NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at September 30, 2019 and for the quarters and nine months ended September 30, 2019 and 2018 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our Annual Report to Shareowners (2018 Annual Report) incorporated by reference in our Annual Report on Form 10-K for calendar year 2018 (2018 Form 10-K).
Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets
Business Acquisitions. During the nine months ended September 30, 2019, our investment in business acquisitions was $39 million, which consisted of small acquisitions at Otis.
On June 9, 2019, UTC entered into a merger agreement with Raytheon Company (“Raytheon”) providing for an all-stock merger of equals transaction. The Raytheon merger agreement provides, among other things, that each share of Raytheon common stock issued and outstanding immediately prior to the closing of the Raytheon merger (except for shares held by Raytheon as treasury stock) will be converted into the right to receive 2.3348 shares of UTC common stock. Upon the closing of the Raytheon merger, Raytheon will become a wholly-owned subsidiary of UTC, and UTC will change its name to Raytheon Technologies Corporation. On October 11, 2019, the shareowners of UTC and Raytheon approved the proposals necessary to complete the Raytheon merger. The Raytheon merger is expected to close in the first half of 2020 and is subject to customary closing conditions, including receipt of required regulatory approvals, as well as the completion of UTC's previously announced separation of its Otis and Carrier businesses.
On November 26, 2018, we completed the acquisition of Rockwell Collins (the "Rockwell Acquisition"), a leader in aviation and high-integrity solutions for commercial and military customers as well as leading-edge avionics, flight controls, aircraft interior and data connectivity solutions. Under the terms of the Rockwell acquisition agreement, each share of common stock, par value $0.01 per share, of Rockwell Collins issued and outstanding immediately prior to the effective time of the Rockwell Acquisition (other than shares held by Rockwell Collins, the Company, Riveter Merger Sub Corp or any of their respective wholly owned subsidiaries) was converted into the right to receive (1) $93.33 in cash, without interest, and (2) 0.37525 shares of Company common stock (together, the “Acquisition Consideration”), less any applicable withholding taxes, with cash paid in lieu of fractional shares. The total aggregate consideration payable in the Rockwell Acquisition was $15.5 billion in cash ($14.9 billion net of cash acquired) and 62.2 million shares of Company common stock. In addition, $7.8 billion of Rockwell Collins debt was outstanding at the time of the Rockwell Acquisition. This equated to a total enterprise value of $30.6 billion, including the $7.8 billion of Rockwell Collins' outstanding debt.
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Amount
|
|
Cash consideration paid for Rockwell Collins outstanding common stock & equity awards
|
|
$
|
15,533
|
|
|
Fair value of UTC common stock issued for Rockwell Collins outstanding common stock & equity awards
|
|
7,960
|
|
|
Total consideration transferred
|
|
$
|
23,493
|
|
The cash consideration utilized for the Rockwell Acquisition was partially financed through the previously disclosed issuance of $11.0 billion aggregate principal notes on August 16, 2018 for net proceeds of $10.9 billion. For the remainder of the cash consideration, we utilized repatriated cash and cash equivalents and cash flow generated from operating activities.
Preliminary Allocation of Consideration Transferred to Net Assets Acquired:
The following amounts represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Rockwell Collins acquisition. The final determination of the fair value of certain assets and liabilities will be completed up to a one year measurement period from the date of acquisition as required by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, “Business Combinations”. As of September 30, 2019, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed have not yet been finalized, including the validation of the underlying cash flows used to determine the fair value of the identified intangible assets. The size and breadth of the Rockwell Collins acquisition necessitates use of the one year measurement period to adequately analyze all the factors used in establishing the asset and liability fair values as of the
acquisition date, including, but not limited to, intangible assets, inventory, real property, leases, deferred tax liabilities related to the unremitted earnings of foreign subsidiaries, certain reserves and the related tax impacts of any adjustments. The table below reflects adjustments recorded as of September 30, 2019. Any additional potential adjustments could be material in relation to the preliminary values presented below:
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Cash and cash equivalents
|
$
|
640
|
|
|
Accounts receivable, net
|
1,665
|
|
|
Inventory, net
|
1,512
|
|
|
Contract assets, current
|
291
|
|
|
Other assets, current
|
252
|
|
|
Future income tax benefits
|
38
|
|
|
Fixed assets, net
|
1,558
|
|
|
Intangible assets:
|
|
|
Customer relationships
|
8,220
|
|
|
Tradenames/trademarks
|
1,870
|
|
|
Developed technology
|
600
|
|
|
Other assets
|
217
|
|
|
Total identifiable assets acquired
|
16,863
|
|
|
|
|
|
Short-term borrowings
|
2,254
|
|
|
Accounts payable
|
520
|
|
|
Accrued liabilities
|
1,657
|
|
|
Contract liabilities, current
|
299
|
|
|
Long-term debt
|
5,530
|
|
|
Future pension and postretirement benefit obligation
|
502
|
|
|
Other long-term liabilities
|
3,464
|
|
|
Noncontrolling interest
|
6
|
|
|
Total liabilities acquired
|
14,232
|
|
|
Total identifiable net assets
|
2,631
|
|
|
Goodwill
|
20,862
|
|
|
Total consideration transferred
|
$
|
23,493
|
|
In order to allocate the consideration transferred for Rockwell Collins, the fair values of all identifiable assets and liabilities were established. For accounting and financial reporting purposes, fair value is defined under FASB ASC Topic 820, “Fair Value Measurements and Disclosures” as the price that would be received upon sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. Use of different estimates and judgments could yield different results. Fair value adjustments to Rockwell Collins' identified assets and liabilities resulted in an increase in inventory and fixed assets of $282 million and $256 million, respectively. In determining the fair value of identifiable assets acquired and liabilities assumed, a review was conducted for any significant contingent assets or liabilities existing as of the acquisition date. The preliminary assessment did not note any significant contingencies related to existing legal or government action.
The fair values of the customer relationship and related program intangible assets, which include the related aerospace program original equipment ("OEM") and aftermarket cash flows, were determined by using an “income approach." Under this approach, the net earnings attributable to the asset or liability being measured are isolated using the discounted projected net cash flows. These projected cash flows are isolated from the projected cash flows of the combined asset group over the remaining economic life of the intangible asset or liability being measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. Our estimates of market participant net cash flows considered historical and projected pricing, remaining developmental effort, operational performance, including company specific synergies, aftermarket retention, product life cycles, material and labor pricing, and other relevant customer, contractual and market factors. Where appropriate, the net cash flows are probability-adjusted to reflect the uncertainties associated with the underlying assumptions as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future cash flows are then discounted to present value using an appropriate discount rate. The customer relationship and related program intangible assets are being amortized on a straight-line basis (which approximates the economic pattern of benefits) over the estimated economic life of the underlying programs of 10 to 20 years. The developed technology intangible asset is being amortized over the economic pattern of benefit. The fair value of the tradename intangible assets were determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the valuation of the tradename and discounted to present value using an appropriate discount rate. The tradename intangible assets have been determined to have an indefinite life. The intangible assets included above consist of the following:
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Estimated
Fair Value
|
|
Estimated
Life
|
|
Acquired customer relationships
|
$
|
8,220
|
|
|
10-20 years
|
|
Acquired tradenames/trademarks
|
1,870
|
|
|
Indefinite
|
|
Acquired developed technology
|
600
|
|
|
15 years
|
|
|
$
|
10,690
|
|
|
|
We also identified customer contractual obligations on certain contracts with economic returns that are lower than could be realized in market transactions as of the acquisition date. We measured these liabilities under the measurement provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” which is based on the price to transfer the obligation to a market participant at the measurement date, assuming that the liability will remain outstanding in the marketplace. Based on the estimated net cash outflows of the programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, we recorded assumed liabilities of approximately $1,020 million. These liabilities will be liquidated in accordance with the underlying pattern of obligations, as reflected by the expenses incurred on the contracts. Total consumption of the contractual obligation for the next five years is expected to be as follows: $36 million remaining in 2019, $114 million in 2020, $101 million in 2021, $106 million in 2022, and $91 million in 2023.
Acquisition-Related Costs:
Acquisition-related costs have been expensed as incurred. In the nine months ended September 30, 2019 and 2018, approximately $30 million and $71 million, respectively, of transaction and integration costs have been incurred. These costs were recorded in Selling, general and administrative expenses within the Condensed Consolidated Statement of Operations.
Supplemental Pro-Forma Data:
Rockwell Collins' results of operations have been included in UTC’s financial statements for the period subsequent to the completion of the acquisition on November 26, 2018. Rockwell Collins contributed sales of approximately $6.9 billion and operating profit of approximately $1.1 billion for the nine months ended September 30, 2019. The following unaudited supplemental pro-forma data presents consolidated information as if the acquisition had been completed on January 1, 2017. The pro-forma results were calculated by combining the results of UTC with the stand-alone results of Rockwell Collins for the pre-acquisition periods, which were adjusted to account for certain costs that would have been incurred during this pre-acquisition period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(dollars in millions, except per share amounts)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net sales
|
$
|
19,496
|
|
|
$
|
18,664
|
|
|
$
|
57,490
|
|
|
$
|
54,795
|
|
|
Net income attributable to common shareowners
|
$
|
1,149
|
|
|
$
|
1,455
|
|
|
$
|
4,534
|
|
|
$
|
5,196
|
|
|
Basic earnings per share of common stock
|
$
|
1.34
|
|
|
$
|
1.70
|
|
|
$
|
5.31
|
|
|
$
|
6.09
|
|
|
Diluted earnings per share of common stock
|
$
|
1.33
|
|
|
$
|
1.68
|
|
|
$
|
5.25
|
|
|
$
|
6.02
|
|
The unaudited supplemental pro-forma data above includes the following significant adjustments made to account for certain costs which would have been incurred if the acquisition had been completed on January 1, 2017, as adjusted for the applicable tax impact.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Amortization of inventory and fixed asset fair value adjustment 1
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
141
|
|
|
$
|
(15
|
)
|
|
Amortization of acquired Rockwell Collins intangible assets, net 2
|
—
|
|
|
(51
|
)
|
|
—
|
|
|
(156
|
)
|
|
Utilization of contractual customer obligation 3
|
—
|
|
|
1
|
|
|
—
|
|
|
11
|
|
|
UTC/Rockwell Collins fees for advisory, legal, accounting services 4
|
1
|
|
|
17
|
|
|
4
|
|
|
60
|
|
|
Interest expense incurred on acquisition financing, net 5
|
—
|
|
|
(40
|
)
|
|
—
|
|
|
(192
|
)
|
|
Elimination of capitalized pre-production engineering amortization 6
|
—
|
|
|
20
|
|
|
—
|
|
|
51
|
|
|
Adjustment to net periodic pension cost 7
|
—
|
|
|
11
|
|
|
—
|
|
|
33
|
|
|
Adjustment to reflect the adoption of ASC 606 8
|
—
|
|
|
29
|
|
|
—
|
|
|
87
|
|
|
Elimination of entities held for sale 9
|
—
|
|
|
(5
|
)
|
|
(5
|
)
|
|
(18
|
)
|
|
|
$
|
1
|
|
|
$
|
(23
|
)
|
|
$
|
140
|
|
|
$
|
(139
|
)
|
|
|
|
|
1
|
Reflects the elimination of the inventory step-up amortization recorded by UTC in 2019 as this would have been completed within the first two quarters of 2017. Additionally, this adjustment reflects the amortization of the fixed asset fair value adjustment as of the acquisition date.
|
|
|
|
|
2
|
Reflects the additional amortization of the acquired Rockwell Collins' intangible assets recognized at fair value in purchase accounting and eliminates the historical Rockwell Collins intangible asset amortization expense.
|
|
|
|
|
3
|
Reflects the additional amortization of liabilities recognized for acquired contracts with terms less favorable than could be realized in market transactions as of the acquisition date and eliminates Rockwell Collins historical amortization of these liabilities.
|
|
|
|
|
4
|
Reflects the elimination of transaction-related fees incurred by UTC and Rockwell Collins in connection with the acquisition and assumes all of the fees were incurred during the first quarter of 2017.
|
|
|
|
|
5
|
Reflects the additional interest expense incurred on debt to finance our acquisition of Rockwell Collins and reduces interest expense for the debt fair value adjustment which would have been amortized.
|
|
|
|
|
6
|
Reflects the elimination of Rockwell Collins capitalized pre-production engineering amortization to conform to UTC policy.
|
|
|
|
|
7
|
Reflects adjustments for the elimination of amortization of prior service cost and actuarial loss amortization, which was recorded by Rockwell Collins, as a result of fair value purchase accounting, net of the impact of the revised pension and post-retirement benefit (expense) as determined under UTC’s plan assumptions.
|
|
|
|
|
8
|
Reflects adjustments to Rockwell Collins revenue recognition as if they adopted the New Revenue Standard as of January 1, 2018 and primarily relates to capitalization of contract costs and changes in timing of sales recognition for contracts requiring an over time method of revenue recognition, partially offset by deferral of revenue recognized on OEM product engineering and development.
|
|
|
|
|
9
|
Reflects the elimination of entities required to be sold for regulatory approvals.
|
The unaudited supplemental pro-forma financial information does not reflect the potential realization of cost savings related to the integration of the two companies. Further, the pro-forma data should not be considered indicative of the results that would have occurred if the acquisition and related financing had been consummated on January 1, 2017, nor are they indicative of future results.
Dispositions. Cash inflows related to dispositions during the nine months ended September 30, 2019 were $134 million and primarily consisted of the dispositions of businesses held for sale associated with the Rockwell Collins acquisition. In accordance with conditions imposed for regulatory approval of the acquisition, Rockwell Collins was required to dispose of certain businesses. These businesses were held separate from UTC’s and Rockwell Collins' ongoing businesses pursuant to regulatory requirements. Definitive agreements to sell each of the businesses were entered into prior to the completion of UTC's acquisition of Rockwell Collins. The related assets and liabilities of these businesses had been accounted for as held for sale at fair value less cost to sell. As of December 31, 2018, assets held for sale of $175 million were included within Other assets, current and liabilities held for sale of $40 million were included within Accrued liabilities on the Consolidated Balance Sheet. The major classes of assets and liabilities primarily include net Inventory of $51 million and net Fixed assets of $37 million. In the first quarter of 2019, Rockwell Collins completed the sale of all businesses which were held for sale as of December 31, 2018.
On November 26, 2018, the Company announced its intention to separate into three independent companies. Following the separations, the Company will operate as an aerospace company comprised of Collins Aerospace Systems and the Pratt & Whitney businesses, and Otis and Carrier will become independent companies. The proposed separations are expected to be effected through spin-offs of Otis and Carrier that are intended to be tax-free for the Company’s shareowners for U.S. federal income tax purposes, and are expected to be completed in the first half of 2020. Separation of Otis and Carrier from UTC via spin-off transactions will be subject to the satisfaction of customary conditions, including, among others, final approval by the Company’s Board of Directors, receipt of tax rulings in certain jurisdictions and/or a tax opinion from external counsel (as applicable), the filing with the Securities and Exchange Commission (SEC) and effectiveness of Form 10 registration statements, and satisfactory completion of financing (subject to UTC’s agreement to consummate the distributions pursuant to, and subject to the terms and conditions of, the Raytheon merger agreement). In the nine months ended September 30, 2019, $342 million of Selling, general and administrative costs and $618 million of tax charges have been incurred related to the portfolio separation activities.
Goodwill. Changes in our goodwill balances for the nine months ended September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Balance as of
January 1, 2019
|
|
Goodwill
Resulting from Business Combinations
|
|
Foreign Currency Translation and Other
|
|
Balance as of September 30, 2019
|
|
Otis
|
$
|
1,688
|
|
|
$
|
14
|
|
|
$
|
(80
|
)
|
|
$
|
1,622
|
|
|
Carrier
|
9,835
|
|
|
1
|
|
|
(136
|
)
|
|
9,700
|
|
|
Pratt & Whitney
|
1,567
|
|
|
1
|
|
|
(4
|
)
|
|
1,564
|
|
|
Collins Aerospace Systems
|
35,001
|
|
|
394
|
|
|
(261
|
)
|
|
35,134
|
|
|
Total Segments
|
48,091
|
|
|
410
|
|
|
(481
|
)
|
|
48,020
|
|
|
Eliminations and other
|
21
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
Total
|
$
|
48,112
|
|
|
$
|
410
|
|
|
$
|
(481
|
)
|
|
$
|
48,041
|
|
Goodwill increased $394 million at Collins Aerospace Systems resulting from several insignificant purchase accounting adjustments made during the nine months ended September 30, 2019, including a reduction in acquired customer relationship intangible assets of $100 million and a reduction in fixed assets of approximately $130 million.
Intangible Assets. Identifiable intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
(dollars in millions)
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Gross Amount
|
|
Accumulated
Amortization
|
|
Amortized:
|
|
|
|
|
|
|
|
|
Service portfolios
|
$
|
2,105
|
|
|
$
|
(1,607
|
)
|
|
$
|
2,164
|
|
|
$
|
(1,608
|
)
|
|
Patents and trademarks
|
353
|
|
|
(244
|
)
|
|
361
|
|
|
(236
|
)
|
|
Collaboration intangible assets
|
4,770
|
|
|
(857
|
)
|
|
4,509
|
|
|
(649
|
)
|
|
Customer relationships and other
|
22,594
|
|
|
(5,318
|
)
|
|
22,525
|
|
|
(4,560
|
)
|
|
|
29,822
|
|
|
(8,026
|
)
|
|
29,559
|
|
|
(7,053
|
)
|
|
Unamortized:
|
|
|
|
|
|
|
|
|
Trademarks and other
|
3,890
|
|
|
—
|
|
|
3,918
|
|
|
—
|
|
|
Total
|
$
|
33,712
|
|
|
$
|
(8,026
|
)
|
|
$
|
33,477
|
|
|
$
|
(7,053
|
)
|
In addition to customer relationship intangible assets obtained through business combinations, customer relationship intangible assets include payments made to our customers to secure certain contractual rights. Such payments are capitalized when distinct rights are obtained and sufficient incremental cash flows to support the recoverability of the assets have been established. Otherwise, the applicable portion of the payments is expensed. We amortize these intangible assets based on the underlying pattern of economic benefit, which may result in an amortization method other than straight-line. In the aerospace industry, amortization based on the pattern of economic benefit generally results in lower amortization expense during the development period with amortization expense increasing as programs enter full production and aftermarket cycles. If a pattern of economic benefit cannot be reliably determined, a straight-line amortization method is used. We classify amortization of such payments as a reduction of sales. The collaboration intangible assets are amortized based upon the pattern of economic benefits as represented by the underlying cash flows.
Amortization of intangible assets for the quarter and nine months ended September 30, 2019 was $369 million and $1,091 million, respectively, compared with $225 million and $680 million for the same periods of 2018. The following is the expected amortization of intangible assets for the years 2019 through 2024, which reflects the pattern of expected economic benefit on certain aerospace intangible assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Remaining 2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Amortization expense
|
|
$
|
363
|
|
|
$
|
1,422
|
|
|
$
|
1,410
|
|
|
$
|
1,410
|
|
|
$
|
1,404
|
|
|
$
|
1,370
|
|
Note 2: Revenue Recognition
We account for revenue in accordance with ASC Topic 606: Revenue from Contracts with Customers.
Performance Obligations. A performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Some of our contracts with customers contain a single performance obligation, while others contain multiple performance obligations most commonly when a contract spans multiple phases of the product life-cycle such as development, production, maintenance and support. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on its standalone selling price.
We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price, including contractual discounts, contract incentive payments, estimates of award fees, unfunded contract value under U.S. Government contracts, and other sources of variable consideration, when determining the transaction price of each contract. We include variable consideration in the estimated transaction price when there is a basis to reasonably estimate the amount. These estimates are based on historical experience, anticipated performance and our best judgment at the time. We also consider whether our contracts provide customers with significant financing. Generally, our contracts do not contain significant financing.
Timing of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms.
Remaining Performance Obligations (RPO). RPO represents the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of September 30, 2019 our total RPO was approximately $127.7 billion compared to
$115.5 billion as of December 31, 2018. Of the total RPO as of September 30, 2019, we expect approximately 43% will be recognized as sales over the following 24 months.
Capitalized Contract Costs. We incur costs for engineering and development of aerospace products directly related to existing or anticipated contracts with customers. Such costs generate or enhance our ability to satisfy our performance obligations under these contracts. We capitalize these costs as contract fulfillment costs to the extent the costs are recoverable from the associated contract margin and subsequently amortize the costs as the OEM products performance obligations are satisfied. In instances where intellectual property does not transfer to the customer, we defer the customer funding of OEM product engineering and development and recognize revenue when the performance obligations related to the OEM products are satisfied. Capitalized net contract fulfillment costs were $1,383 million and $914 million as of September 30, 2019 and December 31, 2018, respectively and are recognized in Other assets in our Condensed Consolidated Balance Sheet. The increase in capitalized net contract fulfillment costs is primarily driven by current year activity in the recently acquired Rockwell Collins businesses.
Contract Assets and Liabilities. Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. Total contract assets and contract liabilities as of September 30, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
September 30, 2019
|
|
December 31, 2018
|
|
Contract assets, current
|
$
|
4,316
|
|
|
$
|
3,486
|
|
|
Contract assets, noncurrent (included within Other assets)
|
1,364
|
|
|
1,142
|
|
|
Total contract assets
|
5,680
|
|
|
4,628
|
|
|
Contract liabilities, current
|
(6,233
|
)
|
|
(5,720
|
)
|
|
Contract liabilities, noncurrent (included within Other long-term liabilities)
|
(5,417
|
)
|
|
(5,069
|
)
|
|
Total contract liabilities
|
(11,650
|
)
|
|
(10,789
|
)
|
|
Net contract liabilities
|
$
|
(5,970
|
)
|
|
$
|
(6,161
|
)
|
Contract assets increased $1,052 million during the nine months ended September 30, 2019 due to revenue recognition in excess of customer billings, primarily on Pratt & Whitney military and commercial aftermarket service agreements and various programs at Collins Aerospace Systems. Contract liabilities increased $861 million during the nine months ended September 30, 2019 primarily due to customer billings in excess of revenue recognized on Pratt & Whitney commercial aftermarket service agreements, at Collins Aerospace Systems across various programs, and on Otis maintenance contracts. We recognized revenue of $4.1 billion during the nine months ended September 30, 2019 related to contract liabilities as of December 31, 2018.
Note 3: Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(dollars in millions, except per share amounts; shares in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net income attributable to common shareowners
|
$
|
1,148
|
|
|
$
|
1,238
|
|
|
$
|
4,394
|
|
|
$
|
4,583
|
|
|
Basic weighted average number of shares outstanding
|
855.1
|
|
|
791.3
|
|
|
854.2
|
|
|
790.6
|
|
|
Stock awards and equity units (share equivalent)
|
9.0
|
|
|
10.5
|
|
|
8.7
|
|
|
10.1
|
|
|
Diluted weighted average number of shares outstanding
|
864.1
|
|
|
801.8
|
|
|
862.9
|
|
|
800.7
|
|
|
Earnings Per Share of Common Stock:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.34
|
|
|
$
|
1.56
|
|
|
$
|
5.14
|
|
|
$
|
5.80
|
|
|
Diluted
|
$
|
1.33
|
|
|
$
|
1.54
|
|
|
$
|
5.09
|
|
|
$
|
5.72
|
|
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period because the effect would be anti-dilutive. In addition, the computation of diluted earnings per share excludes the effect of the potential exercise of stock awards when the awards’ assumed proceeds exceed the average market price of the common shares during the period. For the quarter and nine months ended September 30, 2019, the number of stock awards excluded from the computation was approximately 8.0 million and 11.0 million, respectively. For the quarter and nine months ended September 30, 2018, the number of stock awards excluded from the computation was approximately 5.0 million and 5.2 million, respectively.
Note 4: Inventory, net
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
September 30, 2019
|
|
December 31, 2018
|
|
Raw materials
|
$
|
3,149
|
|
|
$
|
3,052
|
|
|
Work-in-process
|
2,921
|
|
|
2,673
|
|
|
Finished goods
|
5,172
|
|
|
4,358
|
|
|
|
$
|
11,242
|
|
|
$
|
10,083
|
|
Raw materials, work-in-process and finished goods are net of valuation reserves of $1,370 million and $1,270 million as of September 30, 2019 and December 31, 2018, respectively.
Note 5: Borrowings and Lines of Credit
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
September 30, 2019
|
|
December 31, 2018
|
|
Commercial paper
|
$
|
984
|
|
|
$
|
1,257
|
|
|
Other borrowings
|
343
|
|
|
212
|
|
|
Total short-term borrowings
|
$
|
1,327
|
|
|
$
|
1,469
|
|
At September 30, 2019, we had credit agreements with various banks permitting aggregate borrowings of up to $10.35 billion, including: a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement, both of which expire in August 2021; and a $2.0 billion revolving credit agreement and a $4.0 billion term credit agreement, both of which we entered into on March 15, 2019 and which will expire on March 15, 2021 or, if earlier, the date that is 180 days after the date on which each of the separations of Otis and Carrier have been consummated. As of September 30, 2019, there were no borrowings under any of these agreements. The undrawn portions of these revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of September 30, 2019, our maximum commercial paper borrowing limit was $6.35 billion. Commercial paper borrowings at September 30, 2019 include approximately €750 million ($824 million) of euro-denominated commercial paper. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, pension contributions, debt refinancing, dividend payments and repurchases of our common stock. The need for commercial paper borrowings arises when the use of domestic cash for general corporate purposes exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
September 30, 2019
|
|
December 31, 2018
|
|
LIBOR plus 0.350% floating rate notes due 2019 3
|
$
|
350
|
|
|
$
|
350
|
|
|
1.500% notes due 2019 1
|
650
|
|
|
650
|
|
|
1.950% notes due 2019 4
|
—
|
|
|
300
|
|
|
EURIBOR plus 0.15% floating rate notes due 2019 (€750 million principal value) 2
|
824
|
|
|
858
|
|
|
5.250% notes due 2019 4
|
—
|
|
|
300
|
|
|
8.875% notes due 2019
|
271
|
|
|
271
|
|
|
4.875% notes due 2020 1
|
171
|
|
|
171
|
|
|
4.500% notes due 2020 1
|
1,250
|
|
|
1,250
|
|
|
1.900% notes due 2020 1
|
1,000
|
|
|
1,000
|
|
|
EURIBOR plus 0.20% floating rate notes due 2020 (€750 million principal value) 2
|
824
|
|
|
858
|
|
|
8.750% notes due 2021
|
250
|
|
|
250
|
|
|
3.100% notes due 2021 4
|
250
|
|
|
250
|
|
|
3.350% notes due 2021 1
|
1,000
|
|
|
1,000
|
|
|
LIBOR plus 0.650% floating rate notes due 2021 1,3
|
750
|
|
|
750
|
|
|
1.950% notes due 2021 1
|
750
|
|
|
750
|
|
|
1.125% notes due 2021 (€950 million principal value) 1
|
1,044
|
|
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.300% notes due 2022 1
|
500
|
|
|
500
|
|
|
2.800% notes due 2022 4
|
1,100
|
|
|
1,100
|
|
|
3.100% notes due 2022 1
|
2,300
|
|
|
2,300
|
|
|
1.250% notes due 2023 (€750 million principal value) 1
|
824
|
|
|
858
|
|
|
3.650% notes due 2023 1
|
2,250
|
|
|
2,250
|
|
|
3.700% notes due 2023 4
|
400
|
|
|
400
|
|
|
2.800% notes due 2024 1
|
800
|
|
|
800
|
|
|
3.200% notes due 2024 4
|
950
|
|
|
950
|
|
|
1.150% notes due 2024 (€750 million principal value) 1
|
824
|
|
|
858
|
|
|
3.950% notes due 2025 1
|
1,500
|
|
|
1,500
|
|
|
1.875% notes due 2026 (€500 million principal value) 1
|
549
|
|
|
573
|
|
|
2.650% notes due 2026 1
|
1,150
|
|
|
1,150
|
|
|
3.125% notes due 2027 1
|
1,100
|
|
|
1,100
|
|
|
3.500% notes due 2027 4
|
1,300
|
|
|
1,300
|
|
|
7.100% notes due 2027
|
141
|
|
|
141
|
|
|
6.700% notes due 2028
|
400
|
|
|
400
|
|
|
4.125% notes due 2028 1
|
3,000
|
|
|
3,000
|
|
|
7.500% notes due 2029 1
|
550
|
|
|
550
|
|
|
2.150% notes due 2030 (€500 million principal value) 1
|
549
|
|
|
573
|
|
|
5.400% notes due 2035 1
|
600
|
|
|
600
|
|
|
6.050% notes due 2036 1
|
600
|
|
|
600
|
|
|
6.800% notes due 2036 1
|
134
|
|
|
134
|
|
|
7.000% notes due 2038
|
159
|
|
|
159
|
|
|
6.125% notes due 2038 1
|
1,000
|
|
|
1,000
|
|
|
4.450% notes due 2038 1
|
750
|
|
|
750
|
|
|
5.700% notes due 2040 1
|
1,000
|
|
|
1,000
|
|
|
4.500% notes due 2042 1
|
3,500
|
|
|
3,500
|
|
|
4.800% notes due 2043 4
|
400
|
|
|
400
|
|
|
4.150% notes due 2045 1
|
850
|
|
|
850
|
|
|
3.750% notes due 2046 1
|
1,100
|
|
|
1,100
|
|
|
4.050% notes due 2047 1
|
600
|
|
|
600
|
|
|
4.350% notes due 2047 4
|
1,000
|
|
|
1,000
|
|
|
4.625% notes due 2048 1
|
1,750
|
|
|
1,750
|
|
|
Project financing obligations 5
|
307
|
|
|
287
|
|
|
Other (including finance leases)
|
279
|
|
|
287
|
|
|
Total principal long-term debt
|
43,600
|
|
|
44,416
|
|
|
Other (fair market value adjustments, discounts and debt issuance costs)
|
(323
|
)
|
|
(348
|
)
|
|
Total long-term debt
|
43,277
|
|
|
44,068
|
|
|
Less: current portion
|
5,495
|
|
|
2,876
|
|
|
Long-term debt, net of current portion
|
$
|
37,782
|
|
|
$
|
41,192
|
|
|
|
|
|
1
|
We may redeem these notes at our option pursuant to their terms.
|
|
|
|
|
2
|
The three-month EURIBOR rate as of September 30, 2019 was approximately -0.418%. The notes may be redeemed at our option in whole, but not in part, at any time in the event of certain developments affecting U.S. taxation.
|
|
|
|
|
3
|
The three-month LIBOR rate as of September 30, 2019 was approximately 2.0851%.
|
|
|
|
|
4
|
Rockwell Collins debt which remained outstanding following the Rockwell Acquisition.
|
|
|
|
|
5
|
Project financing obligations are associated with the sale of rights to unbilled revenues related to the ongoing activity of an entity owned by Carrier.
|
We had no debt issuances during the nine months ended September 30, 2019 and had the following issuances of debt in 2018:
|
|
|
|
|
|
|
|
|
(dollars and Euro in millions)
|
|
|
|
|
Issuance Date
|
Description of Notes
|
Aggregate Principal Balance
|
|
August 16, 2018:
|
3.350% notes due 20211
|
$
|
1,000
|
|
|
|
3.650% notes due 20231
|
2,250
|
|
|
|
3.950% notes due 20251
|
1,500
|
|
|
|
4.125% notes due 20281
|
3,000
|
|
|
|
4.450% notes due 20381
|
750
|
|
|
|
4.625% notes due 20482
|
1,750
|
|
|
|
LIBOR plus 0.65% floating rate notes due 20211
|
750
|
|
|
|
|
|
|
May 18, 2018:
|
1.150% notes due 20243
|
€
|
750
|
|
|
|
2.150% notes due 20303
|
500
|
|
|
|
EURIBOR plus 0.20% floating rate notes due 20203
|
750
|
|
|
|
|
|
1
|
The net proceeds received from these debt issuances were used to partially finance the cash consideration portion of the purchase price for Rockwell Collins and fees, expenses and other amounts related to the acquisition of Rockwell Collins.
|
|
|
|
|
2
|
The net proceeds from these debt issuances were used to fund the repayment of commercial paper and for other general corporate purposes.
|
|
|
|
|
3
|
The net proceeds received from these debt issuances were used for general corporate purposes.
|
We had the following repayments of debt during the nine months ended September 30, 2019 and the year-ended December 31, 2018:
|
|
|
|
|
|
|
|
|
(dollars and Euro in millions)
|
|
|
|
Repayment Date
|
Description of Notes
|
Aggregate Principal Balance
|
|
July 15, 2019
|
1.950% notes1
|
$
|
300
|
|
|
July 15, 2019
|
5.250% notes1
|
$
|
300
|
|
|
December 14, 2018
|
Variable-rate term loan due 2020 (1 month LIBOR plus 1.25%)1
|
$
|
482
|
|
|
May 4, 2018
|
1.778% junior subordinated notes
|
$
|
1,100
|
|
|
February 22, 2018
|
EURIBOR plus 0.80% floating rate notes
|
€
|
750
|
|
|
February 1, 2018
|
6.80% notes
|
$
|
99
|
|
|
|
|
|
1
|
The notes and term loan were acquired in connection with the Rockwell Collins acquisition and have been subsequently repaid.
|
The average maturity of our long-term debt at September 30, 2019 is approximately 10 years. The average interest expense rate on our total borrowings for the quarters and nine months ended September 30, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Average interest expense rate
|
3.7
|
%
|
|
3.6
|
%
|
|
3.7
|
%
|
|
3.5
|
%
|
On September 27, 2019 we filed a universal shelf registration statement with the SEC for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of debt to be issued under the shelf registration statement.
Note 6: Income Taxes
The increase in the effective tax rate for the quarter ended September 30, 2019 is primarily the result of tax charges connected to the Company’s portfolio separation transactions and the non-deductible impact related to the impairment of an investment at Carrier.
The increase in the effective tax rate for the nine months ended September 30, 2019 is principally related to the items described above offset in part by gains associated with the conclusion of the audit by the Examination Division of the Internal Revenue Service for the UTC 2014, 2015, and 2016 tax years and the filing by a subsidiary of the Company to participate in an amnesty program offered by the Italian Tax Authority in the second quarter of 2019.
We conduct business globally and, as a result, UTC or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, Poland, Singapore, South Korea, Spain, Switzerland, the United Kingdom, and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2008.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. Subject to the impact of the Company’s portfolio separation transactions, it is reasonably possible that a net reduction within the range of $100 million to $600 million of unrecognized tax benefits may occur within the next 12 months as a result of additional worldwide uncertain tax positions, the closure of tax statutes, or the revaluation of current uncertain tax positions arising from the issuance of legislation, regulatory or other guidance or developments in examinations, in appeals, or in the courts. See Note 15, Contingent Liabilities, for discussion regarding uncertain tax positions, included in the above range, related to pending litigation with respect to certain deductions claimed in Germany.
During the quarter, the Company recognized net non-cash gains of approximately $18 million, including pre-tax interest of approximately $5 million, as a result of various federal, state and non-US statute of limitations expirations and settlements with tax authorities. The Examination Division of the Internal Revenue Service is currently auditing Rockwell Collins fiscal tax years 2016 and 2017, prior to its acquisition by UTC, which will continue into 2020.
Note 7: Employee Benefit Plans
Pension and Postretirement Plans. In the quarter ended September 30, 2019, we amended our domestic pension plans to cease accrual of additional benefits for future service and compensation for non-union participants effective December 31, 2019. Beginning January 1, 2020, these participants will earn additional contributions under our domestic savings plan. We utilized the practical expedient and remeasured plan assets and pension benefit obligations for the affected pension plans as of the nearest month-end, August 31, 2019, resulting in a net actuarial loss of $425 million. This reflects a benefit obligation gain of $180 million resulting from the benefit plan change that was offset by remeasurement losses of $605 million. The remeasurement losses are driven by a reduction of 124 basis points in the PBO discount rate as of the remeasurement date compared to December 31, 2018, partially offset by actual asset returns of approximately 17% as of the remeasurement date.
In the quarter ended September 30, 2019, we recorded a curtailment gain of $98 million in the Condensed Consolidated Statement of Operations, due to the recognition of previously unrecognized prior service credits for the affected pension plans. Additionally, as a result of the remeasurement, pension income (excluding curtailment) decreased by approximately $10 million in the quarter ended September 30, 2019.
We sponsor both funded and unfunded domestic and foreign defined pension and other postretirement benefit plans, and defined contribution plans. Contributions to our plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Defined benefit plans
|
$
|
10
|
|
|
$
|
13
|
|
|
$
|
89
|
|
|
$
|
72
|
|
|
Defined contribution plans
|
134
|
|
|
97
|
|
|
421
|
|
|
296
|
|
We made no contributions to our domestic defined benefit pension plans for quarter ended September 30, 2019 and $25 million of contributions in the nine months ended September 30, 2019. There were no contributions to our domestic defined benefit pension plans in the quarter and nine months ended September 30, 2018. Included in the current year contributions to employer sponsored defined contribution plans for the nine months ended September 30, 2019 is $98 million of contributions to the Rockwell Collins participants. The following table illustrates the components of net periodic benefit (income) cost for our defined pension and other postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
Quarter Ended September 30,
|
|
Other Postretirement Benefits
Quarter Ended September 30,
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
88
|
|
|
$
|
94
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
334
|
|
|
274
|
|
|
7
|
|
|
7
|
|
|
Expected return on plan assets
|
(605
|
)
|
|
(558
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of prior service cost (credit)
|
4
|
|
|
(11
|
)
|
|
(10
|
)
|
|
—
|
|
|
Recognized actuarial net loss (gain)
|
66
|
|
|
100
|
|
|
(3
|
)
|
|
(3
|
)
|
|
Net settlement and curtailment (gain) loss
|
(96
|
)
|
|
3
|
|
|
—
|
|
|
—
|
|
|
Total net periodic benefit (income) cost
|
$
|
(209
|
)
|
|
$
|
(98
|
)
|
|
$
|
(6
|
)
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
Nine Months Ended September 30,
|
|
Other Postretirement Benefits
Nine Months Ended September 30,
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
264
|
|
|
$
|
280
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
Interest cost
|
1,014
|
|
|
831
|
|
|
23
|
|
|
19
|
|
|
Expected return on plan assets
|
(1,820
|
)
|
|
(1,683
|
)
|
|
(1
|
)
|
|
—
|
|
|
Amortization of prior service cost (credit)
|
13
|
|
|
(31
|
)
|
|
(32
|
)
|
|
(2
|
)
|
|
Recognized actuarial net loss (gain)
|
172
|
|
|
302
|
|
|
(9
|
)
|
|
(7
|
)
|
|
Net settlement and curtailment (gain)
|
(87
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total net periodic benefit (income) cost
|
$
|
(444
|
)
|
|
$
|
(301
|
)
|
|
$
|
(17
|
)
|
|
$
|
11
|
|
Note 8: Restructuring Costs
During the nine months ended September 30, 2019, we recorded net pre-tax restructuring costs totaling $244 million for new and ongoing restructuring actions. We recorded charges in the segments as follows:
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Otis
|
$
|
44
|
|
|
Carrier
|
97
|
|
|
Pratt & Whitney
|
17
|
|
|
Collins Aerospace Systems
|
83
|
|
|
Eliminations and other
|
3
|
|
|
Total
|
$
|
244
|
|
Restructuring charges incurred during the nine months ended September 30, 2019 primarily relate to actions initiated during 2019 and 2018, and were recorded as follows:
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Cost of sales
|
$
|
119
|
|
|
Selling, general and administrative
|
125
|
|
|
Total
|
$
|
244
|
|
2019 Actions. During the nine months ended September 30, 2019, we recorded net pre-tax restructuring costs of $158 million, comprised of $62 million in cost of sales and $96 million in selling, general and administrative expenses. The 2019 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field and manufacturing operations.
The following table summarizes the accrual balance and utilization for the 2019 restructuring actions for the quarter and nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Severance
|
|
Facility Exit and Other Costs
|
|
Total
|
|
Quarter Ended September 30, 2019
|
|
|
|
|
|
|
Restructuring accruals at June 30, 2019
|
$
|
57
|
|
|
$
|
11
|
|
|
$
|
68
|
|
|
Net pre-tax restructuring costs
|
35
|
|
|
8
|
|
|
43
|
|
|
Utilization, foreign exchange and other costs
|
(33
|
)
|
|
(7
|
)
|
|
(40
|
)
|
|
Balance at September 30, 2019
|
$
|
59
|
|
|
$
|
12
|
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
Net pre-tax restructuring costs
|
$
|
145
|
|
|
$
|
13
|
|
|
$
|
158
|
|
|
Utilization, foreign exchange and other costs
|
(86
|
)
|
|
(1
|
)
|
|
(87
|
)
|
|
Balance at September 30, 2019
|
$
|
59
|
|
|
$
|
12
|
|
|
$
|
71
|
|
The following table summarizes expected, incurred and remaining costs for the 2019 restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Expected
Costs
|
|
Costs Incurred Quarter Ended
March 31, 2019
|
|
Costs Incurred Quarter Ended
June 30, 2019
|
|
Costs Incurred Quarter Ended
September 30, 2019
|
|
Remaining Costs at
September 30, 2019
|
|
Otis
|
$
|
43
|
|
|
$
|
(19
|
)
|
|
$
|
(14
|
)
|
|
$
|
(3
|
)
|
|
$
|
7
|
|
|
Carrier
|
113
|
|
|
(25
|
)
|
|
(24
|
)
|
|
(32
|
)
|
|
32
|
|
|
Pratt & Whitney
|
158
|
|
|
(14
|
)
|
|
(3
|
)
|
|
—
|
|
|
141
|
|
|
Collins Aerospace Systems
|
107
|
|
|
(14
|
)
|
|
—
|
|
|
(7
|
)
|
|
86
|
|
|
Eliminations and other
|
3
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
Total
|
$
|
424
|
|
|
$
|
(73
|
)
|
|
$
|
(42
|
)
|
|
$
|
(43
|
)
|
|
$
|
266
|
|
We are targeting to complete the majority of the remaining workforce and facility related cost reduction actions during 2019 and 2020. No specific plans for other significant actions have been finalized at this time.
2018 Actions. During the nine months ended September 30, 2019, we recorded net pre-tax restructuring costs totaling $44 million for restructuring actions initiated in 2018, including $21 million in cost of sales and $23 million in selling, general and administrative expenses. The 2018 actions relate to ongoing cost reduction efforts, including workforce reductions, consolidation of field and manufacturing operations, and costs to exit legacy programs. The following table summarizes the accrual balances and utilization for the 2018 restructuring actions for the quarter and nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Severance
|
|
Facility Exit,
and
Other Costs
|
|
Total
|
|
Quarter Ended September 30, 2019
|
|
|
|
|
|
|
Restructuring accruals at June 30, 2019
|
$
|
48
|
|
|
$
|
9
|
|
|
$
|
57
|
|
|
Net pre-tax restructuring costs
|
1
|
|
|
4
|
|
|
5
|
|
|
Utilization, foreign exchange and other costs
|
(19
|
)
|
|
(5
|
)
|
|
(24
|
)
|
|
Balance at September 30, 2019
|
$
|
30
|
|
|
$
|
8
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
Restructuring accruals at December 31, 2018
|
$
|
115
|
|
|
$
|
23
|
|
|
$
|
138
|
|
|
Net pre-tax restructuring costs
|
36
|
|
|
8
|
|
|
44
|
|
|
Utilization, foreign exchange and other costs
|
(121
|
)
|
|
(23
|
)
|
|
(144
|
)
|
|
Balance at September 30, 2019
|
$
|
30
|
|
|
$
|
8
|
|
|
$
|
38
|
|
The following table summarizes expected, incurred and remaining costs for the 2018 restructuring actions by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Expected
Costs
|
|
Costs Incurred in 2018
|
|
Costs Incurred Quarter Ended
March 31, 2019
|
|
Costs Incurred Quarter Ended
June 30, 2019
|
|
Costs Incurred Quarter Ended
September 30, 2019
|
|
Remaining Costs at
September 30, 2019
|
|
Otis
|
$
|
55
|
|
|
$
|
(48
|
)
|
|
$
|
(5
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Carrier
|
82
|
|
|
(64
|
)
|
|
(7
|
)
|
|
(6
|
)
|
|
(2
|
)
|
|
3
|
|
|
Pratt & Whitney
|
3
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Collins Aerospace Systems
|
113
|
|
|
(87
|
)
|
|
(11
|
)
|
|
(9
|
)
|
|
(3
|
)
|
|
3
|
|
|
Eliminations and other
|
6
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Total
|
$
|
259
|
|
|
$
|
(207
|
)
|
|
$
|
(23
|
)
|
|
$
|
(16
|
)
|
|
$
|
(5
|
)
|
|
$
|
8
|
|
2017 and Prior Actions. During the nine months ended September 30, 2019, we recorded net pre-tax restructuring costs totaling $42 million for restructuring actions initiated in 2017 and prior. As of September 30, 2019, we have approximately $73 million of accrual balances remaining related to 2017 and prior actions.
Note 9: Financial Instruments
We enter into derivative instruments primarily for risk management purposes, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options, to manage certain foreign currency, interest rate and commodity price exposures.
The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $18.5 billion and $20.1 billion at September 30, 2019 and December 31, 2018, respectively.
The following table summarizes the fair value and presentation in the Condensed Consolidated Balance Sheets for derivative instruments as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Balance Sheet Location
|
September 30, 2019
|
|
December 31, 2018
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Foreign exchange contracts
|
Asset Derivatives:
|
|
|
|
|
|
Other assets, current
|
$
|
5
|
|
|
$
|
10
|
|
|
|
Other assets
|
5
|
|
|
12
|
|
|
|
Total asset derivatives
|
$
|
10
|
|
|
$
|
22
|
|
|
|
Liability Derivatives:
|
|
|
|
|
|
Accrued liabilities
|
(63
|
)
|
|
(83
|
)
|
|
|
Other long-term liabilities
|
(78
|
)
|
|
(111
|
)
|
|
|
Total liability derivatives
|
$
|
(141
|
)
|
|
$
|
(194
|
)
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Foreign exchange contracts
|
Asset Derivatives:
|
|
|
|
|
|
Other assets, current
|
$
|
54
|
|
|
$
|
44
|
|
|
|
Other assets
|
5
|
|
|
19
|
|
|
|
Total asset derivatives
|
$
|
59
|
|
|
$
|
63
|
|
|
|
Liability Derivatives:
|
|
|
|
|
|
Accrued liabilities
|
(97
|
)
|
|
(89
|
)
|
|
|
Other long-term liabilities
|
(83
|
)
|
|
(3
|
)
|
|
|
Total liability derivatives
|
$
|
(180
|
)
|
|
$
|
(92
|
)
|
The effect of cash flow hedging relationships on Accumulated other comprehensive income and on the Condensed Consolidated Statement of Operations for the quarters and nine months ended September 30, 2019 and 2018 are presented in the table below. The amounts of gain or (loss) are attributable to foreign exchange contract activity and are recorded as a component of Product sales when reclassified from accumulated other comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Gain (loss) recorded in Accumulated other comprehensive loss
|
$
|
(153
|
)
|
|
$
|
95
|
|
|
$
|
(125
|
)
|
|
$
|
(105
|
)
|
|
Loss (gain) reclassified from Accumulated other comprehensive loss into Product sales
|
20
|
|
|
2
|
|
|
40
|
|
|
(26
|
)
|
The Company utilizes the critical terms match method in assessing derivatives for hedge effectiveness. Accordingly, the hedged items and derivatives designated as hedging instruments are highly effective.
We have €4.95 billion of euro-denominated long-term debt and €750 million of euro-denominated commercial paper borrowings outstanding, which qualify as a net investment hedge against our investments in European businesses. As of September 30, 2019, the net investment hedge is deemed to be effective.
Assuming current market conditions continue, a $57 million pre-tax loss is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At September 30, 2019, all derivative contracts accounted for as cash flow hedges will mature by October 2023.
The effect of derivatives not designated as hedging instruments within Other income, net, on the Condensed Consolidated Statement of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Foreign exchange contracts
|
$
|
4
|
|
|
$
|
16
|
|
|
$
|
40
|
|
|
$
|
86
|
|
Note 10: Fair Value Measurements
In accordance with the provisions of ASC 820, the following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and non-recurring basis in our Condensed Consolidated Balance Sheet as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
54
|
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative assets
|
69
|
|
|
—
|
|
|
69
|
|
|
—
|
|
|
Derivative liabilities
|
(321
|
)
|
|
—
|
|
|
(321
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Recurring fair value measurements:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
51
|
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative assets
|
85
|
|
|
—
|
|
|
85
|
|
|
—
|
|
|
Derivative liabilities
|
(286
|
)
|
|
—
|
|
|
(286
|
)
|
|
—
|
|
Valuation Techniques. Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally, and are measured at fair value using closing stock prices from active markets. Our derivative assets and liabilities include foreign exchange contracts that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks.
As of September 30, 2019, there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties' credit risks.
The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Condensed Consolidated Balance Sheet at September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
(dollars in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Long-term receivables
|
$
|
375
|
|
|
$
|
367
|
|
|
$
|
334
|
|
|
$
|
314
|
|
|
Customer financing notes receivable
|
283
|
|
|
283
|
|
|
272
|
|
|
265
|
|
|
Short-term borrowings
|
(1,327
|
)
|
|
(1,327
|
)
|
|
(1,469
|
)
|
|
(1,469
|
)
|
|
Long-term debt (excluding finance leases)
|
(44,863
|
)
|
|
(47,794
|
)
|
|
(43,996
|
)
|
|
(44,003
|
)
|
|
Long-term liabilities
|
(406
|
)
|
|
(389
|
)
|
|
(508
|
)
|
|
(467
|
)
|
The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Condensed Consolidated Balance Sheet at September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Long-term receivables
|
$
|
367
|
|
|
$
|
—
|
|
|
$
|
367
|
|
|
$
|
—
|
|
|
Customer financing notes receivable
|
283
|
|
|
—
|
|
|
283
|
|
|
—
|
|
|
Short-term borrowings
|
(1,327
|
)
|
|
—
|
|
|
(984
|
)
|
|
(343
|
)
|
|
Long-term debt (excluding finance leases)
|
(47,794
|
)
|
|
—
|
|
|
(47,396
|
)
|
|
(398
|
)
|
|
Long-term liabilities
|
(389
|
)
|
|
—
|
|
|
(389
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
(dollars in millions)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Long-term receivables
|
$
|
314
|
|
|
$
|
—
|
|
|
$
|
314
|
|
|
$
|
—
|
|
|
Customer financing notes receivable
|
265
|
|
|
—
|
|
|
265
|
|
|
—
|
|
|
Short-term borrowings
|
(1,469
|
)
|
|
—
|
|
|
(1,258
|
)
|
|
(211
|
)
|
|
Long-term debt (excluding finance leases)
|
(44,003
|
)
|
|
—
|
|
|
(43,620
|
)
|
|
(383
|
)
|
|
Long-term liabilities
|
(467
|
)
|
|
—
|
|
|
(467
|
)
|
|
—
|
|
We had commercial aerospace financing and other contractual commitments totaling approximately $15.7 billion and $15.5 billion as of September 30, 2019 and December 31, 2018, respectively, related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms. Associated risks on these commitments from changes in interest rates are mitigated because interest rates are variable during the commitment term and are set at the date of funding based on current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded.
Note 11: Long-Term Financing Receivables
Our long-term financing receivables primarily represent balances related to the aerospace businesses such as long-term trade accounts receivable, leases, and notes receivable. We also have other long-term receivables in our commercial businesses; however, both the individual and aggregate amounts of those other receivables are not significant. The following table summarizes the balance by class of aerospace business related long-term receivables as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
September 30, 2019
|
|
December 31, 2018
|
|
Long-term trade accounts receivable
|
$
|
289
|
|
|
$
|
269
|
|
|
Notes and leases receivable
|
267
|
|
|
258
|
|
|
Total long-term receivables
|
$
|
556
|
|
|
$
|
527
|
|
Customer credit ratings range from customers with an extremely strong capacity to meet financial obligations to customers whose uncollateralized receivable is in default. There can be no assurance that actual results will not differ from
estimates or that consideration of these factors in the future will not result in an increase or decrease to the allowance for credit losses on long-term receivables. Based upon the customer credit ratings, approximately $150 million of our total long-term receivables were considered to bear high credit risk as of September 30, 2019 and December 31, 2018.
For long-term trade accounts receivable, we evaluate credit risk and collectability individually to determine if an allowance is necessary. Our long-term receivables reflected in the table above, which include reserves of $22 million and $16 million as of September 30, 2019 and December 31, 2018, respectively, are individually evaluated for impairment. At September 30, 2019 and December 31, 2018, we did not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or considered to be impaired.
Note 12: Accumulated Other Comprehensive Loss
A summary of the changes in each component of Accumulated other comprehensive loss, net of tax for the quarters and nine months ended September 30, 2019 and 2018 is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Foreign
Currency
Translation
|
|
Defined
Benefit
Pension and
Post-
retirement
Plans
|
|
Unrealized
Hedging
(Losses)
Gains
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Quarter Ended September 30, 2019
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
$
|
(3,354
|
)
|
|
$
|
(6,398
|
)
|
|
$
|
(140
|
)
|
|
$
|
(9,892
|
)
|
|
Other comprehensive loss before
reclassifications, net
|
(417
|
)
|
|
(420
|
)
|
|
(153
|
)
|
|
(990
|
)
|
|
Amounts reclassified, pre-tax
|
—
|
|
|
(41
|
)
|
|
20
|
|
|
(21
|
)
|
|
Tax (benefit) expense
|
(56
|
)
|
|
114
|
|
|
26
|
|
|
84
|
|
|
Balance at September 30, 2019
|
$
|
(3,827
|
)
|
|
$
|
(6,745
|
)
|
|
$
|
(247
|
)
|
|
$
|
(10,819
|
)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
(3,442
|
)
|
|
$
|
(5,718
|
)
|
|
$
|
(173
|
)
|
|
$
|
(9,333
|
)
|
|
Other comprehensive loss before
reclassifications, net
|
(322
|
)
|
|
(434
|
)
|
|
(125
|
)
|
|
(881
|
)
|
|
Amounts reclassified, pre-tax
|
—
|
|
|
46
|
|
|
40
|
|
|
86
|
|
|
Tax (benefit) expense
|
(55
|
)
|
|
98
|
|
|
11
|
|
|
54
|
|
|
ASU 2018-02 adoption impact
|
(8
|
)
|
|
(737
|
)
|
|
—
|
|
|
(745
|
)
|
|
Balance at September 30, 2019
|
$
|
(3,827
|
)
|
|
$
|
(6,745
|
)
|
|
$
|
(247
|
)
|
|
$
|
(10,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Foreign
Currency
Translation
|
|
Defined
Benefit
Pension and
Post-
retirement
Plans
|
|
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
|
|
Unrealized
Hedging
(Losses)
Gains
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Quarter Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
$
|
(3,085
|
)
|
|
$
|
(4,499
|
)
|
|
$
|
—
|
|
|
$
|
(100
|
)
|
|
$
|
(7,684
|
)
|
|
Other comprehensive (loss) income before
reclassifications, net
|
(166
|
)
|
|
(17
|
)
|
|
—
|
|
|
95
|
|
|
(88
|
)
|
|
Amounts reclassified, pre-tax
|
—
|
|
|
86
|
|
|
—
|
|
|
2
|
|
|
88
|
|
|
Tax expense (benefit)
|
4
|
|
|
(15
|
)
|
|
—
|
|
|
(28
|
)
|
|
(39
|
)
|
|
Balance at September 30, 2018
|
$
|
(3,247
|
)
|
|
$
|
(4,445
|
)
|
|
$
|
—
|
|
|
$
|
(31
|
)
|
|
$
|
(7,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
(2,950
|
)
|
|
$
|
(4,652
|
)
|
|
$
|
5
|
|
|
$
|
72
|
|
|
$
|
(7,525
|
)
|
|
Other comprehensive (loss) income before
reclassifications, net
|
(354
|
)
|
|
9
|
|
|
—
|
|
|
(105
|
)
|
|
(450
|
)
|
|
Amounts reclassified, pre-tax
|
(3
|
)
|
|
262
|
|
|
—
|
|
|
(26
|
)
|
|
233
|
|
|
Tax expense (benefit)
|
60
|
|
|
(64
|
)
|
|
—
|
|
|
28
|
|
|
24
|
|
|
ASU 2016-01 adoption impact
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
|
Balance at September 30, 2018
|
$
|
(3,247
|
)
|
|
$
|
(4,445
|
)
|
|
$
|
—
|
|
|
$
|
(31
|
)
|
|
$
|
(7,723
|
)
|
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). The new standard allows companies to reclassify to retained earnings the stranded tax effects in Accumulated other comprehensive income (AOCI) from the TCJA. We elected to reclassify the income tax effects of TCJA from AOCI of $745 million to retained earnings, effective January 1, 2019.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Upon adoption, investments that do not result in consolidation and are not accounted for under the equity method generally must be carried at fair value, with changes in fair value recognized in net income. We had approximately $5 million of unrealized gains on these securities recorded in Accumulated other comprehensive loss in our Consolidated Balance Sheet as of December 31, 2017. We adopted this standard effective January 1, 2018, with these amounts recorded directly to retained earnings as of that date.
Amounts reclassified that relate to our defined benefit pension and postretirement plans include the amortization of prior service costs and actuarial net losses recognized during each period presented. These costs are recorded as components of net periodic pension cost for each period presented. Additionally, in quarter ended September 30, 2019, we recorded a curtailment gain of $98 million in the Condensed Consolidated Statement of Operations which is included within amounts reclassified related to our defined pension and postretirement plans. (See Note 7 for additional details).
All noncontrolling interests with redemption features, such as put options, that are not solely within our control (redeemable noncontrolling interests) are reported in the mezzanine section of the Condensed Consolidated Balance Sheet, between liabilities and equity, at the greater of redemption value or initial carrying value.
Note 13: Variable Interest Entities
Pratt & Whitney holds a 61% net interest in the International Aero Engines AG (IAE) collaboration with MTU Aero Engines AG (MTU) and Japanese Aero Engines Corporation (JAEC) and a 49.5% ownership interest in IAE. IAE's business purpose is to coordinate the design, development, manufacturing and product support of the V2500 program through involvement with the collaborators. Additionally, Pratt & Whitney, JAEC and MTU are participants in International Aero Engines, LLC (IAE LLC), whose business purpose is to coordinate the design, development, manufacturing and product support for the PW1100G-JM engine for the Airbus A320neo aircraft and the PW1400G-JM engine for the Irkut MC21 aircraft. Pratt & Whitney holds a 59% net interest and a 59% ownership interest in IAE LLC. IAE and IAE LLC retain limited equity with the primary economics of the programs passed to the participants. As such, we have determined that IAE and IAE LLC are variable interest entities with Pratt & Whitney the primary beneficiary. IAE and IAE LLC have, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for variable interest entities in our Condensed Consolidated Balance Sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
September 30, 2019
|
|
December 31, 2018
|
|
Current assets
|
$
|
4,770
|
|
|
$
|
4,732
|
|
|
Noncurrent assets
|
1,785
|
|
|
1,600
|
|
|
Total assets
|
$
|
6,555
|
|
|
$
|
6,332
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
5,251
|
|
|
$
|
4,946
|
|
|
Noncurrent liabilities
|
1,925
|
|
|
1,898
|
|
|
Total liabilities
|
$
|
7,176
|
|
|
$
|
6,844
|
|
Note 14: Guarantees
We extend a variety of financial, market value and product performance guarantees to third parties. There have been no material changes to financial guarantees outstanding since December 31, 2018. The changes in the carrying amount of service and product warranties and product performance guarantees for the nine months ended September 30, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
Balance as of January 1
|
|
$
|
1,449
|
|
|
$
|
1,146
|
|
|
Warranties and performance guarantees issued
|
|
464
|
|
|
472
|
|
|
Settlements made
|
|
(375
|
)
|
|
(380
|
)
|
|
Other
|
|
(15
|
)
|
|
(8
|
)
|
|
Balance as of September 30
|
|
$
|
1,523
|
|
|
$
|
1,230
|
|
Note 15: Contingent Liabilities
Summarized below are the matters previously described in Note 18 of the Notes to the Consolidated Financial Statements in our 2018 Annual Report, incorporated by reference in our 2018 Form 10-K, updated as applicable.
Except as otherwise noted, while we are unable to predict the final outcome, based on information currently available, we do not believe that resolution of any of the following matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Environmental. Our operations are subject to environmental regulation by federal, state and local authorities in the United States and authorities with jurisdiction over our foreign operations. As described in Note 1 to the Consolidated Financial Statements in our 2018 Annual Report, we have accrued for the costs of environmental remediation activities, including but not limited to investigatory, remediation, operating and maintenance costs and performance guarantees, and periodically reassess these amounts. We believe that the likelihood of incurring losses materially in excess of amounts accrued is remote. Additional information pertaining to environmental matters is included in Note 1 to the Consolidated Financial Statements in our 2018 Annual Report.
Government. In the ordinary course of business, the Company and its subsidiaries and our properties are subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations and threatened legal actions and proceedings. For example, we are now, and believe that, in light of the current U.S. Government contracting environment, we will continue to be the subject of one or more U.S. Government investigations. Such U.S. Government investigations often take years to complete and could result in administrative, civil or criminal liabilities, including repayments, fines, treble and other damages, forfeitures, restitution or penalties, or could lead to suspension or debarment of U.S. Government contracting privileges. For instance, if we or one of our business units were charged with wrongdoing as a result of any of these investigations or other government investigations (including violations of certain environmental or export laws) the U.S. Government could suspend us from bidding on or receiving awards of new U.S. Government contracts pending the completion of legal proceedings. If convicted or found liable, the U.S. Government could fine and debar us from new U.S. Government contracting for a period generally not to exceed three years. The U.S. Government also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other seriously improper conduct. The U.S. Government could void any contracts found to be tainted by fraud.
Our contracts with the U.S. Government are also subject to audits. Like many defense contractors, we have received audit reports recommending the reduction of certain contract prices because, for example, cost or pricing data or cost accounting practices used to price and negotiate those contracts may not have conformed to government regulations. Some of these audit
reports recommend that certain payments be repaid, delayed, or withheld, and may involve substantial amounts. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and, in some cases, continue to negotiate and/or litigate. The Company may be, and has been, required to make payments into escrow of disputed liabilities while the related litigation is pending. If the litigation is resolved in the Company’s favor, any such payments will be returned to the Company with interest. In addition, we accrue for liabilities associated with those matters that are probable and can be reasonably estimated. The most likely settlement amount to be incurred is accrued based upon a range of estimates. Where no amount within a range of estimates is more likely, then we accrue the minimum amount.
Legal Proceedings.
Cost Accounting Standards Claims
In April 2019, a Divisional Administrative Contracting Officer (DACO) of the United States Defense Contract Management Agency (DCMA) asserted a claim against Pratt & Whitney to recover overpayments of approximately $1.73 billion plus interest (approximately $540 million through September 30, 2019). The claim is based on Pratt & Whitney's alleged noncompliance with cost accounting standards from January 1, 2007 to March 31, 2019, due to its method of allocating independent research and development costs to government contracts. Pratt & Whitney believes that the claim is without merit and filed an appeal to the Armed Services Board of Contract Appeals (ASBCA) on June 7, 2019.
As previously disclosed, in December 2013, a DCMA DACO asserted a claim against Pratt & Whitney to recover overpayments of approximately $177 million plus interest (approximately $96 million through September 30, 2019). The claim is based on Pratt & Whitney's alleged noncompliance with cost accounting standards from January 1, 2005 to December 31, 2012, due to its method of determining the cost of collaborator parts used in the calculation of material overhead costs for government contracts. In 2014, Pratt & Whitney filed an appeal to the ASBCA. An evidentiary hearing was held and completed in June 2019. The parties are now engaged in post-hearing briefing, and a decision from the ASBCA will follow. We continue to believe that the claim is without merit. In December 2018, a DCMA DACO issued a second claim against Pratt & Whitney that similarly alleges that its method of determining the cost of collaborator parts does not comply with the cost accounting standards for calendar years 2013 through 2017. This second claim demands payment of $269 million plus interest (approximately $53 million through September 30, 2019), which we also believe is without merit and which Pratt & Whitney appealed to the ASBCA in January 2019.
German Tax Litigation
As previously disclosed, UTC has been involved in administrative review proceedings with the German Tax Office, which concern approximately €215 million (approximately $237 million) of tax benefits that we have claimed related to a 1998 reorganization of the corporate structure of Otis operations in Germany. Upon audit, these tax benefits were disallowed by the German Tax Office. UTC estimates interest associated with the aforementioned tax benefits is an additional approximately €118 million (approximately $130 million). On August 3, 2012, we filed suit in the local German Tax Court (Berlin-Brandenburg). In March 2016, the local German Tax Court dismissed our suit, and we appealed this decision to the German Federal Tax Court (FTC). Following a hearing in July 2018, the FTC remanded the matter to the local German Tax Court for further proceedings. In 2015, UTC made tax and interest payments to German tax authorities of €275 million (approximately $300 million) in order to avoid additional interest accruals pending final resolution of this matter.
Asbestos Matters
As previously disclosed, like many other industrial companies, we and our subsidiaries have been named as defendants in lawsuits alleging personal injury as a result of exposure to asbestos integrated into certain of our products or business premises. While we have never manufactured asbestos and no longer incorporate it in any currently-manufactured products, certain of our historical products, like those of many other manufacturers, have contained components incorporating asbestos. A substantial majority of these asbestos-related claims have been dismissed without payment or were covered in full or in part by insurance or other forms of indemnity. Additional cases were litigated and settled without any insurance reimbursement. The amounts involved in asbestos related claims were not material individually or in the aggregate in any year.
The amounts recorded by UTC for asbestos-related liabilities are based on currently available information and assumptions that we believe are reasonable and are made with input from outside actuarial experts. The estimated range of total liabilities to resolve all pending and unasserted potential future asbestos claims through 2059 is approximately $330 million to $395 million. Where no amount within a range of estimates is more likely, the minimum is accrued. We have recorded the minimum amount of $330 million, which is principally recorded in Other long-term liabilities on our Consolidated Balance Sheet as of September 30, 2019. This amount is on a pre-tax basis, not discounted, and excludes the Company’s legal fees to defend the asbestos claims, which will continue to be expensed by the Company as they are incurred. In addition, the Company has an insurance recovery receivable for probable asbestos related recoveries of approximately $142 million, which is included primarily in Other assets on our Condensed Consolidated Balance Sheet as of September 30, 2019.
The amounts recorded by UTC for asbestos-related liabilities and insurance recoveries are based on currently available information and assumptions that we believe are reasonable. Our actual liabilities or insurance recoveries could be higher or lower than those recorded if actual results vary significantly from the assumptions. Key variables in these assumptions include the number and type of new claims to be filed each year, the outcomes or resolution of such claims, the average cost of resolution of each new claim, the amount of insurance available, the allocation methodologies, the contractual terms with each insurer with whom we have reached settlements, the resolution of coverage issues with other excess insurance carriers with whom we have not yet achieved settlements, and the solvency risk with respect to our insurance carriers. Other factors that may affect our future liability include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, legal rulings that may be made by state and federal courts, and the passage of state or federal legislation. At the end of each year, the Company will evaluate all of these factors and, with input from an outside actuarial expert, make any necessary adjustments to both our estimated asbestos liabilities and insurance recoveries.
Other.
As described in Note 14 of this Form 10-Q and Note 17 to the Consolidated Financial Statements in our 2018 Annual Report, we extend performance and operating cost guarantees beyond our normal warranty and service policies for extended periods on some of our products. We have accrued our estimate of the liability that may result under these guarantees and for service costs that are probable and can be reasonably estimated.
We also have other commitments and contingent liabilities related to legal proceedings, self-insurance programs and matters arising out of the normal course of business. We accrue contingencies based upon a range of possible outcomes. If no amount within this range is a better estimate than any other, then we accrue the minimum amount.
In the ordinary course of business, the Company and its subsidiaries are also routinely defendants in, parties to or otherwise subject to many pending and threatened legal actions, claims, disputes and proceedings. These matters are often based on alleged violations of contract, product liability, warranty, regulatory, environmental, health and safety, employment, intellectual property, tax and other laws. In some instances, claims for substantial monetary damages are asserted against the Company and its subsidiaries and could result in fines, penalties, compensatory or treble damages or non-monetary relief. We do not believe that these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Note 16: Leases
ASU 2016-02, Leases (Topic 842) and its related amendments (collectively, the New Lease Accounting Standard) are effective for reporting periods beginning after December 15, 2018. We adopted the New Lease Accounting Standard effective January 1, 2019 and elected the modified retrospective approach in which results for periods before 2019 were not adjusted for the new standard and the cumulative effect of the change in accounting was recognized through retained earnings at the date of adoption.
The New Lease Accounting Standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the Condensed Consolidated Balance Sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the Condensed Consolidated Statement of Operations. In addition, this standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor doesn’t convey risks and rewards or control, the lease is treated as operating.
We have elected certain of the practical expedients available under the New Lease Accounting Standard upon adoption. We have applied the practical expedient which allows prospective transition to the New Lease Accounting Standard on January 1, 2019. Under the transition practical expedient, we did not reassess lease classification, embedded leases or initial direct costs. We have applied the practical expedient for short-term leases. We have lease agreements with lease and non-lease components. We have elected the practical expedients to combine these components for certain equipment leases. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease right-of-use assets and liabilities. The adoption of the New Lease Accounting Standard did not have a material effect on our Condensed Consolidated Statement of Operations or Condensed Consolidated Statement of Cash Flows. Upon adoption, we recorded a $2.6 billion right-of-use asset and a $2.7 billion lease liability. The adoption of the New Lease Accounting Standard had an immaterial impact on retained earnings.
We enter into lease agreements for the use of real estate space, vehicles, information technology equipment, and certain other equipment under operating and finance leases. We determine if an arrangement contains a lease at inception. Operating leases are included in Operating lease right-of-use assets, Accrued liabilities, and Operating lease liabilities in our Condensed Consolidated Balance Sheet. Finance leases are not considered significant to our Condensed Consolidated Balance Sheet or Condensed Consolidated Statement of Operations. Finance lease right-of-use assets at September 30, 2019 of $54 million are included in Other assets in our Condensed Consolidated Balance Sheet. Finance lease liabilities at September 30, 2019 of $68 million are included in Long term debt currently due, and Long term debt in our Condensed Consolidated Balance Sheet.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments, and use the implicit rate when readily determinable. We determine our incremental borrowing rate through market sources including relevant industry rates. Our lease right-of-use assets also include any lease pre-payments and exclude lease incentives. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. We exclude variable payments from lease right-of-use assets and lease liabilities, to the extent not considered fixed, and instead, expense variable payments as incurred. Variable lease expense and lease expense for short duration contracts is not a material component of lease expense. Our leases generally have remaining lease terms of 1 to 20 years, some of which include options to extend leases. The majority of our leases with options to extend are up to 5 years with the ability to terminate the lease within 1 year. The exercise of lease renewal options is at our sole discretion and our lease right-of-use assets and liabilities reflect only the options we are reasonably certain that we will exercise. Lease expense is recognized on a straight-line basis over the lease term.
In limited instances we act as a lessor, primarily for commercial aerospace engines and certain heating, ventilation and air conditioning (HVAC) systems and commercial equipment, all of which are classified as operating leases. These leases are not significant to our Condensed Consolidated Balance Sheet or Condensed Consolidated Statement of Operations.
Operating lease expense for the quarter and nine months ended September 30, 2019 was $194 million and $573 million, respectively.
Supplemental cash flow information related to operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Quarter Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
|
Operating cash flows for the measurement of operating lease liabilities
|
$
|
(223
|
)
|
|
$
|
(560
|
)
|
|
Operating lease right-of-use assets obtained in exchange for operating lease obligations
|
38
|
|
|
238
|
|
Operating lease right-of-use assets and liabilities are reflected on our Condensed Consolidated Balance Sheet as follows:
|
|
|
|
|
|
|
|
(dollars in millions, except lease term and discount rate)
|
September 30, 2019
|
|
Operating lease right-of-use assets
|
$
|
2,556
|
|
|
|
|
|
Accrued liabilities
|
$
|
(546
|
)
|
|
Operating lease liabilities
|
(2,105
|
)
|
|
Total operating lease liabilities
|
$
|
(2,651
|
)
|
Supplemental balance sheet information related to operating leases was as follows:
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Weighted Average Remaining Lease Term (in years)
|
6.9
|
|
|
Weighted Average Discount Rate
|
3.6
|
%
|
Undiscounted maturities of operating lease liabilities as of September 30, 2019 are as follows:
|
|
|
|
|
|
|
|
(dollars in millions)
|
Operating 1
|
|
|
2019
|
$
|
186
|
|
|
2020
|
695
|
|
|
2021
|
600
|
|
|
2022
|
473
|
|
|
2023
|
320
|
|
|
Thereafter
|
1,005
|
|
|
Total undiscounted lease payments
|
3,279
|
|
|
Less imputed interest
|
(628
|
)
|
|
Total discounted lease payments
|
$
|
2,651
|
|
1 Operating lease payments include $302 million related to options to extend lease terms that are reasonably certain of being exercised.
Prior to the adoption of the New Lease Accounting Standard, rental commitments on an undiscounted basis were approximately $2.9 billion at December 31, 2018 under long-term non-cancelable operating leases and were payable as follows: $683 million in 2019, $544 million in 2020, $407 million in 2021, $301 million in 2022, $235 million in 2023 and $746 million thereafter.
Note 17: Segment Financial Data
Our operations are classified into four principal segments: Otis, Carrier, Pratt & Whitney, and Collins Aerospace Systems. The segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services.
Total sales by segment include inter-segment sales, which are generally made at prices approximating those that the selling entity is able to obtain on external sales. Results for the quarters ended September 30, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Operating Profits
|
|
Operating Profit Margins
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Otis
|
$
|
3,307
|
|
|
$
|
3,223
|
|
|
$
|
508
|
|
|
$
|
486
|
|
|
15.4
|
%
|
|
15.1
|
%
|
|
Carrier
|
4,822
|
|
|
4,880
|
|
|
685
|
|
|
844
|
|
|
14.2
|
%
|
|
17.3
|
%
|
|
Pratt & Whitney
|
5,283
|
|
|
4,789
|
|
|
471
|
|
|
109
|
|
|
8.9
|
%
|
|
2.3
|
%
|
|
Collins Aerospace Systems
|
6,495
|
|
|
3,955
|
|
|
1,167
|
|
|
610
|
|
|
18.0
|
%
|
|
15.4
|
%
|
|
Total segments
|
19,907
|
|
|
16,847
|
|
|
2,831
|
|
|
2,049
|
|
|
14.2
|
%
|
|
12.2
|
%
|
|
Eliminations and other
|
(411
|
)
|
|
(337
|
)
|
|
(232
|
)
|
|
(102
|
)
|
|
|
|
|
|
General corporate expenses
|
—
|
|
|
—
|
|
|
(113
|
)
|
|
(109
|
)
|
|
|
|
|
|
Consolidated
|
$
|
19,496
|
|
|
$
|
16,510
|
|
|
$
|
2,486
|
|
|
$
|
1,838
|
|
|
12.8
|
%
|
|
11.1
|
%
|
Results for the nine months ended September 30, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Operating Profits
|
|
Operating Profit Margins
|
|
(dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Otis
|
$
|
9,751
|
|
|
$
|
9,604
|
|
|
$
|
1,449
|
|
|
$
|
1,424
|
|
|
14.9
|
%
|
|
14.8
|
%
|
|
Carrier
|
14,107
|
|
|
14,291
|
|
|
2,050
|
|
|
3,081
|
|
|
14.5
|
%
|
|
21.6
|
%
|
|
Pratt & Whitney
|
15,250
|
|
|
13,854
|
|
|
1,328
|
|
|
919
|
|
|
8.7
|
%
|
|
6.6
|
%
|
|
Collins Aerospace Systems
|
19,584
|
|
|
11,734
|
|
|
3,195
|
|
|
1,767
|
|
|
16.3
|
%
|
|
15.1
|
%
|
|
Total segments
|
58,692
|
|
|
49,483
|
|
|
8,022
|
|
|
7,191
|
|
|
13.7
|
%
|
|
14.5
|
%
|
|
Eliminations and other
|
(1,197
|
)
|
|
(1,026
|
)
|
|
(572
|
)
|
|
(210
|
)
|
|
|
|
|
|
General corporate expenses
|
—
|
|
|
—
|
|
|
(335
|
)
|
|
(339
|
)
|
|
|
|
|
|
Consolidated
|
$
|
57,495
|
|
|
$
|
48,457
|
|
|
$
|
7,115
|
|
|
$
|
6,642
|
|
|
12.4
|
%
|
|
13.7
|
%
|
Geographic sales are attributed to the geographic regions based on their location of origin. Segment information for the quarters ended September 30, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
(dollars in millions)
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
United States
|
$
|
893
|
|
$
|
2,536
|
|
$
|
4,184
|
|
$
|
4,764
|
|
$
|
12,377
|
|
|
$
|
864
|
|
$
|
2,537
|
|
$
|
3,696
|
|
$
|
2,805
|
|
$
|
9,902
|
|
|
Europe
|
943
|
|
1,313
|
|
91
|
|
924
|
|
3,271
|
|
|
968
|
|
1,377
|
|
141
|
|
560
|
|
3,046
|
|
|
Asia Pacific
|
1,217
|
|
728
|
|
258
|
|
229
|
|
2,432
|
|
|
1,129
|
|
726
|
|
316
|
|
86
|
|
2,257
|
|
|
Other
|
254
|
|
245
|
|
750
|
|
578
|
|
1,827
|
|
|
262
|
|
240
|
|
636
|
|
504
|
|
1,642
|
|
|
Total segment
|
$
|
3,307
|
|
$
|
4,822
|
|
$
|
5,283
|
|
$
|
6,495
|
|
$
|
19,907
|
|
|
$
|
3,223
|
|
$
|
4,880
|
|
$
|
4,789
|
|
$
|
3,955
|
|
$
|
16,847
|
|
Segment geographic information for the nine months ended September 30, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
(dollars in millions)
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
United States
|
$
|
2,709
|
|
$
|
7,457
|
|
$
|
11,883
|
|
$
|
14,291
|
|
$
|
36,340
|
|
|
$
|
2,568
|
|
$
|
7,250
|
|
$
|
10,469
|
|
$
|
8,235
|
|
$
|
28,522
|
|
|
Europe
|
2,891
|
|
3,906
|
|
311
|
|
2,935
|
|
10,043
|
|
|
3,028
|
|
4,216
|
|
440
|
|
1,752
|
|
9,436
|
|
|
Asia Pacific
|
3,393
|
|
2,077
|
|
807
|
|
628
|
|
6,905
|
|
|
3,220
|
|
2,131
|
|
996
|
|
255
|
|
6,602
|
|
|
Other
|
758
|
|
667
|
|
2,249
|
|
1,730
|
|
5,404
|
|
|
788
|
|
694
|
|
1,949
|
|
1,492
|
|
4,923
|
|
|
Total segment
|
$
|
9,751
|
|
$
|
14,107
|
|
$
|
15,250
|
|
$
|
19,584
|
|
$
|
58,692
|
|
|
$
|
9,604
|
|
$
|
14,291
|
|
$
|
13,854
|
|
$
|
11,734
|
|
$
|
49,483
|
|
Segment sales disaggregated by product type for the quarters ended September 30, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
(dollars in millions)
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
Commercial and industrial, non aerospace
|
$
|
3,307
|
|
$
|
4,822
|
|
$
|
44
|
|
$
|
12
|
|
$
|
8,185
|
|
|
$
|
3,223
|
|
$
|
4,880
|
|
$
|
5
|
|
$
|
14
|
|
$
|
8,122
|
|
|
Commercial aerospace
|
—
|
|
—
|
|
3,671
|
|
4,723
|
|
8,394
|
|
|
—
|
|
—
|
|
3,421
|
|
3,031
|
|
6,452
|
|
|
Military aerospace
|
—
|
|
—
|
|
1,568
|
|
1,760
|
|
3,328
|
|
|
—
|
|
—
|
|
1,363
|
|
910
|
|
2,273
|
|
|
Total segment
|
$
|
3,307
|
|
$
|
4,822
|
|
$
|
5,283
|
|
$
|
6,495
|
|
$
|
19,907
|
|
|
$
|
3,223
|
|
$
|
4,880
|
|
$
|
4,789
|
|
$
|
3,955
|
|
$
|
16,847
|
|
Segment sales disaggregated by product type for the nine months ended September 30, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
(dollars in millions)
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
Commercial and industrial, non aerospace
|
$
|
9,751
|
|
$
|
14,107
|
|
$
|
72
|
|
$
|
38
|
|
$
|
23,968
|
|
|
$
|
9,604
|
|
$
|
14,291
|
|
$
|
31
|
|
$
|
44
|
|
$
|
23,970
|
|
|
Commercial aerospace
|
—
|
|
—
|
|
10,584
|
|
14,406
|
|
24,990
|
|
|
—
|
|
—
|
|
9,989
|
|
8,966
|
|
18,955
|
|
|
Military aerospace
|
—
|
|
—
|
|
4,594
|
|
5,140
|
|
9,734
|
|
|
—
|
|
—
|
|
3,834
|
|
2,724
|
|
6,558
|
|
|
Total segment
|
$
|
9,751
|
|
$
|
14,107
|
|
$
|
15,250
|
|
$
|
19,584
|
|
$
|
58,692
|
|
|
$
|
9,604
|
|
$
|
14,291
|
|
$
|
13,854
|
|
$
|
11,734
|
|
$
|
49,483
|
|
Segment sales disaggregated by sales type for the quarters ended September 30, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
(dollars in millions)
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
Product
|
$
|
1,449
|
|
$
|
3,998
|
|
$
|
3,230
|
|
$
|
5,346
|
|
$
|
14,023
|
|
|
$
|
1,448
|
|
$
|
4,106
|
|
$
|
2,703
|
|
$
|
3,297
|
|
$
|
11,554
|
|
|
Service
|
1,858
|
|
824
|
|
2,053
|
|
1,149
|
|
5,884
|
|
|
1,775
|
|
774
|
|
2,086
|
|
658
|
|
5,293
|
|
|
Total segment
|
$
|
3,307
|
|
$
|
4,822
|
|
$
|
5,283
|
|
$
|
6,495
|
|
$
|
19,907
|
|
|
$
|
3,223
|
|
$
|
4,880
|
|
$
|
4,789
|
|
$
|
3,955
|
|
$
|
16,847
|
|
Segment sales disaggregated by sales type for the nine months ended September 30, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
(dollars in millions)
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
Otis
|
Carrier
|
Pratt & Whitney
|
Collins Aerospace Systems
|
Total
|
|
Product
|
$
|
4,240
|
|
$
|
11,703
|
|
$
|
9,508
|
|
$
|
16,191
|
|
$
|
41,642
|
|
|
$
|
4,192
|
|
$
|
11,917
|
|
$
|
8,016
|
|
$
|
9,825
|
|
$
|
33,950
|
|
|
Service
|
5,511
|
|
2,404
|
|
5,742
|
|
3,393
|
|
17,050
|
|
|
5,412
|
|
2,374
|
|
5,838
|
|
1,909
|
|
15,533
|
|
|
Total segment
|
$
|
9,751
|
|
$
|
14,107
|
|
$
|
15,250
|
|
$
|
19,584
|
|
$
|
58,692
|
|
|
$
|
9,604
|
|
$
|
14,291
|
|
$
|
13,854
|
|
$
|
11,734
|
|
$
|
49,483
|
|
Note 18: Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU and its related amendments modifies the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments, including trade receivables, contract assets, long term receivables and off-balance sheet credit exposures. The amendment requires entities to consider a broader range of information to estimate expected credit losses, including historical information, current conditions and a reasonable forecast period, which may result in earlier recognition of certain losses. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of this ASU and its related amendments.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new standard removes the disclosure requirements for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. This standard did not have a material impact on our financial statement disclosures. We early adopted this standard effective January 1, 2019.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The new standard includes updates to the disclosure requirements for defined benefit plans including several additions, deletions and modifications to the disclosure requirements. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this ASU.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new standard provides updated guidance surrounding implementation costs associated with cloud computing
arrangements that are service contracts. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. We do not expect this ASU to have a material impact on the consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The amendments in this update for determining whether a decision-making fee is a variable interest require reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in generally accepted accounting principles (GAAP)). These amendments also will create alignment between determining whether a decision making fee is a variable interest and determining whether a reporting entity within a related party group is the primary beneficiary of a VIE. This will significantly reduce the risk that decision makers with insignificant direct and indirect interests could be deemed the primary beneficiary of a VIE. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. We do not expect this ASU to have a material impact on the consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. The amendments in this update make targeted improvements to GAAP for collaborative arrangements as follows: clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements; add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606; and require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. The provisions of this ASU are effective for years beginning after December 15, 2019, with early adoption permitted. We do not expect this ASU to have a material impact on the consolidated financial statements.
With respect to the unaudited condensed consolidated financial information of UTC for the quarters and nine months ended September 30, 2019 and 2018, PricewaterhouseCoopers LLP (PricewaterhouseCoopers) reported that it has applied limited procedures in accordance with professional standards for a review of such information. However, its report dated October 25, 2019, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the Act) for its report on the unaudited condensed consolidated financial information because that report is not a "report" or a "part" of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.