Back to GetFilings.com

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

For the transition period from                      to                     

Commission file number 1-812

UNITED TECHNOLOGIES CORPORATION

One Financial Plaza, Hartford, Connecticut 06103

(860) 728-7000

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, and (2) has been subject to such filing requirements for the past 90 days. Yes x. No ¨.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x. No ¨.

At March 31, 2004 there were 513,953,900 shares of Common Stock outstanding.

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

Quarter Ended March 31, 2004

“Corporation,” unless the context otherwise requires, means United Technologies Corporation, or UTC, and its subsidiaries.

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

Part I – Financial Information

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

2

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

3

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

4

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Condensed Consolidated Financial Statements at March 31, 2004 and for the quarters ended March 31, 2004 and 2003 are unaudited, but in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in the Corporation’s Annual Report incorporated by reference in Form 10-K for calendar year 2003. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation.

Employee Benefit Plans

Pension and Postretirement Plans

During the first three months of 2004 and 2003, the Corporation voluntarily contributed cash of $308 and $500 million, respectively, to its defined benefit pension plans. The Corporation also contributed $35 million and $29 million, respectively, to its defined contribution plans.

The following table illustrates the components of net periodic benefit cost for the Corporation’s pension and other postretirement benefits.

5

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

Stock–Based Compensation

The Corporation has long-term incentive plans authorizing various types of market and performance based incentive awards that may be granted to officers and employees. The Corporation applies APB Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its long-term incentive plans. The exercise price of stock options is set on the grant date and may not be less than the fair market value per share on that date. Stock options have a term of ten years and generally vest after three years.

The following table illustrates the effect on net income and earnings per share as if the Black-Scholes fair value method described in Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended, had been applied to the Corporation’s long-term incentive plans.

Derivative Instruments and Hedging Activities

The Corporation uses derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures. Derivative instruments are viewed as risk management tools by the Corporation and are not used for trading or speculative purposes. Derivatives used for hedging purposes must be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in the fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.

At March 31, 2004 and December 31, 2003, the fair value of derivatives recorded as assets was $134 million and $162 million, respectively, and the fair value of derivatives recorded as liabilities was $67 million and $56 million, respectively. Of the amount recorded in shareowners’ equity, a $63 million pre-tax gain is expected to be reclassified into sales or cost of products sold to reflect the fixed prices obtained from hedging within the next 12 months. Gains and losses recognized in earnings related to the ineffectiveness of cash flow hedges during the quarter ended March 31, 2004 were immaterial. All open derivative contracts accounted for as cash flow hedges mature by October 2008.

6

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

Non-Shareowners’ Changes in Equity

Non-shareowners’ changes in equity include all changes in equity during a period except changes resulting from investments by and distributions to shareowners. A summary of the non-shareowners’ changes in equity is provided below.

Inventories and Contracts in Progress

Acquisitions, Goodwill and Other Intangible Assets

During the first quarter of 2004, the Corporation’s investment in businesses was $44 million. The assets and liabilities of acquired businesses are recorded at fair value at the date of acquisition under the purchase method and have been included in the Consolidated Statement of Operations beginning on the effective date of the acquisition.

As previously disclosed, the Corporation acquired Chubb plc (“Chubb”), a global provider of security and fire protection products and services on July 28, 2003. Under the terms of the purchase agreement, the Corporation acquired 100% of the outstanding shares of Chubb for approximately $900 million cash and assumed approximately $1.1 billion of debt. Because the Corporation provides equipment and services for many buildings worldwide, the acquisition of Chubb expands the Corporation’s building system offerings globally. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the July 28, 2003 acquisition date:

In connection with the acquisition of Chubb, the Corporation recorded $962 million of identifiable intangible assets. The Chubb trademark, valued at $535 million, was assigned an indefinite life. The amortized intangible assets and the related weighted average amortization period are as follows: trademarks–$32 million (30 years), customer relationships–$389 million (10 years) and completed technology–$6 million (7 years).

The excess of the purchase price over the net assets acquired was recorded as an increase to goodwill.

7

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

The final purchase price allocation of all acquired businesses is subject to the finalization of the valuation of certain assets and liabilities, plans for consolidation of facilities and relocation of employees and other integration activities.

The Corporation’s goodwill balances for the quarter ended March 31, 2004 were as follows:

The increase in goodwill of $186 million for the three months ended March 31, 2004 is due primarily to the favorable impact of foreign currency translation and purchase price adjustments related to restructuring actions at Chubb. Costs relating to restructuring actions that directly impact Chubb’s operations and employees were $57 million at March 31, 2004, including $40 million recorded in the first quarter of 2004, and were accounted for as purchase price adjustments.

Identifiable intangible assets are recorded in “Other assets” in the Condensed Consolidated Balance Sheet. The amortized intangible assets are comprised of:

The increase in purchased service contracts was primarily due to the acquisition of service portfolios at Otis. The increase in “other” was primarily due to acquisitions and the impact of foreign currency translation at Chubb.

8

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

Amortization of intangible assets for the quarters ended March 31, 2004 and 2003 was $34 million and $14 million, respectively. Amortization of these intangible assets for 2004 to 2008 is expected to approximate $115 million per year.

Intangible assets determined to have indefinite lives, primarily the Chubb trade name, amounted to $607 million and $583 million at March 31, 2004 and December 31, 2003, respectively, and are not amortized. The increase during the period was primarily related to the impact of foreign currency translation.

Accrued Liabilities

In the first quarter of 2004, the Corporation reclassified approximately $467 million of prior year amounts, primarily related to billings on contracts in progress, from inventory to accrued liabilities.

Guarantees

The Corporation extends a variety of financial, market value and product performance guarantees to third parties. During the first quarter, the Corporation and Lockheed Martin both individually guaranteed to the U.S. Navy (the “Navy”) the performance of a contract between the Navy and a Sikorsky and Lockheed Martin joint venture, which will provide full life-cycle logistics support for the Navy’s H-60 helicopter fleet. The Corporation’s maximum potential payment under this guarantee is approximately $140 million. The liability recorded for the fair value of the guarantee is not material. While it is possible that the ultimate liability under these commitments may differ from management’s assessment, the Corporation believes the liability under this guarantee will not have a material impact on its financial condition, results of operations or cash flows. There have been no other material changes to guarantees outstanding since December 31, 2003.

The changes in the carrying amount of service and product warranties and product performance guarantees for the quarter ended March 31, 2004 are as follows:

9

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

Restructuring

During the first three months of 2004, the Corporation recorded net pre-tax restructuring and related charges totaling $259 million in the Corporation’s segments for new and ongoing restructuring actions as follows: Otis $68 million, Carrier $113 million, Pratt & Whitney $51 million, Flight Systems $21 million and Eliminations and other $6 million. The charges include $221 million in cost of sales, $34 million in selling, general and administrative expenses and $4 million in other income. As described below, these charges relate to actions initiated during 2004 and 2003.

2004 Actions During the first three months of 2004, the Corporation initiated restructuring actions relating to ongoing cost reduction efforts, including global workforce reductions and the consolidation of manufacturing, sales and service facilities including Carrier’s McMinnville, Tennessee commercial air conditioning and ventilation product manufacturing facility, Otis’ Stadthagen, Germany escalator manufacturing facility and various Pratt & Whitney facilities. The pre-tax restructuring and related charges, totaling $216 million, included $179 million recorded in cost of sales, $33 million in selling, general and administrative expenses and $4 million in other income.

The 2004 actions are expected to result in net workforce reductions of approximately 3,600 hourly and salaried employees, the exiting of approximately 3.7 million square feet of facilities and the disposal of assets associated with the exited facilities. As of March 31, 2004, net workforce reductions of approximately 800 employees have been completed and 100,000 square feet of facilities have been exited. The majority of the remaining workforce and facility related cost reductions are targeted for completion during 2004 and 2005. A significant portion of the remaining square footage to be eliminated under 2004 actions relates to the aforementioned facilities at Carrier, Otis and Pratt & Whitney.

The following tables summarize the 2004 restructuring actions accrued by type and related activity and by total costs expected to be incurred by type and by segment:

The total expected costs for the 2004 programs by type are as follows:

10

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

The total expected costs for the 2004 programs by segment are as follows:

2003 Actions During the first three months of 2004, the Corporation recorded net pre-tax restructuring and related charges of $43 million for actions initiated during 2003. These charges relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of manufacturing, sales and service facilities including Carrier’s Syracuse, New York-based container refrigeration and compression manufacturing operations and Otis’ Bloomington, Indiana-based manufacturing, distribution and field tool operations. The charges included $42 million recorded in cost of sales and $1 million in selling, general and administrative expenses.

The 2003 actions are expected to result in net workforce reductions of approximately 4,000 hourly and salaried employees, the exiting of approximately 2.1 million square feet of facilities and the disposal of assets associated with the exited facilities. As of March 31, 2004, net workforce reductions of approximately 3,100 employees have been completed and 150,000 square feet of facilities have been exited. The majority of the remaining workforce and facility related cost reduction actions are targeted for completion in 2004. A significant portion of the remaining square footage to be eliminated under the 2003 actions relates to the aforementioned Carrier and Otis facilities.

The following tables summarize the 2003 restructuring actions accrued by type and related activity and by total costs expected to be incurred by type and by segment:

11

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

The total expected costs for the 2003 programs by type are as follows:

The total expected costs for the 2003 programs by segment are as follows:

Contingent Liabilities

As previously reported in the Corporation’s Form 10-K for the year ended 2003, the Department of Justice filed a complaint under the civil False Claims Act and related common law theories in March 1999 against the Corporation in the U.S. District Court for the Southern District of Ohio. This lawsuit relates to the “Fighter Engine Competition” between Pratt & Whitney’s F100 engine and GE’s F110 engine, for contracts awarded by the U.S. Air Force between fiscal years 1985 and 1990, inclusive. The Government alleges that it overpaid for engines because Pratt & Whitney inflated its estimated costs for some purchased parts and withheld data that would have revealed the overstatements. As previously reported, the Government amended its complaint in September 2003 to allege damages in excess of $141 million, and to add an additional allegation without quantifying damages. Treble damages and penalties of up to $10,000 per false claim could be assessed if the court finds that Pratt & Whitney violated the civil False Claims Act, and common law damages would accrue pre-judgment interest. In February 2004, the Government’s expert witnesses filed reports expressing their opinion that Pratt & Whitney’s cumulative liability for damages, penalties and interest may be as much as $805 million. An amended report reduces this estimate to approximately $777 million. The Corporation believes these estimates to be substantially overstated, and is pursuing deposition and other discovery as to the experts’ basis for determining liability and their estimate of damages. The Corporation denies any liability and is vigorously defending the Government’s claims. Trial of this matter is scheduled for the fourth quarter of 2004.

The European Commission’s competition directorate (the “Commission”) recently conducted inspections at offices of the Corporation’s Otis subsidiary in Berlin, Brussels, Luxembourg and Paris. The inspections relate to the Commission’s ongoing investigation of possible unlawful collusive arrangements involving the elevator and escalator industry in Europe. The Corporation is cooperating fully with the Commission’s investigation and is conducting its own internal investigation of these matters. Based on the results of its internal investigation, the Corporation has reason to believe that some Otis employees in limited European locations may have engaged in activities at a local level in violation of Otis and Corporation policies and applicable competition law. It is too early in the investigation for the Corporation to reasonably estimate any possible civil fines or range of fines to which it may be subject.

Summarized below are the matters previously described in Notes 1 and 16 of the Notes to the Consolidated Financial Statements in the Corporation’s Annual Report, incorporated by reference in Form 10-K for calendar year 2003.

Environmental

The Corporation’s operations are subject to environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over its foreign operations.

Environmental investigatory, remediation, operating and maintenance costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to

12

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

each individual site, including existing technology, current laws and regulations and prior remediation experience. Where no amount within a range of estimates is more likely, the minimum is accrued. For sites with multiple responsible parties, the Corporation considers its likely proportionate share of the anticipated remediation costs and the ability of the other parties to fulfill their obligations in establishing a provision for those costs. Liabilities with fixed or reliably determinable future cash payments are discounted. Accrued environmental liabilities are not reduced by potential insurance reimbursements. The Corporation periodically reassesses these accrued amounts. Management believes that the likelihood of incurring losses materially in excess of amounts accrued is remote.

U.S. Government

The Corporation is now, and believes that in light of the current government contracting environment it will be, the subject of one or more government investigations. If the Corporation or one of its business units were charged with wrongdoing as a result of any of these investigations or other government investigations (including violations and certain environmental or export laws) it could be suspended from bidding on or receiving awards of new government contracts pending the completion of legal proceedings. If convicted or found liable, the Corporation could be fined and debarred from new government contracting for a period generally not to exceed three years. Any contracts found to be tainted by fraud could be voided by the Government.

The Corporation’s contracts with the U.S. Government are also subject to audits. Like many defense contractors, the Corporation has received audit reports, which recommend that certain contract prices should be reduced to comply with various government regulations. Some of these audit reports involve substantial amounts. The Corporation has made voluntary refunds in those cases it believes appropriate and continues to litigate certain cases. In addition, the Corporation accrues for liabilities associated with those matters that are probable and can be reasonably estimated.

Should the Government ultimately prevail with respect to one or more of the significant government contracting matters the Corporation has disclosed, the outcome could result in a material effect on the Corporation’s results of operations in the period the matter is resolved. However, the Corporation believes that the resolution of these matters will not have a material adverse effect on the Corporation’s results of operations, competitive position, cash flows or financial condition.

Other

The Corporation extends performance and operating cost guarantees beyond its normal warranty and service policies for extended periods on some of its products, particularly commercial aircraft

13

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

engines. Liability under such guarantees is contingent upon future product performance and durability. In addition, the Corporation incurs discretionary costs to service its products in connection with product performance issues. The Corporation has accrued its estimated liability that may result under these guarantees and for service costs which are probable and can be reasonably estimated.

The Corporation also has other commitments and contingent liabilities related to legal proceedings and matters arising out of the normal course of business.

The Corporation has accrued for environmental investigatory, remediation, operating and maintenance costs, performance guarantees and other litigation and claims based on management’s estimate of the probable outcome of these matters. While it is possible that the outcome of these matters may differ from the recorded liability, management believes that resolution of these matters will not have a material impact on the Corporation’s financial condition, results of operations or cash flows.

Earnings Per Share

Segment Financial Data

The Corporation’s operations are classified into five principal segments: Otis, Carrier, Chubb, Pratt & Whitney and Flight Systems. Those segments were generally determined based on the management structure of the businesses and the groupings of similar operating companies, where each management organization has general operating autonomy over diversified products and services. Segment financial data include the results of the Corporation’s majority-owned businesses, consistent with the management reporting of these businesses. For certain of these subsidiaries, minority shareholders have rights which, under the provisions of Emerging Issues Task Force (“EITF”) 96-16 “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval of Veto Rights,” overcome the presumption of control. In the Corporation’s consolidated results through the year ended December 31, 2003, these entities were accounted for under the equity method of accounting.

Effective January 1, 2004, the Corporation adopted the provisions of the FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51” (“FIN 46”). The

14

Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

interpretation requires variable interest entities to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack certain specified characteristics. While the adoption of FIN 46 did not have a material impact on the Corporation’s results of operations, financial condition or cash flows in the first quarter of 2004, it did result in the consolidation of certain subsidiaries that were previously accounted for under the equity method of accounting under the provisions of EITF 96-16. Adjustments to reconcile segment reporting to consolidated results for the quarters ended March 31, 2004 and 2003, respectively, are included in “Eliminations and other,” which also includes certain small subsidiaries.