Back to GetFilings.com



Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2004

 

OR

 

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

 

For the transition period from                      to                     

 

Commission file number 1-812

 

UNITED TECHNOLOGIES CORPORATION

 

DELAWARE   06-0570975

 

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 September 30, 2004 there were 511,043,162 shares of Common Stock outstanding.

 



Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

 

Quarter Ended September 30, 2004

 

         Page

Part I - Financial Information

    

Item 1.

 

Financial Statements:

    
   

Condensed Consolidated Statement of Operations for the quarters ended September 30, 2004 and 2003

   2
   

Condensed Consolidated Statement of Operations for the nine months ended September 30, 2004 and 2003

   3
   

Condensed Consolidated Balance Sheet at September 30, 2004 and December 31, 2003

   4
   

Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2004 and 2003

   5
   

Notes to Condensed Consolidated Financial Statements

   6
   

Report of Independent Registered Public Accounting Firm

   19

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   29

Item 4.

 

Controls and Procedures

   29

Part II - Other Information

    

Item 1.

 

Legal Proceedings

   32

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   34

Item 6.

 

Exhibits

   34

Signatures

   36

Exhibit Index

   37

 

“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

 

Item 1. Financial Statements

 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

     Quarter Ended
September 30,


 
In Millions (except per share amounts)    2004

    2003

 

Revenues

                

Product sales

   $ 6,675     $ 5,763  

Service sales

     2,573       2,112  

Financing revenues and other income, net

     91       79  
    


 


       9,339       7,954  
    


 


Costs and expenses

                

Cost of products sold

     5,174       4,349  

Cost of services sold

     1,623       1,364  

Research and development

     296       260  

Selling, general and administrative

     1,070       933  
    


 


Operating Profit

   $ 1,176     $ 1,048  

Interest

     89       95  
    


 


Income before income taxes and minority interests

     1,087       953  

Income tax expense

     (304 )     (267 )

Minority interests

     (61 )     (47 )
    


 


Net income

   $ 722     $ 639  
    


 


Earnings per share of Common Stock

                

Basic

   $ 1.46     $ 1.34  

Diluted

   $ 1.43     $ 1.27  

Dividends per share of Common Stock

   $ .35     $ .27  

Average number of shares outstanding

                

Basic

     496       470  

Diluted

     505       504  

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

2


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

     Nine Months Ended
September 30,


 
In Millions (except per share amounts)    2004

    2003

 

Revenues

                

Product sales

   $ 19,347     $ 16,440  

Service sales

     7,713       5,796  

Financing revenues and other income, net

     547       210  
    


 


       27,607       22,446  
    


 


Costs and expenses

                

Cost of products sold

     15,026       12,437  

Cost of services sold

     5,012       3,761  

Research and development

     917       776  

Selling, general and administrative

     3,263       2,554  
    


 


Operating Profit

   $ 3,389     $ 2,918  

Interest

     267       279  
    


 


Income before income taxes and minority interests

     3,122       2,639  

Income tax expense

     (810 )     (739 )

Minority interests

     (174 )     (127 )
    


 


Net income

   $ 2,138     $ 1,773  
    


 


Earnings per share of Common Stock

                

Basic

   $ 4.30     $ 3.73  

Diluted

   $ 4.23     $ 3.53  

Dividends per share of Common Stock

   $ 1.05     $ .785  

Average number of shares outstanding

                

Basic

     497       469  

Diluted

     506       502  

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEET

 

     September 30,
2004


    December 31,
2003


 
In Millions    (Unaudited)     (Audited)  
Assets                 

Cash and cash equivalents

   $ 2,340     $ 1,623  

Accounts receivable, net

     6,063       5,187  

Inventories and contracts in progress, net

     4,622       4,420  

Future income tax benefits

     1,274       1,372  

Other current assets

     378       388  
    


 


Total Current Assets

     14,677       12,990  
    


 


Customer financing assets

     1,166       1,031  

Future income tax benefits

     1,217       1,283  

Fixed assets

     12,149       12,082  

Less: Accumulated depreciation

     (7,276 )     (7,002 )
    


 


Net Fixed Assets

     4,873       5,080  
    


 


Goodwill

     9,666       9,329  

Other assets

     6,032       5,561  
    


 


Total Assets

   $ 37,631     $ 35,274  
    


 


Liabilities and Shareowners’ Equity                 

Short-term borrowings

   $ 438     $ 669  

Accounts payable

     3,100       2,806  

Accrued liabilities

     7,765       7,071  

Long-term debt currently due

     367       375  
    


 


Total Current Liabilities

     11,670       10,921  
    


 


Long-term debt

     4,254       4,257  

Future pension and postretirement benefit obligations

     4,699       4,752  

Other long-term liabilities

     3,133       2,928  

Minority interest in subsidiary companies

     837       709  

Shareowners’ Equity:

                

Common Stock

     6,928       6,587  

Treasury Stock

     (6,019 )     (5,335 )

Retained earnings

     14,103       12,527  

Unearned ESOP shares

     (262 )     (273 )

Accumulated other non-shareowners’ changes in equity

     (1,712 )     (1,799 )
    


 


       13,038       11,707  
    


 


Total Liabilities and Shareowners’ Equity

   $ 37,631     $ 35,274  
    


 


 

See accompanying Notes to Condensed Consolidated Financial Statements

 

4


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended
September 30,


 
In Millions    2004

    2003

 

Operating Activities:

                

Net income

   $ 2,138     $ 1,773  

Adjustments to reconcile net income to net cash flows provided by operating activities:

                

Depreciation and amortization

     744       570  

Deferred income tax provision

     218       238  

Minority interests in subsidiaries’ earnings

     174       127  

Change in:

                

Accounts receivable

     (764 )     20  

Inventories and contracts in progress

     (162 )     (21 )

Accounts payable and accrued liabilities

     630       (19 )

Other current assets

     19       (109 )

Voluntary contributions to global pension plans

     (559 )     (735 )

Other, net

     403       233  
    


 


Net cash flows provided by operating activities

     2,841       2,077  
    


 


Investing Activities:

                

Capital expenditures

     (451 )     (322 )

Investments in businesses

     (341 )     (1,076 )

Dispositions of businesses

     7       10  

Increase in customer financing assets, net

     (94 )     (223 )

Other, net

     89       35  
    


 


Net cash flows used in investing activities

     (790 )     (1,576 )
    


 


Financing Activities:

                

Repayment of long-term debt

     (15 )     (1,030 )

(Decrease) Increase in short-term borrowings, net

     (244 )     439  

Common Stock issued under employee stock plans

     252       181  

Dividends paid on Common Stock

     (496 )     (369 )

Repurchase of Common Stock

     (688 )     (301 )

Other, net

     (149 )     (159 )
    


 


Net cash flows used in financing activities

     (1,340 )     (1,239 )
    


 


Effect of foreign exchange rate changes on Cash and cash equivalents

     6       79  
    


 


Net increase (decrease) in Cash and cash equivalents

     717       (659 )

Cash and cash equivalents, beginning of year

     1,623       2,080  
    


 


Cash and cash equivalents, end of period

   $ 2,340     $ 1,421  
    


 


 

See accompanying Notes to Condensed Consolidated Financial Statements

 

5


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Condensed Consolidated Financial Statements at September 30, 2004 and for the quarters and nine months ended September 30, 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 nine months of 2004 and 2003, the Corporation’s total cash contributions to its defined benefit plans were $647 million and $800 million, respectively, including $223 million and $156 million in the third quarter of 2004 and 2003, respectively. Voluntary contributions comprised $201 million and $559 million, respectively, of the total contributions made in the third quarter and first nine months of 2004. During the first nine months of 2004 and 2003, the Corporation also contributed $99 million and $86 million, respectively, to its defined contribution plans, including $32 million in both the third quarter of 2004 and 2003, respectively.

 

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

 

     Pension Benefits
Quarter Ended
September 30,


    Pension Benefits
Nine Months Ended
September 30,


 
In Millions    2004

    2003

    2004

    2003

 

Components of Net Periodic Benefit Cost:

                                

Service cost

   $ 85     $ 75     $ 249     $ 217  

Interest cost

     261       246       774       702  

Expected return on plan assets

     (310 )     (294 )     (929 )     (846 )

Amortization

     37       7       114       22  

Recognized actuarial net loss

     6       12       17       36  

Net settlement and curtailment loss

     9       —         36       —    
    


 


 


 


Total net periodic benefit cost

   $ 88     $ 46     $ 261     $ 131  
    


 


 


 


    

Other Postretirement Benefits
Quarter Ended

September 30,


    Other Postretirement Benefits
Nine Months Ended
September 30,


 
In Millions    2004

    2003

    2004

    2003

 

Components of Net Periodic Benefit Cost:

                                

Service cost

   $ 2     $ 2     $ 5     $ 6  

Interest cost

     16       16       48       48  

Expected return on plan assets

     (1 )     (1 )     (3 )     (3 )

Amortization

     (6 )     (5 )     (17 )     (15 )

Net settlement and curtailment gain

     (3 )     —         (2 )     —    
    


 


 


 


Total net periodic benefit cost

   $ 8     $ 12     $ 31     $ 36  
    


 


 


 


 

6


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.

 

     Quarter Ended
September 30,


   

Nine Months Ended

September 30,


 
In Millions    2004

    2003

    2004

    2003

 
(except per share amounts)                         

Net income as reported

   $ 722     $ 639     $ 2,138     $ 1,773  

Add: Stock-based employee compensation expense included in net income, net of related tax effects

     1       2       3       6  

Less: Total stock-based employee compensation expense determined under Black-Scholes option pricing model, net of related tax effects

     (30 )     (34 )     (80 )     (91 )
    


 


 


 


Pro forma net income

   $ 693     $ 607     $ 2,061     $ 1,688  
    


 


 


 


Earnings per share:

                                

Basic – as reported

   $ 1.46     $ 1.34     $ 4.30     $ 3.73  

Basic – pro forma

   $ 1.40     $ 1.28     $ 4.15     $ 3.55  

Diluted – as reported

   $ 1.43     $ 1.27     $ 4.23     $ 3.53  

Diluted – pro forma

   $ 1.37     $ 1.20     $ 4.07     $ 3.36  

 

Derivative Instruments and Hedging Activities

 

The Corporation uses derivative instruments, including swaps, forward contracts and options to manage certain foreign currency and interest rate 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 September 30, 2004 and December 31, 2003, the fair value of derivatives recorded as assets was $127 million and $162 million, respectively, and the fair value of derivatives recorded as liabilities was $28 million and $56 million, respectively. Of the amount recorded in shareowners’ equity, a $53 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 September 30, 2004 were immaterial. All open derivative contracts accounted for as cash flow hedges mature by April 2009.

 

7


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.

 

     Quarter Ended
September 30,


   Nine Months Ended
September 30,


In Millions    2004

    2003

   2004

    2003

Foreign currency translation, net

   $ 100     $ 26    $ 36     $ 358

Unrealized holding gain on marketable equity securities, net

     (3 )     7      58       26

Cash flow hedging gain (loss), net

     16       6      (7 )     60
    


 

  


 

     $ 113     $ 39    $ 87     $ 444
    


 

  


 

 

Inventories and Contracts in Progress

 

In Millions    September 30,
2004


    December 31,
2003


 

Inventories consist of the following:

                

Raw materials

   $ 810     $ 743  

Work-in-process

     1,190       1,118  

Finished goods

     2,309       2,221  

Contracts in progress

     2,553       2,363  
    


 


       6,862       6,445  

Less:

                

Progress payments, secured by lien, on U.S. Government contracts

     (94 )     (110 )

Billings on contracts in progress

     (2,146 )     (1,915 )
    


 


     $ 4,622     $ 4,420  
    


 


 

Acquisitions, Goodwill and Other Intangible Assets

 

During the first nine months of 2004, the Corporation’s investment in businesses was $341 million, including $132 million in the third quarter of 2004, primarily for acquisitions by Carrier, Chubb, Sikorsky and Otis. 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.

 

8


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

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 Millions     

Current assets

   $ 887

Property, plant and equipment

     260

Intangible assets

     962

Goodwill

     1,979
    

Total assets acquired

   $ 4,088

Accounts payable and

      

    accrued liabilities

   $ 1,042

Short-term borrowings

     103

Long-term debt

     1,039

Pension and postretirement obligations

     573

Other liabilities

     295
    

Total liabilities assumed

    

$3,052

Net assets acquired

   $ 1,036
    

 

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 periods 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 amount of net assets acquired was recorded as an increase in goodwill.

 

The final purchase price allocation of all acquired businesses is subject to 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 at September 30, 2004 were as follows:

 

In Millions    Otis

   Carrier

   Chubb

   Pratt &
Whitney


   Flight
Systems


   Total
Segments


   Eliminations
and other


    Total

Balance as of January 1, 2004

   $ 911    $ 2,059    $ 2,096    $ 462    $ 3,807    $ 9,335    $ (6 )   $ 9,329

Goodwill resulting from business combinations completed or finalized

     4      69      202      10      8      293      —         293

Foreign currency translation and other

     24      2      3      3      6      38      6       44
    

  

  

  

  

  

  


 

Balance as of September 30, 2004

   $ 939    $ 2,130    $ 2,301    $ 475    $ 3,821    $ 9,666    $ —       $ 9,666
    

  

  

  

  

  

  


 

 

The increase in goodwill of $337 million for the nine months ended September 30, 2004 was due primarily to the finalization of purchase accounting at Chubb, acquisitions by Carrier and Chubb, and foreign currency translation. Estimated costs relating to restructuring actions that directly impact Chubb’s operations and employees were $162 million through September 30, 2004, including $98 million recorded in the third quarter of 2004, and were accounted for as purchase accounting adjustments. Approximately half of the restructuring was related to severance with the remainder related to asset write-downs and other facility exit costs.

 

9


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

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

 

     September 30, 2004

    December 31, 2003

 
In Millions    Gross
Amount


   Accumulated
Amortization


    Gross
Amount


   Accumulated
Amortization


 

Amortized intangible assets

                              

Purchased service contracts

   $ 930    $ (314 )   $ 894    $ (275 )

Patents and trademarks

     206      (40 )     197      (34 )

Other, principally customer relationships

     642      (103 )     581      (51 )
    

  


 

  


     $ 1,778    $ (457 )   $ 1,672    $ (360 )
    

  


 

  


 

The increase in purchased service contracts was due primarily to the acquisition of service portfolios at Otis. The increase in “other” was due primarily to $28 million from acquisitions at Carrier and $27 million from the acquisition of monitoring lines by Chubb, including $9 million in the third quarter, partially offset by the finalization of purchase accounting at Chubb.

 

Amortization of intangible assets for the quarter and nine-month periods ending September 30, 2004 was $35 million and $98 million, respectively, compared with $24 million and $53 million for the same periods of 2003. Amortization of these intangible assets for 2004 through 2008 is expected to approximate $120 million per year.

 

Intangible assets determined to have indefinite lives, primarily the Chubb trademark, amounted to $551 million and $583 million at September 30, 2004 and December 31, 2003, respectively, and are not amortized. The decrease during the period was primarily related to the finalization of purchase accounting at Chubb.

 

Accrued Liabilities

 

In Millions   

September 30,

2004


  

December 31,

2003


Accrued salaries, wages and employee benefits

   $ 1,347    $ 1,291

Advances on sales contracts

     1,672      1,543

Service and warranty

     476      534

Service billings

     510      265

Income taxes payable

     513      521

Accrued restructuring costs

     348      100

Other

     2,899      2,817
    

  

     $ 7,765    $ 7,071
    

  

 

In the first nine months of 2004, the Corporation has reclassified approximately $626 million of prior year amounts from inventory to accrued liabilities, primarily related to billings on contracts in progress, to conform to the current year presentation.

 

10


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Guarantees

 

The Corporation extends a variety of financial, market value and product performance guarantees to third parties. During the first quarter of 2004, 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 nine months ended September 30, 2004 are as follows:

 

In Millions       

Balance as of January 1, 2004

   $ 1,161  

Warranties and performance guarantees issued

     339  

Settlements made

     (324 )

Other

     (8 )
    


Balance as of September 30, 2004

   $ 1,168  
    


 

Restructuring

 

During the first nine months of 2004, the Corporation recorded net pre-tax restructuring and related charges totaling $473 million for new and ongoing restructuring actions. These charges include $259 million recorded in the first quarter, $156 million recorded in the second quarter, and $58 million recorded in the third quarter. During the first nine months of 2004, the Corporation recorded charges in the segments as follows: Otis $117 million, Carrier $202 million, Pratt & Whitney $97 million, Flight Systems $43 million and Eliminations and other $14 million. The charges include $414 million in cost of sales, $49 million in selling, general and administrative expenses and $10 million in other income. As described below, these charges relate to actions initiated during 2004 and 2003.

 

2004 Actions During the first nine 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, including a Space Propulsion facility located in San Jose, California. During the first nine months of 2004, net pre-tax restructuring and related charges, totaling $392 million, included $335 million recorded in cost of sales, $47 million in selling, general and administrative expenses and $10 million in other income.

 

The 2004 actions that have occurred during the first nine months of the year resulted in net workforce reductions of approximately 2,600 employees and the exiting of 397,000 square feet of facilities. The majority of the remaining workforce and facility related cost reductions are targeted for completion during 2004 and 2005.

 

11


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

The following table summarizes the accrual balances and utilization by cost type for the 2004 programs:

 

In Millions


   Severance

    Asset
Write-
downs


    Facility Exit
and Lease
Termination
Costs


    Total

 

For the quarter ended September 30, 2004

                                

Restructuring accruals at June 30, 2004

   $ 157     $ —       $ 19     $ 176  

Net pre-tax restructuring charges

     8       9       27       44  

Utilization

     (20 )     (9 )     (27 )     (56 )
    


 


 


 


Restructuring accruals at September 30, 2004

   $ 145     $ —       $ 19     $ 164  
    


 


 


 


The following table summarizes expected, incurred and remaining costs for the 2004 programs by type:                  

In Millions


   Severance

    Asset
Write-
downs


    Facility Exit
and Lease
Termination
Costs


    Total

 

Expected costs

   $ 229     $ 71     $ 222     $ 522  

Costs incurred – quarter ended March 31, 2004

     (155 )     (20 )     (41 )     (216 )

Costs incurred – quarter ended June 30, 2004

     (51 )     (42 )     (39 )     (132 )

Costs incurred – quarter ended September 30, 2004

     (8 )     (9 )     (27 )     (44 )
    


 


 


 


Remaining costs at September 30, 2004

   $ 15     $ —       $ 115     $ 130  
    


 


 


 


 

The following table summarizes expected, incurred and remaining costs for the 2004 programs by segment:

 

In Millions


   Otis

    Carrier

    Pratt &
Whitney


    Flight
Systems


    Eliminations
and
other


    Total

 

Expected costs

   $ 109     $ 172     $ 164     $ 63     $ 14     $ 522  

Costs incurred – quarter ended March 31, 2004

     (56 )     (82 )     (51 )     (21 )     (6 )     (216 )

Costs incurred – quarter ended June 30, 2004

     (32 )     (53 )     (23 )     (17 )     (7 )     (132 )

Costs incurred – quarter ended September 30, 2004

     (8 )     (9 )     (22 )     (4 )     (1 )     (44 )
    


 


 


 


 


 


Remaining costs at September 30, 2004

   $ 13     $ 28     $ 68     $ 21     $ —       $ 130  
    


 


 


 


 


 


 

2003 Actions During the first nine months of 2004, the Corporation recorded net pre-tax restructuring and related charges of $81 million for actions initiated during 2003. The 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 $79 million recorded in cost of sales and $2 million in selling, general and administrative expenses.

 

12


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

As of September 30, 2004, net workforce reductions of approximately 3,900 employees have been completed and 920,000 square feet of facilities have been exited since the actions were initiated. The balance of the remaining workforce and facility related cost reduction actions are targeted for completion through early 2005.

 

The following table summarizes the accrual balances and utilization by cost type for the 2003 programs:

 

In Millions


   Severance

    Asset
Write-
downs


    Facility Exit
and Lease
Termination
Costs


    Total

 

For the quarter ended September 30, 2004

                                

Restructuring accruals at June 30, 2004

   $ 44     $ —       $ 5     $ 49  

Net pre-tax restructuring charges

     1       —         13       14  

Utilization

     (15 )     (—   )     (10 )     (25 )
    


 


 


 


Restructuring accruals at September 30, 2004

   $ 30     $ —       $ 8     $ 38  
    


 


 


 


The following table summarizes expected, incurred and remaining costs for the 2003 programs by type:                  

In Millions


   Severance

    Asset
Write-
downs


    Facility Exit
and Lease
Termination
Costs


    Total

 

Expected costs

   $ 178     $ 8     $ 108     $ 294  

Costs incurred – through December 31, 2003

     (150 )     (8 )     (41 )     (199 )

Costs incurred – quarter ended March 31, 2004

     (16 )     (—   )     (27 )     (43 )

Costs incurred – quarter ended June 30, 2004

     (9 )     (—   )     (15 )     (24 )

Costs incurred – quarter ended September 30, 2004

     (1 )     (—   )     (13 )     (14 )
    


 


 


 


Remaining costs at September 30, 2004

   $ 2     $ —       $ 12     $ 14  
    


 


 


 


 

The following table summarizes expected, incurred and remaining costs for the 2003 programs by segment:

 

In Millions


   Otis

    Carrier

    Pratt &
Whitney


    Flight
Systems


    Eliminations
and other


    Total

 

Expected costs

   $ 98     $ 130     $ 29     $ 27     $ 10     $ 294  

Costs incurred – through December 31, 2003

     (71 )     (65 )     (27 )     (26 )     (10 )     (199 )

Costs incurred – quarter ended March 31, 2004

     (12 )     (31 )     (—   )     (—   )     (—   )     (43 )

Costs incurred – quarter ended June 30, 2004

     (6 )     (18 )     (—   )     (—   )     (—   )     (24 )

Costs incurred – quarter ended September 30, 2004

     (3 )     (9 )     (1 )     (1 )     (—   )     (14 )
    


 


 


 


 


 


Remaining costs at September 30, 2004

   $ 6     $ 7     $ 1     $ —       $ —       $ 14  
    


 


 


 


 


 


 

13


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Contingent Liabilities

 

As previously disclosed, the European Commission’s competition directorate (the “Commission”) conducted inspections earlier this year 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. Based on the results of its own internal investigation, the Corporation believes that some Otis employees in limited European locations engaged in activities at a local level in violation of Otis and Corporation policies, and may have violated applicable competition law. It is still too early in the Commission’s investigation for the Corporation to reasonably estimate the range of civil fines to which it would likely be subject. The aggregate amount of such fines, if ultimately imposed, could be material to the Corporation’s operating results for the period in which the liability would be recognized or cash flows for the period in which the fines would be paid. The Corporation does not believe that any such fines would have a material adverse effect on the Corporation’s financial condition, or that the resolution of this matter would have a material adverse effect on Otis’ competitive position.

 

As previously reported, a qui tam relator filed a complaint in July 1997 against the Corporation and its subsidiary, Norden Systems, Inc., in the U.S. District Court in Connecticut (U.S. ex rel. Drake v. Norden Systems, Inc. and UTC, No. 394CV00963) alleging that the Corporation and Norden are liable under the civil False Claims Act for violating U.S. Government rules on accounting for fixed assets. The qui tam relator claimed unspecified damages and penalties. The Government declined to intervene. In February 2003, the District Court granted the Corporation’s motion to dismiss the case for lack of prosecution and the relator appealed. In July 2004, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of the claims against the Corporation, but remanded certain of the claims against Norden back to the District Court for further proceedings. The civil False Claims Act provides for treble damages and penalties of up to $10,000 per false claim submitted to the Government. The number of false claims, if any, implicated by the remaining claims cannot currently be ascertained; however, if determined adversely to Norden, the number could result in significant damages and penalties, which the Corporation might be required to pay. The Corporation believes the claims against Norden are without merit, and intends to continue to defend this matter vigorously.

 

Carrier Corporation has reached an agreement in principle with the U.S. Environmental Protection Agency (“EPA”) to resolve its current liability at the Puente Valley Operable Unit Superfund Site in California. Under the proposed agreement, Carrier would pay approximately $125,000 and undertake an environmental project for approximately $500,000, in settlement of claims for civil penalties related to alleged noncompliance with an administrative order. The Corporation expects the proposed agreement with the EPA to be finalized in a consent decree subject to approval by the U.S. District Court for the Central District of California, which is expected in the first half of 2005. Management believes that the resolution of this matter will not have a material adverse effect upon the Corporation’s competitive position, financial position or results of operations.

 

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.

 

14


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Environmental investigatory, remediation, operating and maintenance costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site, including existing technology, current laws and regulations and prior remediation experience. Where no amount within a range of estimates is more likely, the minimum is accrued. For sites with multiple responsible parties, 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 of 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 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, competitive position, results of operations or cash flows.

 

15


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Earnings Per Share

 

     Quarter Ended
September 30,


   

Nine Months Ended

September 30,


 

In Millions (except per share amounts)

 

   2004

   2003

    2004

   2003

 

Net income

   $ 722    $ 639     $ 2,138    $ 1,773  

Less: ESOP Stock dividends

     —        (8 )     —        (24 )
    

  


 

  


Basic earnings

     722      631       2,138      1,749  

ESOP Stock adjustment

     —        7       —        22  
    

  


 

  


Diluted earnings

   $ 722    $ 638     $ 2,138    $ 1,771  
    

  


 

  


Average shares:

                              

Basic

     496      470       497      469  

Stock awards

     9      8       9      6  

ESOP Stock

     —        26       —        27  
    

  


 

  


Diluted

     505      504       506      502  
    

  


 

  


Earnings per share of Common Stock:

                              

Basic

   $ 1.46    $ 1.34     $ 4.30    $ 3.73  

Diluted

   $ 1.43    $ 1.27     $ 4.23    $ 3.53  

 

Income Taxes

 

The Corporation has exposures relating to tax filings in the ordinary course of business. The Corporation periodically assesses its liabilities and contingencies for all tax years under audit based upon the latest information available. For those matters where it is probable that an adjustment will be asserted, the Corporation has recorded its best estimate of tax liability (including related interest charges) in its consolidated financial statements.

 

In the second quarter of 2004, the Corporation reached a settlement with the Internal Revenue Service (“IRS”) and obtained final review by the U.S. Congress Joint Committee on Taxation related to claims and other disputed items related to the 1986 to 1993 U.S. Federal tax audits. The settlement resulted in an approximate $80 million reduction in tax expense and approximately $125 million of pretax interest income.

 

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 or 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.

 

16


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

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 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 third quarter and first nine months of 2004, it did result in the consolidation of certain entities 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 and nine months ended September 30, 2004 and 2003, respectively, are included in “Eliminations and other,” which also includes certain small subsidiaries.

 

Results for the quarter and nine months ended September 30, 2004 and 2003 are as follows:

 

In Millions    Revenues

    Operating Profits

    Operating
Profit Margin


 

Quarter Ended September 30,

 

   2004

    2003

    2004

    2003

    2004

    2003

 

Otis

   $ 2,245     $ 1,941     $ 409     $ 350     18.2 %   18.0 %

Carrier

     2,678       2,453       313       304     11.7 %   12.4 %

Chubb

     697       416       35       20     5.0 %   4.8 %

Pratt & Whitney

     2,106       1,859       318       281     15.1 %   15.1 %

Flight Systems

     1,647       1,424       224       199     13.6 %   14.0 %
    


 


 


 


 

 

Total segment

     9,373       8,093       1,299       1,154     13.9 %   14.3 %

Eliminations and other

     (34 )     (139 )     (52 )     (55 )            

General corporate expenses

     —         —         (71 )     (51 )            
    


 


 


 


           

Consolidated

   $ 9,339     $ 7,954     $ 1,176     $ 1,048              
    


 


 


 


           

 

Third quarter 2004 restructuring and related charges totaling $58 million included in consolidated operating profit are as follows: Otis - $11 million, Carrier - $18 million, Pratt & Whitney - $23 million, Flight Systems - $5 million and Eliminations and other - $1 million.

 

The Corporation recorded restructuring charges of $11 million in the third quarter of 2003, similar in nature to those noted above.

 

In Millions    Revenues

    Operating Profits

    Operating
Profit Margin


 

Nine Months Ended September 30,

 

   2004

   2003

    2004

    2003

    2004

    2003

 

Otis

   $ 6,568    $ 5,717     $ 1,094     $ 1,000     16.7 %   17.5 %

Carrier

     7,934      7,050       752       818     9.5 %   11.6 %

Chubb

     2,108      416       102       20     4.8 %   4.8 %

Pratt & Whitney

     6,134      5,538       846       826     13.8 %   14.9 %

Flight Systems

     4,662      4,133       609       559     13.1 %   13.5 %
    

  


 


 


 

 

Total segment

     27,406      22,854       3,403       3,223     12.4 %   14.1 %

Eliminations and other

     201      (408 )     191       (140 )            

General corporate expenses

     —        —         (205 )     (165 )            
    

  


 


 


           

Consolidated

   $ 27,607    $ 22,446     $ 3,389     $ 2,918              
    

  


 


 


           

 

Restructuring and related charges for the nine months ended September 30, 2004 totaling $473 million included in consolidated operating profit are as follows: Otis - $117 million, Carrier - $202

 

17


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

million, Pratt & Whitney - $97 million, Flight Systems - $43 million and Eliminations and other - $14 million.

 

In the first nine months of 2003, the Corporation recorded restructuring and related charges, similar in nature to those above, of $44 million in connection with its continuing cost reduction efforts in both the commercial and aerospace segments.

 

In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into certain collaboration arrangements in which costs, revenues and risks are shared. Revenues from Pratt & Whitney’s engine programs under collaboration agreements are recorded as earned and collaborator share of revenue is recorded as a reduction of revenue at that time. The collaborator share of revenue for the quarters ended September 30, 2004 and 2003 was approximately $144 million and $136 million, respectively. For the nine months ended September 30, 2004 and 2003, the approximate collaborator share of revenue was $448 million and $395 million, respectively.

 

18


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

With respect to the unaudited condensed consolidated financial information of United Technologies Corporation for the quarters and nine months ended September 30, 2004 and 2003, PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their report dated October 26, 2004, appearing below, states that they did not audit and they do not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those which would have been necessary if their report had not been included. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (“the Act”) for their report on the unaudited condensed consolidated financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.

 

REPORT OF INDEPENDENT REG ISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareowners of

  United Technologies Corporation

 

We have reviewed the accompanying condensed consolidated balance sheet of United Technologies Corporation (the “Corporation”) and its consolidated subsidiaries as of September 30, 2004, and the related condensed consolidated statement of operations for each of the three-month and nine-month periods ended September 30, 2004 and 2003, and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2004 and 2003. This interim financial information is the responsibility of the Corporation’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

 

We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003, and the related consolidated statements of operations, of changes in shareowners’ equity and of cash flows for the year then ended (not presented herein), and in our report dated January 20, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Hartford, Connecticut

October 26, 2004

 

19


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Item 2. Management’s Discussion and Analysis of Finan cial Condition and Results of Operations

 

BUSINESS ENVIRONMENT

 

The Corporation’s operations are classified into five principal segments: Otis, Carrier, Chubb, Pratt & Whitney and Flight Systems. Otis, Carrier and Chubb serve customers in the commercial and residential property industries. Carrier also serves commercial and transport refrigeration customers. Pratt & Whitney and the Flight Systems segment, which includes Hamilton Sundstrand and Sikorsky Aircraft (“Sikorsky”), primarily serve commercial and government customers in the aerospace industry and also serve customers in industrial markets.

 

For discussion of the Corporation’s business environment, refer to the discussion of “Business Environment” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Corporation’s Annual Report incorporated by reference in the Corporation’s Form 10-K for calendar year 2003. The current status of significant factors impacting the Corporation’s business environment in 2004 is discussed below.

 

The Corporation’s growth strategy contemplates acquisitions. The rate and extent to which appropriate acquisition opportunities are available and to which acquired businesses are effectively integrated and anticipated synergies or cost savings are achieved can affect the Corporation’s operations and results.

 

As worldwide businesses, the Corporation’s operations are affected by global and regional industry, economic and political factors. However, the Corporation’s geographic and industry diversity, as well as the diversity of its product sales and services, has helped limit the impact of any one industry or the economy of any single country on its consolidated results. Good economic conditions have led to improvements in heating, ventilating and air conditioning (“HVAC”) and elevator markets, which together with improvements in the commercial aerospace aftermarket have contributed positively to the Corporation’s results in the first nine months of 2004. In addition, the defense portion of the Corporation’s aerospace businesses is affected by changes in market demand and the global political environment. The Corporation’s participation in long-term production and development programs for the U.S. Government has contributed positively to the Corporation’s results in the first nine months of 2004 and is expected to continue to contribute to results for the remainder of 2004, but at flat to lower levels than in 2003. During the first nine months of 2004, foreign currency translation contributed positively to the Corporation’s consolidated results, primarily driven by the strengthening of the euro in relation to the U.S. dollar. In addition, the Corporation continues to pursue investment opportunities in China.

 

Sikorsky, in a joint venture arrangement with Boeing, received notice in February 2004 of the U.S. Army’s (the “Army”) intent to terminate the RAH-66 Comanche helicopter program and reallocate funds to restructure and revitalize Army aviation programs to meet current and future needs. A partial Termination for Convenience notice was issued effective March 19, 2004. A limited number of selected technologies are being continued in order to facilitate the transfer of Comanche technology to other programs. In the second quarter of 2004, the Corporation announced the planned closure of its Comanche facility and initiated other cost reduction actions as a result of the program termination. In the third quarter of 2004, the Boeing Sikorsky Joint Venture and U.S. Army agreed to a contract modification that revised and capped program funding levels and established additional contract performance incentives related to the contract termination. The Corporation does not expect the Comanche program termination and the related cost reduction actions to have a material adverse impact on the Corporation’s results of operations, financial condition or cash flows.

 

The Corporation’s products and services are regulated by strict safety and performance standards, particularly in the commercial engine business. Compliance with these standards along with the

 

20


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

competitive dynamics of the commercial airline business can create uncertainty regarding the profitability of commercial engine programs.

 

Continued commercial airline financial distress, uncertainty in the global economic recovery and changes in commodity prices, interest rates and foreign currency exchange rates create uncertainties that could impact the Corporation’s earnings outlook for the remainder of 2004.

 

CRITICAL ACCOUNTING ESTIMATES

 

Preparation of the Corporation’s financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in the Corporation’s Annual Report, incorporated by reference in Form 10-K for the calendar year 2003, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates.

 

The Corporation has exposures related to tax filings in the ordinary course of business. The Corporation periodically assesses its liabilities and contingencies for all tax years under audit based upon the latest information available. For those matters where it is probable that an adjustment will be asserted, the Corporation has recorded its best estimate of tax liability (including related interest charges) in its consolidated financial statements. In the second quarter of 2004, the Corporation settled open claims and other disputed items related to its 1986 to 1993 U.S. Federal tax audits as further described in “Results of Continuing Operations” below. The IRS is currently auditing the Corporation’s 1994 to 1999 Federal tax returns and the Corporation currently expects the examination phase of these audits to be completed in 2005. Timing of final settlement of these periods is contingent upon resolution of any disputed issues that may arise from the examination.

 

There have been no significant changes in the Corporation’s critical accounting estimates during the first nine months of 2004.

 

RESULTS OF CONTINUING OPERATIONS

 

Consolidated revenues were $9,339 million in the third quarter of 2004, an increase of $1,385 million (17%) when compared to the same period of 2003 and $27,607 million for the nine-month period of 2004, a $5,161 million (23%) increase when compared to the same period of 2003. The third quarter and nine-month period increases reflect revenue contributed from acquisitions (5% and 9%, respectively), primarily Chubb, and the favorable impact of foreign currency translation (3% in both periods), primarily resulting from the continued strength of the euro in relation to the U.S. dollar. The increases also reflect revenue growth at Otis and Carrier and increased commercial aerospace volume at Pratt & Whitney and in the Flight Systems segment.

 

Financing revenues and other income, net, increased $12 million in the third quarter of 2004 and $337 million for the first nine months of 2004, when compared to the same periods of 2003. The nine-month increase primarily reflects approximately $125 million of pretax interest income associated with the favorable settlement of claims and other disputed items related to the 1986 to 1993 U.S. Federal tax audits and a $250 million payment from DaimlerChrysler in January 2004. In consideration for this payment, the Corporation released DaimlerChrysler from certain commitments previously made in support of MTU Aero Engines GmbH.

 

21


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Gross margin as a percentage of sales decreased 1.0 percentage point and 1.2 percentage points in the third quarter and nine-month period of 2004, respectively, when compared to the same periods of 2003. The decreases were due primarily to $57 million and $414 million of restructuring charges in the third quarter and first nine months of 2004, respectively, and the impact of increased commodity costs in 2004, primarily at Carrier and Otis, which reduced gross margin by approximately $50 million and $100 million in the third quarter and first nine months of 2004.

 

The Corporation’s research and development spending includes both company and customer funded programs. Total research and development spending for the Corporation increased $41 million (6%) to $744 million in the third quarter of 2004 compared to the same period of 2003 and increased $230 million (12%) to $2,182 million in the first nine months of 2004 compared to the same period of 2003.

 

Company-funded research and development spending increased $36 million (14%) and $141 million (18%) in the third quarter and first nine months of 2004, respectively, when compared to the same periods of 2003. Approximately two-thirds of the third quarter and nine-month increases are due primarily to increases at Pratt & Whitney, reflecting in part, a technology funding agreement at Pratt & Whitney Canada entered into in the first quarter of 2003 and increased spending on commercial engine research and development programs in 2004. As a percentage of sales, research and development was 3.2% in the third quarter and 3.4% in the first nine months of 2004, compared to 3.3% and 3.5% in the same periods of 2003. Company-funded research and development spending is subject to the variable nature of program development schedules.

 

In addition to company-funded programs, costs related to customer funded research and development programs were $448 million and $1.27 billion in the third quarter and first nine months of 2004, respectively, as compared to $443 million and $1.18 billion for the same periods of 2003. The third quarter and nine-month increases are due primarily to costs associated with the Comanche termination at Sikorsky, which were largely offset by lower costs associated with Pratt & Whitney’s Joint Strike Fighter program. Customer funded research and development costs are expensed as incurred and are recorded as a component of cost of products sold.

 

Company-funded research and development spending for the full year of 2004 is expected to increase by approximately $200 million from 2003. Combined company and customer funded research and development spending is expected to be slightly higher than 2003.

 

Selling, general and administrative expenses increased $137 million (15%) and $709 million (28%) in the third quarter and first nine months of 2004, respectively, when compared to the same periods of 2003. The third quarter and nine-month increases were due primarily to the acquisition of Chubb (6% and 16%, respectively) and the remainder due primarily to foreign currency translation at Carrier and Otis. The nine-month results include 2004 restructuring charges of $49 million (2%). As a percentage of sales, these expenses were 11.6% and 12.1% for the quarter and nine months ended September 30, 2004 compared to 11.8% and 11.5% for the same periods of 2003.

 

Interest expense decreased $6 million (6%) and $12 million (4%) in the third quarter and first nine months of 2004, respectively, when compared to the same periods of 2003, reflecting lower average short-term borrowings.

 

The effective income tax rate for the third quarter and first nine months of 2004 was 28.0% and 25.9%, respectively, compared to 28% for the comparable periods in 2003. In the second quarter, the Corporation reached settlement with the IRS and obtained final review by the U.S. Congress Joint Committee on Taxation related to claims and other disputed items related to the 1986 to 1993 U.S. Federal tax audits. The settlement resulted in an approximate $80 million reduction in tax expense and approximately $125 million in pretax interest income, referred to above, both of which were recorded in the quarter ended June 30, 2004. The Corporation expects its effective tax rate to approximate 28% in

 

22


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

the fourth quarter of 2004. However, the Corporation’s effective tax rate is dependent upon many factors and may vary in future periods. The Corporation is currently evaluating the provisions of the American Jobs Creation Act and its potential impact on the Corporation’s effective tax rate.

 

The effective tax rate in the fourth quarter of 2003 was 24.3% and was favorably impacted by a $448 million tax loss associated with the sale of a non-core business of Carrier. The tax loss was attributable to a worthless stock deduction relating primarily to a diminution in value of certain assets of International Comfort Products, USA (“ICP, USA”) and other events that fixed the loss in 2003, including transfer of substantially all of the heating and cooling assets, trade names and trademarks of ICP, USA to Carrier and the subsequent sale of ICP, USA and its remaining non-core business to a third party. The decrease in value, beginning in 2002 and continuing into 2003, was the result of many factors, the more significant of which were the overall decline in industry conditions, deteriorating pricing, and the loss of a key customer.

 

The third party sale of the ICP, USA assets did not result in a significant loss for financial accounting purposes because the book value and fair value of the assets were about equal. There was no impairment charge under FAS 142 “Goodwill and Intangible Assets” because the ICP, USA business was included in one of the reporting units within the Carrier segment and the evaluation of that reporting unit did not result in an impairment charge.

 

Net income and diluted earnings per share increased $83 million (13%) and $.16 (13%), respectively, in the third quarter of 2004 when compared with the same period of 2003 and $365 million (21%) and $.70 (20%), respectively, in the first nine months of 2004 when compared with the same period of 2003.

 

Restructuring

 

During the first nine months of 2004, the Corporation recorded net pre-tax restructuring and related charges totaling $473 million for new and ongoing restructuring actions. These charges include $259 million recorded in the first quarter, $156 million recorded in the second quarter, and $58 million recorded in the third quarter. During the first nine months of 2004, the Corporation recorded charges in the segments as follows: Otis $117 million, Carrier $202 million, Pratt & Whitney $97 million, Flight Systems $43 million and Eliminations and other $14 million. The charges include $414 million in cost of sales, $49 million in selling, general and administrative expenses and $10 million in other income. As described below, these charges relate to actions initiated during 2004 and 2003.

 

2004 Actions During the first nine months of 2004, the Corporation initiated restructuring actions relating to ongoing cost reduction efforts, including 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, including a Space Propulsion facility located in San Jose, California. During the first nine months of 2004, net pre-tax restructuring and related charges, totaling $392 million, included $335 million recorded in cost of sales, $47 million in selling, general and administrative expenses and $10 million in other income. These charges were recorded in the Corporation’s segments as follows: Otis $96 million, Carrier $144 million, Pratt & Whitney $96 million, Flight Systems $42 million and Eliminations and other $14 million. These charges included $214 million for severance and related employee termination costs, $71 million for asset write-downs, including impairments, largely related to manufacturing assets and exiting facilities that will no longer be utilized, and $107 million for facility exit and lease termination costs.

 

The 2004 actions are expected to result in net workforce reductions of approximately 4,500 hourly and salaried employees, the exiting of approximately 5.0 million square feet of facilities and the disposal of assets associated with the exited facilities. Approximately 60% of the total pre-tax charge will require cash payments, which will be primarily funded by cash generated from operations. The

 

23


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Corporation had pre-tax cash outflows related to the 2004 programs of approximately $17 million, $38 million, and $29 million during the first, second and third quarters of 2004, respectively. Savings are expected to increase over a two-year period resulting in recurring pre-tax savings of approximately $210 million annually. As of September 30, 2004, net workforce reductions of approximately 2,600 employees have been completed and 397,000 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 and 2005. A significant portion of the remaining square footage to be eliminated under the 2004 actions relates to facilities at Carrier, Otis and Pratt & Whitney. Additional restructuring and related charges of $130 million are expected to be incurred to complete these actions, primarily in 2004 and 2005. As of September 30, 2004, approximately $145 million of severance and related costs and $19 million of facility exit and lease termination accruals remain.

 

2003 Actions During the first nine months of 2004, the Corporation recorded net pre-tax restructuring and related charges of $81 million for actions initiated in 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 compressor manufacturing operations and Otis’ Bloomington, Indiana-based manufacturing, distribution and field tool operations. The charges included $79 million recorded in cost of sales and $2 million in selling, general and administrative expenses. These charges were recorded in the Corporation’s segments as follows: Otis $21 million, Carrier $58 million, Pratt & Whitney $1 million and Flight Systems $1 million. The charges included $26 million for severance and related employee termination costs and $55 million for facility exit and lease termination costs.

 

The 2003 actions are expected to result in net workforce reductions of approximately 4,200 hourly and salaried employees, the exiting of approximately 1.9 million square feet of facilities and the disposal of assets associated with the exited facilities. Approximately 60% of the total pre-tax charge will require cash payments, which will be primarily funded by cash generated from operations. The Corporation had pre-tax cash outflows of approximately $30 million, $31 million and $19 million related to the 2003 programs during the first quarter, second quarter and third quarter, respectively. Savings are expected to increase over a two-year period resulting in recurring pre-tax savings of approximately $165 million annually. As of September 30, 2004, net workforce reductions of approximately 3,900 employees have been completed and 920,000 square feet of facilities have been exited. The balance of the remaining workforce and facility related cost reduction actions are targeted for completion through early 2005. The remaining square footage to be eliminated under the 2003 actions relates to Carrier and Otis facilities. Additional restructuring and related charges of $14 million are expected to be incurred to complete these actions through early 2005. As of September 30, 2004, approximately $30 million of severance and related costs and $8 million of facility exit and lease termination accruals remain.

 

Additional 2004 Actions

 

The Corporation expects to incur approximately $50 million of additional restructuring costs in the fourth quarter of 2004 related to previously announced restructuring actions. The Corporation expects that total restructuring costs in 2004 will exceed the first quarter contract related gain and second quarter tax settlement.

 

The Corporation may initiate additional restructuring actions during the fourth quarter of 2004 through its continuing cost reduction efforts. No specific plans for significant new actions have been finalized at this time. The Corporation also anticipates recognizing a gain in the fourth quarter of 2004 resulting from the divestiture of a minority investment. If this gain is realized, restructuring actions are expected to be initiated approximating the amount of the gain.

 

24


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Segment Review

 

Revenues, operating profits and operating profit margins of the Corporation’s principal segments include the results of all majority-owned subsidiaries, consistent with the management reporting of these businesses. As discussed in the Notes to the Condensed Consolidated Financial Statements, for certain of these subsidiaries, minority shareholders have rights, which overcome the presumption of control. In the Corporation’s consolidated results, these subsidiaries are accounted for using the equity method of accounting. As a result of the adoption of FIN 46, certain of these subsidiaries are now consolidated. Adjustments to reconcile segment reporting for the quarters and nine-month periods ended September 30, 2004 and 2003 are included in “Eliminations and other,” which also includes certain small subsidiaries.

 

Results for the quarters and nine months ended September 30, 2004 and 2003 are as follows:

 

In Millions

Quarter Ended September 30,

   Revenues

    Operating Profits

   

Operating

Profit Margin


 
   2004

    2003

    2004

    2003

    2004

    2003

 

Otis

   $  2,245     $  1,941     $ 409     $ 350     18.2 %   18.0 %

Carrier

     2,678       2,453       313       304     11.7 %   12.4 %

Chubb

     697       416       35       20     5.0 %   4.8 %

Pratt & Whitney

     2,106       1,859       318       281     15.1 %   15.1 %

Flight Systems

     1,647       1,424       224       199     13.6 %   14.0 %
    


 


 


 


 

 

Total segment

     9,373       8,093       1,299       1,154     13.9 %   14.3 %

Eliminations and other

     (34 )     (139 )     (52 )     (55 )            

General corporate expenses

     —         —         (71 )     (51 )            
    


 


 


 


           

Consolidated

   $ 9,339     $ 7,954     $ 1,176     $ 1,048              
    


 


 


 


           

 

Third quarter 2004 restructuring and related charges included in consolidated operating profit totaling $58 million are as follows: Otis - $11 million, Carrier - $18 million, Pratt & Whitney - $23 million, Flight Systems - $5 million and Eliminations and other - $1 million.

 

The Corporation recorded restructuring charges of $11 million in the third quarter of 2003, similar in nature to those noted above.

 

In Millions

Nine Months Ended

September 30,

   Revenues

    Operating Profits

   

Operating

Profit Margin


 
   2004

   2003

    2004

    2003

    2004

    2003

 

Otis

   $ 6,568    $ 5,717     $ 1,094     $ 1,000     16.7 %   17.5 %

Carrier

     7,934      7,050       752       818     9.5 %   11.6 %

Chubb

     2,108      416       102       20     4.8 %   4.8 %

Pratt & Whitney

     6,134      5,538       846       826     13.8 %   14.9 %

Flight Systems

     4,662      4,133       609       559     13.1 %   13.5 %
    

  


 


 


 

 

Total segment

     27,406      22,854       3,403       3,223     12.4 %   14.1 %

Eliminations and other

     201      (408 )     191       (140 )            

General corporate expenses

     —        —         (205 )     (165 )            
    

  


 


 


           

Consolidated

   $ 27,607    $ 22,446     $ 3,389     $ 2,918              
    

  


 


 


           

 

Restructuring and related charges for the nine months ended September 30, 2004 included in consolidated operating profit totaling $473 million are as follows: Otis - $117 million, Carrier - $202

 

25


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

million, Pratt & Whitney - $97 million, Flight Systems - $43 million and Eliminations and other - $14 million.

 

In the first nine months of 2003, the Corporation recorded restructuring and related charges, similar in nature to those above, of $44 million in connection with its continuing cost reduction efforts in both the commercial and aerospace segments.

 

Otis revenues increased $304 million (16%) and $851 million (15%) in the third quarter and first nine months of 2004, respectively, compared to the same periods of 2003, reflecting growth in all geographic regions. The third quarter and nine month increases also reflect the favorable impact of foreign currency translation (5% and 7%, respectively), the impact of acquisitions (2% in both periods) and volume growth within the business (9% and 6%, respectively).

 

Otis operating profits increased $59 million (17%) and $94 million (9%) in the third quarter and first nine months of 2004, respectively, compared to the same periods of 2003. These increases reflect profit improvement at constant currency, primarily in Europe and Asia, the favorable impact of foreign currency translation (5% and 8%, respectively), partially offset by restructuring charges of $11 million (3%) and $117 million (12%), respectively.

 

Carrier revenues increased $225 million (9%) and $884 million (13%) in the third quarter and first nine months of 2004, respectively, compared to the same periods of 2003. All businesses reported year over year revenue growth with North American HVAC, transport refrigeration, Asia and Europe contributing approximately 70% and 75% of the overall growth in the third quarter and first nine months of 2004, respectively. Volume growth in Asia was strong in the third quarter while growth in the North American HVAC slowed in the third quarter, due largely to cooler weather in the summer selling season. In addition, growth in the container business has slowed compared to 2003 levels. The favorable impact of foreign currency translation increased revenues by approximately 2% and 3%, respectively, in the third quarter and first nine months of 2004 compared to the same periods in 2003.

 

Carrier operating profits increased $9 million (3%) and decreased $66 million (8%) in the third quarter and first nine months of 2004, respectively, compared to the same periods of 2003. Third quarter profit improvements from higher volume and factory productivity (12%), primarily in the transport refrigeration and European businesses, were more than offset by higher commodity costs (12%) and restructuring ($18 million or 6%). The nine-month results reflect profit improvements attributable to higher volumes in North American HVAC, transport refrigeration and European businesses (22%) offset by restructuring charges of $202 million (25%) and higher commodity costs (9%). The favorable impact of foreign currency translation increased operating profits by approximately 3% and 4%, respectively in the third quarter and first nine months compared to the same periods in 2003.

 

Chubb revenues and operating profits were $697 million and $35 million, respectively, for the quarter ended September 30, 2004 and $2,108 million and $102 million, respectively, for the nine months ended September 30, 2004. Approximately 80% of the reported revenues and operating profit in the third quarter and nine months ended September 30, 2004 were contributed by fire and security services in Australia, the United Kingdom and Continental Europe.

 

Pratt & Whitney revenues increased $247 million (13%) and $596 million (11%) in the third quarter and first nine months of 2004, respectively, compared to the same periods of 2003. The third quarter and nine-month increase reflects higher commercial aerospace revenues (10% in both periods) due primarily to higher commercial aftermarket volume and higher engine shipments at Pratt & Whitney Canada. The third quarter and nine-month results also reflect relatively flat military aerospace revenues.

 

Pratt & Whitney operating profits increased $37 million (13%) and $20 million (2%) in the third quarter and first nine months of 2004, respectively, compared to the same periods of 2003. The third

 

26


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

quarter and nine month increase is due primarily to higher commercial aerospace profits (26% and 30%, respectively), due primarily to higher volume at Pratt & Whitney Canada and higher volume, cost reduction and productivity in the commercial aftermarket business, partially offset by restructuring charges (8% and 12% respectively) and higher company-funded research and development spending (8% and 12%, respectively). The nine-month increase also reflects costs associated with the collaboration accounting litigation matter (5%) recorded in the first quarter of 2004.

 

Flight Systems revenues increased $223 million (16%) and $529 million (13%) in the third quarter and first nine months of 2004, respectively, compared to the same periods of 2003. The third quarter and nine-month results reflect higher original equipment sales at both Hamilton Sundstrand and Sikorsky (11% and 7%, respectively), including Comanche termination revenues. The increases are also attributable to higher Hamilton industrial revenues (3% and 2%, respectively) and higher commercial aftermarket revenues at both Hamilton Sundstrand and Sikorsky (2% and 4%, respectively).

 

Flight Systems operating profits increased $25 million (13%) and $50 million (9%) in the third quarter and first nine months of 2004, respectively, compared to the same periods of 2003. The third quarter and nine-month increases primarily reflect an increase in aftermarket profits at both Sikorsky and Hamilton Sundstrand (10% and 16%, respectively) and higher Hamilton industrial profits (3% in both periods). The nine-month increase was partially offset by restructuring charges of $43 million (8%), primarily at Hamilton Sundstrand.

 

Eliminations and other revenues and operating profits were $(34) million and $(52) million, respectively in the third quarter of 2004 and $201 million and $191 million, respectively, for the first nine months of 2004. The third quarter operating profit includes estimated costs of approximately $35 million associated with an ongoing legal matter substantially offset by the favorable resolution of an environmental matter related to an inactive operation. The revenue and operating profit for the first nine months of 2004 also reflect the one-time gain of $250 million from the settlement with DaimlerChrysler in the first quarter of 2004 and approximately $125 million of pretax interest income associated with the second quarter 2004 settlement of claims and other disputed items related to the 1986 to 1993 U.S. Federal tax audits.

 

LIQUIDITY AND FINANCIAL CONDITION

 

Management assesses the Corporation’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, customer financing requirements, investments in businesses, dividends, Common Stock repurchases, pension funding, adequacy of available bank lines of credit and the ability to attract long-term capital with satisfactory terms.

 

In Millions

  

September 30,

2004


   

December 31,

2003


   

September 30,

2003


 
      

Cash and cash equivalents

   $ 2,340     $ 1,623     $ 1,421  

Total debt

     5,059       5,301       5,456  

Net debt (total debt less cash)

     2,719       3,678       4,035  

Shareowners’ equity

     13,038       11,707       10,119  

Total capitalization (debt plus equity)

     18,097       17,008       15,575  

Net capitalization (debt plus equity less cash)

     15,757       15,385       14,154  

Debt to total capitalization

     28 %     31 %     35 %

Net debt to net capitalization

     17 %     24 %     29 %

 

Net cash flows provided by operating activities increased $764 million in the first nine months of 2004 compared to the corresponding period in 2003, due primarily to improved operating performance in the first nine months of 2004 compared to the same period in 2003, a $250 million payment from the

 

27


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

settlement with DaimlerChrysler in the first quarter of 2004 and $153 million lower total global pension contributions in 2004.

 

Cash used in investing activities decreased $786 million in the first nine months of 2004 compared with the same period of 2003, primarily reflecting approximately $900 million of cash spending for the Chubb acquisition in July 2003 and lower customer financing funding, partially offset by higher capital expenditures in 2004. Cash spending for investments in businesses for the first nine months of 2004 was $341 million, including $132 million in the third quarter, primarily for acquisitions at Carrier, Chubb, Sikorsky and Otis. Capital expenditures for the full year 2004 are expected to increase and approximate 90% of current year depreciation levels.

 

On October 1, 2004, Carrier completed the acquisition of Linde AG’s Refrigeration division (“Linde”) for approximately 325 million euros ($390 million), including estimated debt upon closing. Linde, a commercial refrigeration business headquartered in Germany, has annual sales of approximately $1 billion. Its operations include manufacturing facilities in Europe, Asia and South America. The final purchase price of Linde is subject to many factors, including finalization of the valuation of certain assets and liabilities, and integration investments necessary to leverage scale across complementary refrigeration product platforms and geographies. These investments may also require considerations regarding the level of vertical integration and focusing of the business operations.

 

The Corporation expects total investments in businesses for the full year 2004 to approximate $1 billion, including debt assumed. However, actual acquisition spending may vary depending upon the timing and availability of appropriate acquisition opportunities.

 

On October 21, 2004, the Corporation announced that it had received U.S. antitrust clearance to acquire up to 30 percent of the shares of Kidde plc, a U.K.-based provider of fire safety and detection equipment. The Corporation also confirmed that Kidde had rejected the Corporation’s proposal for a cash offer of up to 160 U.K. pence per share, subject to due diligence, for all of the shares of Kidde. The Corporation currently holds 21.875 million shares (2.6 percent) of Kidde’s approximately 843.2 million outstanding shares. While the Corporation also confirmed that it is considering whether to proceed, there can be no certainty as to whether an offer will be made or the value of any offer or whether the Corporation will increase or retain its ownership of Kidde shares. Further events are subject to important uncertainties, including the ability to obtain satisfactory due diligence, the degree of interest among Kidde shareholders, changes in economic conditions and required regulatory approvals.

 

Customer financing activity was a net use of cash of $94 million in the first nine months of 2004 compared with a $223 million net use of cash in the first nine months of 2003, reflecting lower customer generated financing requirements. While the Corporation expects that 2004 customer financing activity will be a net use of funds, actual funding is subject to usage under existing customer financing commitments during the remainder of the year. The Corporation had financing and rental commitments of approximately $1.3 billion and $1.2 billion related to commercial aircraft at September 30, 2004 and December 31, 2003, respectively. The Corporation may also arrange for third-party investors to assume a portion of its commitments.

 

Net cash flows used in financing activities increased $101 million in the first nine months of 2004 compared with the same period of 2003. The increase reflects higher share repurchases and dividend payments partially offset by higher stock option exercises and lower debt repayments, following the 2003 repayment of debt assumed in the Chubb acquisition. In September 2004, the Corporation filed a shelf registration statement with the Securities and Exchange Commission, which, together with existing registration statements, allows the Corporation to issue up to $2 billion of additional debt and equity securities.

 

28


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

The Corporation repurchased $688 million of Common Stock, representing approximately 7.8 million shares, in the first nine months of 2004 under previously announced share repurchase programs. In October 2002, the Corporation announced that the Board of Directors authorized the repurchase of up to 30 million shares. The authorization replaced the previous share repurchase authority. At September 30, 2004 approximately 11.7 million shares remain available for repurchase under the authorized program. The Corporation expects total share repurchases in 2004 to be at least $900 million; however, total repurchases may vary depending upon the level of other investing activities. The share repurchase program continues to be a use of the Corporation’s cash flows and is expected to offset the dilutive effect of the issuance of stock and options under stock-based employee benefit programs.

 

The funded status of the Corporation’s pension plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. The Corporation can contribute cash to its plans at its discretion and made $559 million of voluntary cash contributions to its global pension plans during the first nine months of 2004. The Corporation expects total voluntary contributions to its global pension plans in 2004 to be at least $700 million.

 

The Corporation manages its worldwide cash requirements considering available funds among the many subsidiaries through which it conducts its business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of the Corporation’s subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations. The Corporation has and will continue to transfer cash from those subsidiaries to the parent and to other international subsidiaries when it is cost effective to do so.

 

Management believes that its existing cash position and other available sources of liquidity are sufficient to meet current and anticipated requirements for the foreseeable future. Although variations in acquisition spending could cause changes in debt-to-capital levels, management anticipates that the year-end 2004 debt-to-capital level will be slightly lower than the year-end 2003 level.

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

In its 2003 Form 10-K, the Corporation disclosed its off-balance sheet arrangements and contractual obligations in compliance with the Securities and Exchange Commission’s final ruling on the “Disclosure in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations.” As discussed in the Notes to the Condensed Consolidated Financial Statements, in the first quarter of 2004, the Corporation entered into a new guarantee related to a Sikorsky-Lockheed joint venture. There have been no other material changes to off-balance sheet arrangements or contractual obligations outside the ordinary course of business since December 31, 2003.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There has been no significant change in the Corporation’s exposure to market risk during the first nine months of 2004. For discussion of the Corporation’s exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in the Corporation’s Annual Report incorporated by reference in Form 10-K for the calendar year 2003.

 

Item 4. Controls and Procedures

 

As of the end of the quarter ended September 30, 2004, management, including the Corporation’s Chief Executive Officer and principal financial officers, has evaluated the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based upon that evaluation, and as of the end of the quarter for which this report is made, the Chief Executive Officer and principal financial officers concluded that the disclosure controls and procedures were effective, in all material

 

29


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

respects, to ensure that information required to be disclosed in the reports the Corporation files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

 

There has been no change in the Corporation’s internal control over financial reporting during the Corporation’s quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

During the first nine months of 2004, the Corporation invested $341 million in the acquisition of businesses. As part of its ongoing integration activities, the Corporation is continuing to incorporate its controls and procedures into these recently acquired businesses.

 

30


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

 

This report on Form 10-Q 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 the future operating and financial performance of the Corporation, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate” and other words of similar meaning in connection with a discussion of future operating or financial performance. These include, among others, statements relating to:

 

  Future earnings and other measures of financial performance

 

  Future cash flow and uses of cash

 

  The effect of economic downturns or growth in particular regions

 

  The effect of changes in the level of activity in particular industries or markets

 

  The scope, nature or impact of acquisition activity and integration into the Corporation’s businesses

 

  Product developments and new business opportunities

 

  Restructuring costs and savings

 

  The outcome of contingencies

 

  Future repurchases of Common Stock

 

  Future levels of indebtedness and capital spending

 

  Pension plan assumptions and future contributions.

 

All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. This Quarterly Report on Form 10-Q includes important information as to risk factors in the “Notes to Condensed Consolidated Financial Statements” under the heading “Contingent Liabilities” and in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Business Environment,” “Critical Accounting Estimates,” “Results of Continuing Operations,” and “Liquidity and Financial Condition.” The Corporation’s Annual Report on Form 10-K for the calendar year 2003 also includes important information as to risk factors in the “Business” section under the headings “General,” “Description of Business by Segment” and “Other Matters Relating to the Corporation’s Business as a Whole” and in the “Legal Proceedings” section. Additional important information as to risk factors is included in the Corporation’s 2003 Annual Report to Shareowners in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Business Environment,” “Critical Accounting Estimates,” “Environmental Matters” and “Restructuring and Other Costs.” For additional information identifying factors that may cause actual results to vary materially from those stated in the forward-looking statements, see the Corporation’s reports on Forms 10-Q and 8-K filed with the Securities and Exchange Commission from time to time.

 

31


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Part II – Other Information

 

Item 1. Legal Proceedings

 

As previously disclosed, the European Commission’s competition directorate (the “Commission”) conducted inspections earlier this year 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. Based on the results of its own internal investigation, the Corporation believes that some Otis employees in limited European locations engaged in activities at a local level in violation of Otis and Corporation policies, and may have violated applicable competition law. It is still too early in the Commission’s investigation for the Corporation to reasonably estimate the range of civil fines to which it would likely be subject. The aggregate amount of such fines, if ultimately imposed, could be material to the Corporation’s operating results for the period in which the liability would be recognized or cash flows for the period in which the fines would be paid. The Corporation does not believe that any such fines would have a material adverse effect on the Corporation’s financial condition, or that the resolution of this matter would have a material adverse effect on Otis’ competitive position.

 

Since the Commission’s investigation became public and the Corporation announced the preliminary results of its internal investigation, class action lawsuits have been filed in various federal district courts in the United States naming the Corporation, Otis and others as defendants and alleging a worldwide agreement among elevator and escalator manufacturers to fix prices in violation of the Sherman Act. The plaintiffs purport to represent injured parties worldwide that have allegedly purchased elevators, escalators, or elevator and escalator repair services from the Corporation, Otis, and other defendants. These lawsuits will likely be consolidated through the Multi-District Litigation procedures available in the United States. The lawsuits do not specify the amount of damages claimed. The Corporation believes that these lawsuits are the result of press reports about the Commission’s investigation and that they are devoid of merit. The Corporation will defend them vigorously.

 

As previously reported, a qui tam relator filed a complaint in July 1997 against the Corporation and its subsidiary, Norden Systems, Inc., in the U.S. District Court in Connecticut (U.S. ex rel. Drake v. Norden Systems, Inc. and UTC, No. 394CV00963) alleging that the Corporation and Norden are liable under the civil False Claims Act for violating U.S. Government rules on accounting for fixed assets. The qui tam relator claimed unspecified damages and penalties. The Government declined to intervene. In February 2003, the District Court granted the Corporation’s motion to dismiss the case for lack of prosecution and the relator appealed. In July 2004, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of the claims against the Corporation, but remanded certain of the claims against Norden back to the District Court for further proceedings. The civil False Claims Act provides for treble damages and penalties of up to $10,000 per false claim submitted to the Government. The number of false claims, if any, implicated by the remaining claims cannot currently be ascertained; however, if determined adversely to Norden, the number could result in significant damages and penalties, which the Corporation might be required to pay. The Corporation believes the claims against Norden are without merit, and intends to continue to defend this matter vigorously.

 

Carrier Corporation has reached an agreement in principle with the U.S. Environmental Protection Agency (“EPA”) to resolve its current liability at the Puente Valley Operable Unit Superfund Site in California. Under the proposed agreement, Carrier would pay approximately $125,000 and undertake an environmental project for approximately $500,000, in settlement of claims for civil penalties related to alleged noncompliance with an administrative order. The

 

32


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Corporation expects the proposed agreement with the EPA to be finalized in a consent decree subject to approval by the U.S. District Court for the Central District of California, which is expected in the first half of 2005. Management believes that the resolution of this matter will not have a material adverse effect upon the Corporation’s competitive position, financial position or results of operations.

 

Except as noted above, there have been no material developments in legal proceedings. For a description of previously reported legal proceedings, refer to Part I, Item 3, “Legal Proceedings”, of the Corporation’s Annual Report on Form 10-K for 2003 and Part II, Item 1, “Legal Proceedings”, of the Corporation’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.

 

33


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

2004


   Total
Number of
Shares
Purchased
(000’s)


   Average
Price Paid
per Share


  

Total Number of
Shares Purchased as
Part of a Publicly
Announced Program

(000’s)


  

Maximum Number of
Shares that may yet
be Purchased Under
the Program

(000’s)


July 1 – July 31

   93    $ 75.21    0    13,916

August 1 – August 31

   901      90.17    799    13,117

September 1 – September 30

   1,527      92.88    1,394    11,723
    
  

  
  

Total

   2,521    $ 93.49    2,193    11,723
    
  

  
  

 

In October 2002, the Corporation announced that the Board of Directors authorized the repurchase of up to 30 million shares of the Corporation’s Common Stock. Shares may be purchased on the open market, in privately negotiated transactions, or both. The Corporation may also repurchase shares outside of the program in connection with stock swap exercises of employee stock options. Approximately 328 thousand shares were repurchased in non-cash stock swap transactions during the quarter.

 

Item 6. Exhibits

 

(10.1)    Restricted Stock Award Schedule of Terms and Form of Award relating to the United Technologies Corporation Long Term Incentive Plan (previously filed as Exhibit 10.11 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1989, as amended by Amendment No. 1 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1995 and Amendment No. 2 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 2003).*
(10.2)    Nonqualified Stock Option Award Schedule of Terms and Form of Award relating to the United Technologies Corporation Long-Term Incentive Plan (previously filed as Exhibit 10.11 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1989, as amended by Amendment No. 1 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1995 and Amendment No. 2 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 2003).*
(10.3)    Restricted Stock Unit Award relating to the United Technologies Corporation Directors’ Restricted Stock/Unit Program (previously filed as Exhibit 10(xiii) to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1992). *

 

34


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

(10.4)    Form of Award relating to the United Technologies Corporation Nonemployee Director Stock Option Plan (previously filed as Exhibit 10.17 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1995, as amended by Amendment 1 thereto (previously filed as Exhibit 10(iii)(A)(2) to the Corporation’s Report on Form 10-Q for quarterly period ended June 30, 2000), Amendment 2 thereto (previously filed as Exhibit 10(iii)(A)(1) to the Corporation’s Report on Form 10-Q for quarterly period ended June 30, 2001), Amendment 3 thereto (previously filed as Exhibit 10.17 to the Corporation’s Annual Report on Form 10-K for fiscal year ending December 31, 2001), Amendment 4 thereto (previously filed as Exhibit 10.12 to the Corporation’s Annual Report on Form 10-K for fiscal year ending December 31, 2002) and Amendment 5 thereto (previously filed as Exhibit 10.12 to the Corporation’s Annual Report on Form 10-K for fiscal year ending December 31, 2003). *
(10.5)    Recognition Stock Option Program Prospectus and Statement of Award relating to the United Technologies Corporation Employee Stock Option Plan (previously filed as Exhibit 10.13 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 2002, as amended by Amendment 1, filed as Exhibit 10.13 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 2003).*
(10.6)    Continuous Improvement Incentive Program Non-qualified Stock Option and Dividend Equivalent Award Schedule of Terms and Forms of Award relating to the United Technologies Corporation Long Term Incentive Plan (previously filed as Exhibit 10.11 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1989, as amended by Amendment No. 1 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1995 and Amendment No. 2 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 2003).*
(10.7)    United Technologies Corporation Executive Leadership Program, amending and restating the United Technologies Corporation Executive Disability, Income Protection and Standard Separation Agreement Plan (previously filed as Exhibit 10 (xii) to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1992) and the following related agreements: Executive Leadership Group Agreement, Executive Leadership Group Perquisite Allowance Account Deferral Agreement and Executive Leadership Group Retirement Agreement.*
(10.8)    Retainer Payment Election Form relating to the United Technologies Corporation Board of Directors Deferred Stock Unit Plan (previously filed as Exhibit 10.14 to the Corporation’s Annual Report on Form 10-K for fiscal year ended 1995, as amended by Amendment No. 1 thereto (incorporated by reference to Exhibit 10(iii)(A)(1) to the Corporation’s Report on Form 10-Q for quarterly period ended June 30, 2000)).*
(12)    Statement re: computation of ratio of earnings to fixed charges. *
(15)    Letter re: unaudited interim financial information. *
(31)    Rule 13a-14(a)/15d-14(a) Certifications. *
(32)    Section 1350 Certifications. *
     *Submitted electronically herewith.

 

35


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

       

UNITED TECHNOLOGIES CORPORATION

Dated:

 

October 27, 2004

      By:   /s/    JAMES E. GEISLER        
                James E. Geisler
                Vice President, Finance

Dated:

 

October 27, 2004

      By:   /s/    GREGORY J. HAYES        
                Gregory J. Hayes
                Vice President, Accounting and Control;
                Controller

Dated:

 

October 27, 2004

      By:   /s/    WILLIAM H. TRACHSEL        
                William H. Trachsel
                Senior Vice President and General Counsel

 

36


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

EXHIBIT INDEX

 

(10.1)    Restricted Stock Award Schedule of Terms and Form of Award relating to the United Technologies Corporation Long Term Incentive Plan (previously filed as Exhibit 10.11 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1989, as amended by Amendment No. 1 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1995 and Amendment No. 2 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 2003).*
(10.2)    Nonqualified Stock Option Award Schedule of Terms and Form of Award relating to the United Technologies Corporation Long-Term Incentive Plan (previously filed as Exhibit 10.11 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1989, as amended by Amendment No. 1 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1995 and Amendment No. 2 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 2003).*
(10.3)    Restricted Stock Unit Award relating to the United Technologies Corporation Directors’ Restricted Stock/Unit Program (previously filed as Exhibit 10(xiii) to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1992). *
(10.4)    Form of Award relating to the United Technologies Corporation Nonemployee Director Stock Option Plan (previously filed as Exhibit 10.17 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1995, as amended by Amendment 1 thereto (previously filed as Exhibit 10(iii)(A)(2) to the Corporation’s Report on Form 10-Q for quarterly period ended June 30, 2000), Amendment 2 thereto (previously filed as Exhibit 10(iii)(A)(1) to the Corporation’s Report on Form 10-Q for quarterly period ended June 30, 2001), Amendment 3 thereto (previously filed as Exhibit 10.17 to the Corporation’s Annual Report on Form 10-K for fiscal year ending December 31, 2001), Amendment 4 thereto (previously filed as Exhibit 10.12 to the Corporation’s Annual Report on Form 10-K for fiscal year ending December 31, 2002) and Amendment 5 thereto (previously filed as Exhibit 10.12 to the Corporation’s Annual Report on Form 10-K for fiscal year ending December 31, 2003). *
(10.5)    Recognition Stock Option Program Prospectus and Statement of Award relating to the United Technologies Corporation Employee Stock Option Plan (previously filed as Exhibit 10.13 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 2002, as amended by Amendment 1, filed as Exhibit 10.13 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 2003.*
(10.6)    Continuous Improvement Incentive Program Non-qualified Stock Option and Dividend Equivalent Award Schedule of Terms and Forms of Award relating to the United Technologies Corporation Long Term Incentive Plan (previously filed as Exhibit 10.11 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1989, as amended by Amendment No. 1 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1995 and Amendment No. 2 filed as Exhibit 10.6 to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 2003).*
(10.7)    United Technologies Corporation Executive Leadership Program, amending and restating the United Technologies Corporation Executive Disability, Income Protection and Standard Separation Agreement Plan (previously filed as Exhibit 10 (xii) to the Corporation’s Annual Report on Form 10-K for fiscal year ended December 31, 1992) and the following related agreements: Executive Leadership Group Agreement, Executive Leadership Group Perquisite Allowance Account Deferral Agreement and Executive Leadership Group Retirement Agreement.*
(10.8)    Retainer Payment Election Form relating to the United Technologies Corporation Board of Directors Deferred Stock Unit Plan (previously filed as Exhibit 10.14 to the Corporation’s Annual Report on Form 10-K for fiscal year ended 1995, as amended by Amendment No. 1 thereto (incorporated by reference to Exhibit 10(iii)(A)(1) to the Corporation’s Report on Form 10-Q for quarterly period ended June 30, 2000)).*
(12)    Statement re: computation of ratio of earnings to fixed charges. *

 

37


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

 

(15)    Letter re: unaudited interim financial information. *
(31)    Rule 13a-14(a)/15d-14(a) Certifications. *
(32)    Section 1350 Certifications. *

 

* Submitted electronically herewith.

 

38