costs recorded within discontinued operations      26  
Total    $ 576  
          

The following table summarizes the charges associated with the 2012 restructuring actions:

 

(DOLLARS IN MILLIONS)    2012  
Cost of sales    $   313  
Selling, general and administrative      236  
Other income, net      1  
Restructuring costs recorded within continuing operations      550  
Restructuring costs recorded within discontinued operations      26  
Total    $ 576  
          

The following table summarizes the charges associated with the 2012 restructuring actions by cost type:

 

(DOLLARS IN MILLIONS)    2012  
Severance    $   426  
Asset write-downs      14  
Facility exit, lease termination and other costs      110  
Restructuring costs recorded within continuing operations      550  
Restructuring costs recorded within discontinued operations      26  
Total    $ 576  
          

We expect the actions initiated in 2012, once fully complete, to result in net workforce reductions of approximately 7,000 hourly and salaried employees, the exiting of approximately 2.6 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of December 31, 2012, with respect to the actions initiated in 2012, we have completed net workforce reductions of approximately 4,000 employees, and 750,000 net square feet of facilities have been exited. We are targeting to complete in 2013 the majority of the remaining workforce and facility related cost reduction actions initiated in 2012.

Approximately 80% of the total pre-tax charge will require cash payments, which we have and expect to continue to fund with cash generated from operations. During 2012, we had cash outflows of approximately $199 million related to the 2012 actions. We expect to incur additional restructuring and other charges of $105 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $560 million annually, of which, approximately $125 million was realized in 2012.

2011 Actions. During 2012 and 2011, we recorded net pre-tax restructuring charges of $53 million and $286 million, respectively, for actions initiated in 2011. The 2011 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We recorded net pre-tax restructuring charges in 2012 and 2011 as follows:

 

(DOLLARS IN MILLIONS)    2012      2011  
Otis    $   19      $ 76  
UTC Climate, Controls & Security      25        93  
Pratt & Whitney      3        37  
UTC Aerospace Systems              8  
Sikorsky      5        51  
Restructuring costs recorded within continuing operations      52        265  
Restructuring costs recorded within discontinued operations      1        21  
Total    $   53      $   286  
                   

The following table summarizes the charges associated with the 2011 restructuring actions:

 

(DOLLARS IN MILLIONS)   2012     2011  
Cost of sales   $   33     $   120  
Selling, general and administrative     19       142  
Other income, net            3  
Restructuring costs recorded within continuing operations     52       265  
Restructuring costs recorded within discontinued operations     1       21  
Total   $ 53     $ 286  
                 

The following table summarizes the 2012 and 2011 charges associated with the 2011 restructuring actions by cost type:

 

(DOLLARS IN MILLIONS)   2012     2011  
Severance   $   30     $   242  
Asset write-downs     1       4  
Facility exit, lease termination and other costs     21       19  
Restructuring costs recorded within continuing operations     52       265  
Restructuring costs recorded within discontinued operations     1       21  
Total   $ 53     $ 286  
                 

We expect the actions initiated in 2011, once fully completed, to result in net workforce reductions of approximately 4,900

 


 

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hourly and salaried employees, the exiting of approximately 2 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of December 31, 2012, we have completed, with respect to the actions initiated in 2011, net workforce reductions of approximately 4,200 employees and exited 200,000 net square feet of facilities. We are targeting to complete in 2013 the majority of the remaining workforce and all facility related cost reduction actions initiated in 2011. Approximately 75% of the total pre-tax charge will require cash payments, which we have and

expect to continue to fund with cash generated from operations. During 2012, we had cash outflows of approximately $153 million related to the 2011 actions. We expect to incur additional restructuring charges of $29 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $280 million annually.

For additional discussion of restructuring, see Note 13 to the Consolidated Financial Statements.

 

 

SEGMENT REVIEW

 

     Net Sales     Operating Profits     Operating Profit Margin  
(DOLLARS IN MILLIONS)    2012     2011     2010     2012     2011     2010     2012      2011      2010  
Otis    $   12,056     $   12,437     $   11,579     $   2,512     $   2,815     $   2,575       20.8%         22.6%         22.2%   
UTC Climate, Controls & Security      17,090       18,864       17,876       2,425       2,212       1,776       14.2%         11.7%         9.9%   
Pratt & Whitney      13,964       12,711       12,150       1,589       1,867       1,885       11.4%         14.7%         15.5%   
UTC Aerospace Systems      8,334       4,760       4,399       944       759       654       11.3%         15.9%         14.9%   
Sikorsky      6,791       7,355       6,684       712       840       716       10.5%         11.4%         10.7%   
Total segment      58,235       56,127       52,688       8,182       8,493       7,606       14.0%         15.1%         14.4%   
Eliminations and other      (527     (373     (413     (72     (228     (331              
General corporate expenses                           (426     (419     (377                          
Consolidated    $ 57,708     $ 55,754     $ 52,275     $ 7,684     $ 7,846     $ 6,898       13.3%         14.1%         13.2%   
                                                                            

 

Commercial Businesses

The financial performance of our commercial businesses can be influenced by a number of external factors including fluctuations in residential and commercial construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, credit markets and other global and political factors. UTC Climate, Controls & Security’s financial performance can also be influenced by production and utilization of transport equipment, and for its residential business, weather conditions. Geographic and industry diversity across the commercial businesses help to balance the impact of such factors on our consolidated operating results, particularly in the face of uneven economic growth. While Otis faced challenging economic conditions in Europe and lower order rates in China during the first half of the year, improving market conditions

in China and North America resulted in higher order rates in the second half of the year. New equipment orders in China declined for the year (3%), but increased during the fourth quarter (19%) as compared with the fourth quarter of 2011. Organic sales for 2012 within each of our commercial businesses were consistent with prior year levels.

In 2012, 70% of total commercial business sales were generated outside the U.S., including U.S. export sales, as compared to 72% in 2011. The following table shows sales generated outside the U.S., including U.S. export sales, for each of the commercial business segments:

 

       2012      2011  
Otis      82%         83%   
UTC Climate, Controls & Security      62%         65%   
                   
 


 

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Otis is the world’s largest elevator and escalator manufacturing, installation and service company. Otis designs, manufactures, sells and installs a wide range of passenger and freight elevators for low-, medium- and high-speed applications, as well as a broad line of escalators and moving walkways. In addition to new equipment, Otis provides modernization products to upgrade elevators and

escalators as well as maintenance and repair services for both its products and those of other manufacturers. Otis serves customers in the commercial and residential property industries around the world. Otis sells directly to the end customer and through sales representatives and distributors.

 

 

                                Total Increase (Decrease) Year-Over-Year for:  
(DOLLARS IN MILLIONS)    2012      2011      2010      2012 Compared with 2011      2011 Compared with 2010  
Net Sales    $   12,056      $   12,437      $   11,579      $   (381     (3)%       $   858        7%   
Cost of Sales      8,008        8,090        7,540        (82     (1)%         550        7%   
     4,048        4,347        4,039                     
Operating Expenses and Other      1,536        1,532        1,464                     
Operating Profits    $ 2,512      $ 2,815      $ 2,575      $ (303     (11)%       $ 240        9%   
                                                               

 

    Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:  
    2012     2011  
      Net Sales     Cost of Sales     Operating
Profits
    Net Sales     Cost of Sales     Operating
Profits
 
Organic / Operational     –             1%        (3)%        2%        2%        2%   
Foreign currency translation     (3)%        (3)%        (4)%        4%        4%        5%   
Acquisitions and divestitures, net     –             –             –             1%        1%        –       
Restructuring costs     –             1 %        (4)%        –            –            –       
Other     –             –             –             –            –            2%   
Total % change     (3)%        (1)%        (11)%        7%        7%        9%   
                                                 

 

2012 Compared with 2011

There was no organic sales growth in 2012 as higher service sales were offset by lower new equipment sales. Higher service sales in Asia and the Americas (2%) were offset by declines in Europe (1%). Lower new equipment volume (1%) primarily in China and Europe was partially offset by a slight increase in the Americas and Russia.

The operational profit decline for the year (3%) is due to lower new equipment contribution driven by lower volume and pricing pressures (4%), lower service contribution (1%) resulting from continued pricing pressure primarily in Europe, and the impact of higher commodity costs (1%). Partially offsetting these factors were benefits derived from ongoing cost reduction initiatives (3%).

2011 Compared with 2010

The organic sales increase (2%) in the year was due to higher new equipment sales volume in China, Russia and Brazil (combined 3%), partially offset by declines in North America (1%). Increased contractual maintenance and repair volume across all regions was offset by a decline in modernization volume in Europe. New equipment orders improved 15% versus the prior year, led by strong order growth in China. Selling prices remained under pressure.

The operational profit improvement (2%) in the period was due to higher new equipment volume, increases in contractual maintenance and repair services, and the benefits of ongoing cost reduction initiatives, partially offset by lower pricing, the impact of

higher commodity costs, and lower modernization volume in Europe.

UTC Climate, Controls & Security As described above, on September 28, 2011, we announced a new organizational structure that allows us to better serve customers through greater integration across product lines. As part of this new structure, effective January 1, 2012, we formed the UTC Climate, Controls & Security segment, which is composed of the former Carrier and UTC Fire & Security segments. UTC Climate, Controls & Security is the leading provider of HVAC and refrigeration solutions, including controls for residential, commercial, industrial and transportation applications. These products and services are sold under the Carrier name and other brand names to building contractors and owners, homeowners, transportation companies, retail stores and food service companies. UTC Climate, Controls & Security is also a global provider of security and fire safety products and services. UTC Climate, Controls & Security provides electronic security products such as intruder alarms, access control systems and video surveillance systems and designs and manufactures a wide range of fire safety products including specialty hazard detection and fixed suppression products, portable fire extinguishers, fire detection and life safety systems, and other firefighting equipment. Services provided to the electronic security and fire safety industries include systems integration, video surveillance, installation, maintenance, and inspection. In certain markets, UTC Climate, Controls & Security

 


 

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also provides monitoring, response and security personnel services, including cash-in-transit security, to complement its electronic security and fire safety businesses. Through its venture with Watsco, Inc., UTC Climate, Controls & Security distributes Carrier, Bryant, Payne and Totaline residential and light commercial HVAC products in the U.S. and selected territories in the Caribbean and Latin America. UTC Climate, Controls & Security sells directly to end customers and through manufacturers’ representatives, distributors, wholesalers, dealers and retail outlets. Certain of UTC Climate, Controls & Security’s HVAC businesses are seasonal and can be impacted by weather. UTC Climate, Controls & Security customarily offers its customers incentives to purchase products to ensure an adequate supply of its products in the distribution chan-

nels. The principal incentive program provides reimbursements to distributors for offering promotional pricing on UTC Climate, Controls & Security products. We account for incentive payments made as a reduction to sales. UTC Climate, Controls & Security products and services are used by governments, financial institutions, architects, building owners and developers, security and fire consultants, homeowners and other end-users requiring a high level of security and fire protection for their businesses and residences. UTC Climate, Controls & Security provides its security and fire safety products and services under Chubb, Kidde and other brand names and sells directly to customers as well as through manufacturer representatives, distributors, dealers and U.S. retail distribution.

 

 

                                Total Increase (Decrease) Year-Over-Year for:  
(DOLLARS IN MILLIONS)    2012      2011      2010      2012 Compared with 2011      2011 Compared with 2010  
Net Sales    $   17,090      $   18,864      $   17,876      $   (1,774     (9)%       $   988        6%   
Cost of Sales      12,316        13,848        13,158        (1,532     (11)%         690        5%   
     4,774        5,016        4,718                     
Operating Expenses and Other      2,349        2,804        2,942                     
Operating Profits    $ 2,425      $ 2,212      $ 1,776      $ 213       10 %       $ 436        25%   
                                                               

 

    Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:  
    2012     2011  
      Net Sales     Cost of Sales     Operating
Profits
    Net Sales     Cost of Sales     Operating
Profits
 
Organic / Operational     –             –             10 %        7 %        8 %        13 %   
Foreign currency translation     (2)%        (3)%        (2)%        3 %        3 %        3 %   
Acquisitions and divestitures, net     (7)%        (8)%        –             (4)%        (5)%        (2)%   
Restructuring costs     –             –             (1)%        –             –             2 %   
Other     –             –             3 %        –             (1)%        9 %   
Total % change     (9)%        (11)%        10 %        6 %        5 %        25 %   
                                                 

 

2012 Compared with 2011

There was no organic sales growth during 2012 as lower volumes in the transport refrigeration business (1%) were offset by growth in the Americas (1%) attributable to the residential and commercial HVAC businesses. The decrease in “Acquisitions and divestitures, net” (7%) reflects the year-over-year impact of divestitures completed in the preceding twelve months associated with UTC Climate, Controls & Security’s ongoing portfolio transformation.

The 10% operational profit increase was driven largely by the benefits of net cost productivity and restructuring actions (combined 3%) including savings from the consolidation of legacy Carrier and UTC Fire & Security, favorable commodity costs (2%), and higher equity income from joint venture partners (2%). Also, operational profit included the benefit of a special cash dividend (1%) received from an interest in a distribution partner. The 3% increase in “Other” primarily reflects an approximately $46 million net year-over-year gain from UTC Climate, Controls & Security’s ongoing portfolio transformation and the absence of a $66 million

other-than-temporary impairment charge recorded on an Asian equity investment in the prior year. This was partially offset by the absence of an approximately $25 million favorable litigation resolution and gain on the disposition of the U.K. Security business, both recorded in 2011. The year-over-year net portfolio transformation gain primarily includes approximately $120 million from the sale of a controlling interest in a Canadian distribution business, including a $24 million pension settlement charge, combined with an approximately $215 million net gain from the sale of a controlling interest in a manufacturing and distribution joint venture in Asia. These gains were partially offset by a $32 million loss on the disposition of the U.S. Fire & Security branch operations, $142 million of impairment charges recorded in 2012 related to ongoing business dispositions, and the absence of an approximately $80 million prior year gain resulting primarily from the contribution of legacy Carrier’s HVAC operations in Brazil, Argentina and Chile into a new venture controlled by Midea Group of China.

 


 

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2011 Compared with 2010

Organic sales growth was 7%, with the recovery in the transport refrigeration market partially offset by declines in the U.K. and U.S. service businesses. The 4% decrease in “Acquisitions and divestitures, net” primarily reflects the net impact from acquisitions and the business transformation actions completed in the preceding twelve months as part of UTC Climate, Controls & Security’s ongoing portfolio transformation initiative.

The operational profit improvement of 13% was driven by strong conversion on organic sales growth (7%), particularly in the higher margin transport refrigeration business, lower bad debt expense, and earnings improvement in a joint venture in Japan (2%). This was partially offset by lower margins and unfavorable sales mix primarily within the fire protection products business in the U.K. and higher net commodity costs (6%). The 9% increase in “Other” primarily reflects the year-over-year impact of net gains associated with UTC Climate, Control & Security’s ongoing portfolio transformation. This includes an approximately $80 million gain recorded in 2011 as a result of the contribution of legacy Carrier’s HVAC operations in Brazil, Argentina, and Chile into a new venture controlled by Midea Group of China. Also included in “Other” is the favorable resolution of litigation and gains on the dispositions of U.K. security businesses and the absence of an asset impairment charge in 2010 of approximately $58 million, all of which was partially offset by a $66 million other-than-temporary impairment charge recorded on an equity investment in Asia in 2011.

Aerospace Businesses

The financial performance of Pratt & Whitney, UTC Aerospace Systems and Sikorsky is directly tied to the economic conditions of the commercial aerospace and defense aerospace industries. In particular, Pratt & Whitney experiences intense competition for new commercial airframe/engine combinations. Engine suppliers may offer substantial discounts and other financial incentives, performance and operating cost guarantees, participation in financing arrangements and maintenance agreements. At times, the aerospace businesses also enter into development programs and firm fixed-price development contracts, which may require the company to bear cost overruns related to unforeseen technical and design challenges that arise during the development stage of the program. Customer selections of engines and components can also have a significant impact on later sales of parts and service. Predicted traffic levels, load factors, worldwide airline profits, general economic activity and global defense spending have been reliable indicators for new aircraft and aftermarket orders within the aerospace industry. Spare part sales and aftermarket service trends are affected by many factors, including usage, technological improvements, pricing, regulatory changes and the retirement of older aircraft. Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits.

Our long-term aerospace contracts are subject to strict safety and performance regulations which can affect our ability to estimate costs precisely. Contract cost estimation for the development of complex projects, in particular, requires management to make significant judgments and assumptions regarding the complexity of the work to be performed, availability of materials, the performance by subcontractors, the timing of funding from customers and the length of time to complete the contract. As a result, we review and update our cost estimates on significant contracts on a quarterly basis, and no less frequently than annually for all others, or when circumstances change and warrant a modification to a previous estimate. Changes in estimates relate to the current period impact of revisions to total estimated contract sales and costs at completion. We record changes in contract estimates using the cumulative catch-up method in accordance with the Revenue Recognition Topic of the FASB Accounting Standards Codification (“ASC”). The net decrease in operating profits as a result of significant changes in aerospace contract estimates was $19 million in 2012, including the revision in estimate on the Sikorsky CH-148 contract discussed further below. The adverse impact of this contract adjustment was partially offset by several positive contract adjustments recorded throughout the year largely at the Pratt & Whitney segment. The impact of these adjustments was not considered significant to either the sales or operating profits of the segment in the quarter in which they were recorded other than the impact of a contract termination which was disclosed in the Pratt & Whitney segment results in the first quarter of 2012.

The commercial airline industry remained strong throughout 2012. Airline traffic growth rates, as measured by revenue passenger miles (RPMs), stabilized during 2012 and 2011 after rebounding in 2010. RPMs grew 5.5% in 2012, as compared with 2011, and we expect RPMs will continue to grow between 4% and 6% in 2013. We made significant investment in engineering and development in 2012 and expect continued investment in 2013, primarily at Pratt & Whitney as we continue to develop five separate geared turbofan platforms to meet demand for new engines which are fuel efficient and have reduced noise levels and exhaust emissions. Although airlines have generally returned to profitability, high fuel prices continue to challenge the airlines to consider the need for more fuel efficient aircraft.

Deficit reduction measures considered by the U.S. Government are expected to pressure the U.S. Department of Defense budget in the coming years, resulting in a decline in U.S. Department of Defense spending. Total sales to the U.S. Government of $10.1 billion in 2012, $9.1 billion in 2011, and $9.1 billion in 2010 were 18%, 16% and 17% of total UTC sales in 2012, 2011 and 2010, respectively. The defense portion of our aerospace business is affected by changes in market demand and the global political environment. Our participation in long-term production and development programs for the U.S. Government has contributed positively to our results in 2012 and is expected to continue to benefit results in 2013.

 


 

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Sikorsky continued to benefit from military spending, with approximately 86% of Sikorsky’s 2012 helicopter deliveries based on military platforms. In July 2012, the U.S. Government and Sikorsky signed a five-year multiservice contract for approximately 650 H-60 helicopters. Actual production quantities will be determined year-by-year over the life of the program based on funding allocations set by Congressional and Pentagon acquisition priorities. Commercial helicopter aftermarket sales volumes were consistent with the prior year on strong demand for the S-92 helicopter which was offset by lower volumes of the S-76 helicopter as Sikorsky transitions to the new S-76D helicopter.

As previously reported, Sikorsky is developing the CH-148 derivative of the H-92 helicopter (the “Cyclone”), a military variant of the S-92 helicopter, for the Canadian Government. The Cyclone is being developed under a fixed-price contract that provides for the development and production of 28 helicopters (the “Acquisition Contract”), and a related In Service Support contract (the “ISS Contract”) through March 2028 (collectively, the “Arrangements”). The current contract values of the Arrangements are estimated to be $4.3 billion. Revenues are subject to changes in underlying variables such as the timing of deliveries, future flight hours and fluctuations in foreign currency exchange rates.

As previously disclosed, in June 2010 Sikorsky and the Canadian Government signed contract amendments that revised the delivery schedule and contract specifications, while also establishing requirements that enabled initial operational test and evaluation activities for the first six interim aircraft. The amendments also included modifications to the liquidated damages schedule, readjustment of payment schedules, resolution of open disputes and other program related enhancements.

In accordance with our revenue recognition policy, losses, if any, on long-term contracts are provided for when anticipated. Loss provisions on original equipment contracts are recognized to the extent that estimated inventoriable manufacturing, engineering, product warranty and product performance guarantee costs, as appropriate, exceed the projected revenue from the products contemplated under the contractual arrangement. In 2011, Sikorsky completed a significant contractual milestone for work on four interim configuration helicopters and recognized the revenues and related costs. Although the Arrangements were expected to be profitable on a combined basis in 2011, $56 million of losses were recorded upon completing the milestones for the four aircraft as the actual costs exceeded revenues. These interim configuration aircraft will require further software and hardware upgrades before full mission capability can be achieved.

Delivery of the final configuration aircraft, which was scheduled to begin in 2012, did not occur due to a number of disputes between the Canadian Government and Sikorsky that arose during the course of 2012 related to contractual requirements and contract performance. These included issues related to excusable delays, development, production, logistical support and delays in

the delivery of final configuration aircraft. The parties have been unable to resolve these disputes and are engaged in the dispute resolution process.

As a result of these matters, Sikorsky recorded a loss provision of $157 million during the fourth quarter of 2012 as the estimated profits on the ISS Contract no longer exceeded the estimated remaining losses on the Acquisition Contract. The profit erosion was driven by an increase in total expected costs to be incurred primarily as a result of the delays in delivering the final configuration aircraft, and a reduction of expected flight hour revenues on the ISS Contract. Since the Acquisition Contract’s costs exceed its revenues on a stand-alone basis, we expect to record a $14 million loss upon the contractual delivery of each aircraft in the future.

Sikorsky is prepared to deliver additional aircraft in a configuration that would allow for the commencement of certain contractually required activities such as pilot training, customer testing, and limited mission capability. These aircraft would require the incorporation of additional hardware and software upgrades before full mission capability can be achieved and final configuration aircraft subsequently delivered. Sikorsky continues discussions with the Canadian Government in an effort to resolve the open disputes including the establishment of a potential arrangement that allows for the delivery of interim configuration aircraft. However, if these efforts are unsuccessful and the Canadian Government requires the delivery of only final configuration aircraft under current contractual requirements, no deliveries are expected to occur until 2015 at the earliest.

While Sikorsky is committed to the program, the current disputes and unresolved contract status, coupled with the remaining development issues and long-term nature of this program, provide substantial uncertainty and risk in regards to the future profitability of the overall program. While the loss provisions recorded to date reflect management’s best estimate of the projected costs to complete the development and manufacture of the final configuration aircraft, there is still significant effort required to complete the development of the mission system capability as well as complete the manufacturing, testing and retrofit activities. Future variability in internal cost targets related to the aircraft may be caused by increases in holding costs, retrofit estimates, subcontractor performance and changes in liquidated damages. With respect to the multi-year ISS Contract, the future profitability is dependent upon a number of factors including aircraft flight hours, deployed aircraft availability, aircraft performance, availability of trained pilots and government budgetary pressures. The inability to achieve a satisfactory contractual solution, further unplanned delays, additional developmental cost growth or variations in any of the estimates used in the existing contract analysis could lead to further loss provisions on the Arrangements. Additional losses could have a material adverse impact on the consolidated results of operations in the period in which the loss may be recognized.

 


 

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Effective July 1, 2012, the auxiliary power unit business (APU) of the UTC Aerospace Systems business segment was transferred to the Pratt & Whitney business segment. The APU business designs and manufactures a variety of products for commercial and military aircraft. Annual sales for the APU business are approximately $600 million. The reclassification has been made prospectively; prior year results have not been restated for the transfer of the business.

Pratt & Whitney is among the world’s leading suppliers of aircraft engines for the commercial, military, business jet and general aviation markets. Pratt & Whitney Commercial Engines provides maintenance, repair and overhaul services, including the sale of spare parts, as well as fleet management services for large commercial engines. Pratt & Whitney produces families of engines for wide- and narrow-body and large regional aircraft in the commercial market and for fighter and transport aircraft in the military market. P&WC is a world leader in the production of engines powering business, regional, light jet, utility and military airplanes and helicopters and provides related maintenance, repair and overhaul services, including the sale of spare parts, as well as fleet management services. Pratt & Whitney’s products are sold principally to aircraft manufacturers, airlines and other aircraft operators, aircraft leasing companies, space launch vehicle providers and the U.S. and foreign governments. Pratt & Whitney’s products and services must adhere to strict regulatory and market-driven safety and performance standards. The frequently changing nature of these standards, along with the long duration of aircraft engine development, production and support programs, creates uncertainty regarding engine program profitability. The vast majority of sales are made directly to the end customer and, to a limited extent, through independent distributors and foreign sales representatives.

Pratt & Whitney is currently developing technology, including the PurePower PW1000G Geared TurboFan engine, intended to enable it to power both currently-proposed and future aircraft. The PurePower PW1000G engine targets a significant reduction in fuel burn and noise levels with lower environmental emissions and operating costs than current production engines. In December 2010, Airbus announced that it will offer a version of the PurePower PW1000G engine as a new engine option to power its A320neo family of aircraft scheduled to enter into service in 2015. In November 2012, Pratt&