10-Q 1 a2014-03x3110xq.htm 10-Q 2014-03-31 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 
____________________________________ 

FORM 10-Q
____________________________________ 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission file number 1-812
 
____________________________________ 
UNITED TECHNOLOGIES CORPORATION
____________________________________ 
DELAWARE
 
06-0570975
One Financial Plaza, Hartford, Connecticut 06101
(860) 728-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý.    No  ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý.    No  ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨.    No  ý.
At March 31, 2014 there were 916,731,329 shares of Common Stock outstanding.



UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
Quarter Ended March 31, 2014
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

United Technologies Corporation and its subsidiaries’ names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or tradenames of United Technologies Corporation and its subsidiaries. Names, abbreviations of names, logos, and products and service designators of other companies are either the registered or unregistered trademarks or tradenames of their respective owners. As used herein, the terms “we,” “us,” “our,” “the Company,” or “UTC,” unless the context otherwise requires, mean United Technologies Corporation and its subsidiaries. References to internet web sites in this Form 10-Q are provided for convenience only. Information available through these web sites is not incorporated by reference into this Form 10-Q.

2


PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Quarter Ended March 31,
(Dollars in millions, except per share amounts)
 
2014
 
2013
Net Sales:
 
 
 
 
Product sales
 
$
10,692

 
$
10,255

Service sales
 
4,053

 
4,144

 
 
14,745

 
14,399

Costs and Expenses:
 
 
 
 
Cost of products sold
 
8,081

 
7,848

Cost of services sold
 
2,609

 
2,617

Research and development
 
624

 
610

Selling, general and administrative
 
1,596

 
1,627

 
 
12,910

 
12,702

Other income, net
 
263

 
309

Operating profit
 
2,098

 
2,006

Interest expense, net
 
225

 
236

Income from continuing operations before income taxes
 
1,873

 
1,770

Income tax expense
 
567

 
418

Net income from continuing operations
 
1,306

 
1,352

Less: Noncontrolling interest in subsidiaries' earnings from continuing operations
 
93

 
82

Income from continuing operations attributable to common shareowners
 
1,213

 
1,270

Discontinued operations (Note 2):
 
 
 
 
Income from operations
 

 
20

Loss on disposal
 

 
(15
)
Income tax expense
 

 
(9
)
Loss from discontinued operations attributable to common shareowners
 

 
(4
)
Net income attributable to common shareowners
 
$
1,213

 
$
1,266

Comprehensive income
 
$
1,238

 
$
908

Less: Comprehensive income attributable to noncontrolling interest
 
86

 
61

Comprehensive income attributable to common shareowners
 
$
1,152

 
$
847

Earnings Per Share of Common Stock - Basic:
 
 
 
 
Income from continuing operations attributable to common shareowners
 
$
1.35

 
$
1.41

Net income attributable to common shareowners
 
$
1.35

 
$
1.40

Earnings Per Share of Common Stock - Diluted:
 
 
 
 
Income from continuing operations attributable to common shareowners
 
$
1.32

 
$
1.39

Net income attributable to common shareowners
 
$
1.32

 
$
1.39

See accompanying Notes to Condensed Consolidated Financial Statements

 
 
 
 
 

3


UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
 
(Dollars in millions)
 
March 31, 2014
 
December 31, 2013
Assets
 
 
 
 
Cash and cash equivalents
 
$
4,477

 
$
4,619

Accounts receivable, net
 
11,537

 
11,458

Inventories and contracts in progress, net
 
10,992

 
10,330

Future income tax benefits, current
 
1,922

 
1,964

Other assets, current
 
892

 
1,071

Total Current Assets
 
29,820

 
29,442

Customer financing assets
 
1,105

 
1,156

Future income tax benefits
 
1,237

 
1,236

Fixed assets
 
18,869

 
18,661

Less: Accumulated depreciation
 
(9,974
)
 
(9,795
)
Fixed assets, net
 
8,895

 
8,866

Goodwill
 
28,216

 
28,168

Intangible assets, net
 
15,528

 
15,521

Other assets
 
6,428

 
6,205

Total Assets
 
$
91,229

 
$
90,594

Liabilities and Equity
 
 
 
 
Short-term borrowings
 
$
188

 
$
388

Accounts payable
 
6,949

 
6,965

Accrued liabilities
 
15,678

 
15,335

Long-term debt currently due
 
116

 
112

Total Current Liabilities
 
22,931

 
22,800

Long-term debt
 
19,739

 
19,741

Future pension and postretirement benefit obligations
 
3,320

 
3,444

Other long-term liabilities
 
11,407

 
11,279

Total Liabilities
 
57,397

 
57,264

Commitments and contingent liabilities (Note 14)
 
 
 

Redeemable noncontrolling interest
 
137

 
111

Shareowners’ Equity:
 
 
 
 
Common Stock
 
14,937

 
14,764

Treasury Stock
 
(20,760
)
 
(20,431
)
Retained earnings
 
41,205

 
40,539

Unearned ESOP shares
 
(124
)
 
(126
)
Accumulated other comprehensive loss
 
(2,941
)
 
(2,880
)
Total Shareowners’ Equity
 
32,317

 
31,866

Noncontrolling interest
 
1,378

 
1,353

Total Equity
 
33,695

 
33,219

Total Liabilities and Equity
 
$
91,229

 
$
90,594

See accompanying Notes to Condensed Consolidated Financial Statements

4


UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
 
Quarter Ended March 31,
(Dollars in millions)
 
2014
 
2013
Operating Activities of Continuing Operations:
 
 
 
 
Income from continuing operations
 
$
1,306

 
$
1,352

Adjustments to reconcile income from continuing operations to net cash flows provided by operating activities of continuing operations:
 
 
 
 
Depreciation and amortization
 
467

 
444

Deferred income tax provision (benefit)
 
44

 
(40
)
Stock compensation cost
 
60

 
70

Change in:
 
 
 
 
Accounts receivable
 
(66
)
 
209

Inventories and contracts in progress
 
(712
)
 
(746
)
Other current assets
 
(5
)
 
(56
)
Accounts payable and accrued liabilities
 
262

 
395

Global pension contributions
 
(84
)
 
(29
)
Other operating activities, net
 
63

 
(190
)
Net cash flows provided by operating activities of continuing operations
 
1,335

 
1,409

Investing Activities of Continuing Operations:
 
 
 
 
Capital expenditures
 
(333
)
 
(295
)
Investments in businesses
 
(17
)
 
(24
)
Dispositions of businesses
 
123

 
746

Decrease in customer financing assets, net
 
12

 
31

Increase in collaboration intangible assets
 
(142
)
 
(157
)
Other investing activities, net
 
(85
)
 
38

Net cash flows (used in) provided by investing activities of continuing operations
 
(442
)
 
339

Financing Activities of Continuing Operations:
 
 
 
 
Issuance (repayment) of long-term debt, net
 
6

 
(46
)
Decrease in short-term borrowings, net
 
(200
)
 
(329
)
Proceeds from Common Stock issued under employee stock plans
 
86

 
153

Dividends paid on Common Stock
 
(514
)
 
(465
)
Repurchase of Common Stock
 
(335
)
 
(335
)
Other financing activities, net
 
(38
)
 
3

Net cash flows used in financing activities of continuing operations
 
(995
)
 
(1,019
)
Discontinued Operations:
 
 
 
 
Net cash used in operating activities
 

 
(715
)
Net cash used in investing activities
 

 
(51
)
Net cash flows used in discontinued operations
 

 
(766
)
Effect of foreign exchange rate changes on cash and cash equivalents
 
(40
)
 
(18
)
Net decrease in cash and cash equivalents
 
(142
)
 
(55
)
Cash and cash equivalents, beginning of year
 
4,619

 
4,836

Cash and cash equivalents, end of period
 
4,477

 
4,781

Less: Cash and cash equivalents of businesses held for sale
 

 
14

Cash and cash equivalents of continuing operations, end of period
 
$
4,477

 
$
4,767


See accompanying Notes to Condensed Consolidated Financial Statements

5



UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at March 31, 2014 and for the quarters ended March 31, 2014 and 2013 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The financial information included herein should be read in conjunction with the financial statements and notes in our Annual Report to Shareowners (2013 Annual Report) incorporated by reference to our Annual Report on Form 10-K for calendar year 2013 (2013 Form 10-K).
Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets
Business Acquisitions and Dispositions. During the quarter ended March 31, 2014, our cash investment in business acquisitions was $17 million, and consisted of a number of small acquisitions, primarily in our commercial businesses.
As a result of the 2012 transactions related to IAE International Aero Engines AG (IAE), Pratt & Whitney holds a 61% net interest in the collaboration 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. IAE retains limited equity with the primary economics of the V2500 program passed to the participants in the separate collaboration arrangement. As such, we have determined that IAE is a variable interest entity, and Pratt & Whitney its primary beneficiary under the criteria established in the FASB ASC Topic 810 “Consolidations” and has, therefore, been consolidated. The carrying amounts and classification of assets and liabilities for IAE in our Condensed Consolidated Balance Sheet as of March 31, 2014 are as follows:
(Dollars in millions)
 
Current assets
$
1,811

Noncurrent assets
1,096

Total assets
$
2,907

 
 
Current liabilities
$
1,990

Noncurrent liabilities
1,123

Total liabilities
$
3,113

Goodwill. Changes in our goodwill balances for the quarter ended March 31, 2014 were as follows:
(Dollars in millions)
Balance as of
January 1, 2014
 
Goodwill 
resulting from business combinations
 
Foreign currency translation and other
 
Balance as of
March 31, 2014
Otis
$
1,741

 
$
11

 
$
(10
)
 
$
1,742

UTC Climate, Controls & Security
9,727

 

 
30

 
9,757

Pratt & Whitney
1,273

 

 

 
1,273

UTC Aerospace Systems
15,069

 

 
17

 
15,086

Sikorsky
353

 

 

 
353

Total Segments
28,163

 
11

 
37

 
28,211

Eliminations and other
5

 

 

 
5

Total
$
28,168

 
$
11

 
$
37

 
$
28,216


6


Intangible Assets. Identifiable intangible assets are comprised of the following:
 
March 31, 2014
 
December 31, 2013
(Dollars in millions)
Gross Amount
 
Accumulated
Amortization
 
Gross Amount
 
Accumulated
Amortization
Amortized:
 
 
 
 
 
 
 
Service portfolios
$
2,263

 
$
(1,332
)
 
$
2,234

 
$
(1,295
)
Patents and trademarks
380

 
(186
)
 
380

 
(181
)
IAE collaboration
2,421

 
(5
)
 
2,273

 

Customer relationships and other
12,049

 
(2,326
)
 
12,049

 
(2,199
)
 
17,113

 
(3,849
)
 
16,936

 
(3,675
)
Unamortized:
 
 
 
 
 
 
 
Trademarks and other
2,264

 

 
2,260

 

Total
$
19,377

 
$
(3,849
)
 
$
19,196

 
$
(3,675
)
The customer relationships intangible assets include payments made to our customers to secure certain contractual rights. 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 accordance with the FASB ASC Topic 605, “Customer Payments and Incentives,” we classify amortization of such payments as a reduction of sales. The IAE collaboration intangible asset is being amortized based upon the economic pattern of benefits as represented by the underlying cash flows. Prior to the quarter ended March 31, 2014, these cash flows were negative and, accordingly, no amortization had previously been recorded. Amortization of intangible assets for the quarters ended March 31, 2014 and 2013 was $179 million and $175 million, respectively. The following is the expected amortization of intangible assets for the years 2014 through 2019, which reflects an increase in expected amortization expense due to the pattern of economic benefit on certain aerospace intangible assets increasing over time. 
(Dollars in millions)
 
Remaining 2014
 
2015
 
2016
 
2017
 
2018
 
2019
Amortization expense
 
$
524

 
$
675

 
$
683

 
$
702

 
$
727

 
$
702


Note 2: Discontinued Operations
In 2012, the UTC Board of Directors approved plans for the divestiture of a number of non-core businesses, which were completed with the sale of Pratt & Whitney Rocketdyne (Rocketdyne) on June 14, 2013. Cash generated from these divestitures was used to repay debt incurred to finance the acquisition of Goodrich Corporation (Goodrich) in 2012.
On February 12, 2013, we completed the disposition of UTC Power to ClearEdge Power. The disposition resulted in payments by UTC totaling $48 million, which included capitalization of the business prior to the sale and interim funding of operations as the buyer took control of a loss-generating business. We have no continuing involvement with the UTC Power business post disposition.
The following summarized financial information for our discontinued operations businesses was segregated from continuing operations and reported as Discontinued Operations in 2013. There was no discontinued operations activity in the quarter ended March 31, 2014.
(Dollars in millions)
Quarter Ended March 31, 2013
Discontinued Operations:
 
Net sales
$
161

Income from operations
$
20

Income tax expense
(7
)
Income from operations, net of income taxes
13

Loss on disposal
(15
)
Income tax expense
(2
)
Net loss on discontinued operations
$
(4
)

7


Note 3: Earnings Per Share
 
Quarter Ended March 31,
(Dollars in millions, except per share amounts; shares in millions)
2014
 
2013
Net income attributable to common shareowners:
 
 
 
Net income from continuing operations
$
1,213

 
$
1,270

Net loss from discontinued operations

 
(4
)
Net income attributable to common shareowners
$
1,213

 
$
1,266

Basic weighted average number of shares outstanding
900.9

 
901.3

Stock awards and equity units
16.1

 
12.5

Diluted weighted average number of shares outstanding
917.0

 
913.8

Earnings Per Share of Common Stock - Basic:
 
 
 
Net income from continuing operations
$
1.35

 
$
1.41

Net income attributable to common shareowners
1.35

 
1.40

Earnings Per Share of Common Stock - Diluted:
 
 
 
Net income from continuing operations
$
1.32

 
$
1.39

Net income attributable to common shareowners
1.32

 
1.39

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. These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would be anti-dilutive. For the quarters ended March 31, 2014 and 2013, there were no anti-dilutive stock awards excluded from the computation.
Note 4: Inventories and Contracts in Progress
(Dollars in millions)
March 31, 2014
 
December 31, 2013
Raw materials
$
2,038

 
$
1,983

Work-in-process
4,993

 
4,600

Finished goods
3,653

 
3,360

Contracts in progress
8,029

 
7,929

 
18,713

 
17,872

Less:
 
 
 
Progress payments, secured by lien, on U.S. Government contracts
(372
)
 
(279
)
Billings on contracts in progress
(7,349
)
 
(7,263
)
 
$
10,992

 
$
10,330

As of March 31, 2014 and December 31, 2013, inventory also includes capitalized contract development costs of $922 million and $899 million, respectively, related to certain aerospace programs. These capitalized costs are liquidated as production units are delivered to the customer. The capitalized contract development costs within inventory principally relate to capitalized costs on Sikorsky’s CH-148 contract with the Canadian Government.

8


Note 5: Borrowings and Lines of Credit
(Dollars in millions)
March 31, 2014
 
December 31, 2013
Commercial paper
$

 
$
200

Other borrowings
188

 
188

Total short-term borrowings
$
188

 
$
388

At March 31, 2014, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $4 billion pursuant to a $2 billion revolving credit agreement and a $2 billion multicurrency revolving credit agreement, both of which expire in November 2016. As of March 31, 2014, there were no borrowings under either of these revolving credit agreements. The undrawn portions of these revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of March 31, 2014, our maximum commercial paper borrowing authority as set by our Board of Directors was $4 billion. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, debt refinancing, and repurchases of our common stock.
On April 1, 2014, we redeemed all remaining outstanding 2016 Goodrich 6.290% notes, representing approximately $188 million in aggregate principal, under our redemption notice issued on February 28, 2014.

9


Long-term debt consisted of the following:
(Dollars in millions)
March 31, 2014
 
December 31, 2013
LIBOR§ plus 0.500% floating rate notes due 2015
$
500

 
$
500

4.875% notes due 2015*
1,200

 
1,200

6.290% notes due 2016
188

 
188

5.375% notes due 2017*
1,000

 
1,000

1.800% notes due 2017*
1,500

 
1,500

6.800% notes due 2018
99

 
99

6.125% notes due 2019*
1,250

 
1,250

8.875% notes due 2019
271

 
271

4.500% notes due 2020*
1,250

 
1,250

4.875% notes due 2020
171

 
171

8.750% notes due 2021
250

 
250

3.100% notes due 2022*
2,300

 
2,300

1.550% junior subordinated notes due 2022
1,100

 
1,100

7.100% notes due 2027
141

 
141

6.700% notes due 2028
400

 
400

7.500% notes due 2029*
550

 
550

5.400% notes due 2035*
600

 
600

6.050% notes due 2036*
600

 
600

6.800% notes due 2036
134

 
134

7.000% notes due 2038
159

 
159

6.125% notes due 2038*
1,000

 
1,000

5.700% notes due 2040*
1,000

 
1,000

4.500% notes due 2042*
3,500

 
3,500

Project financing obligations
102

 
86

Other (including capitalized leases)
389

 
394

Total principal long-term debt
19,654

 
19,643

Other (fair market value adjustments and discounts)
201

 
210

Total long-term debt
19,855

 
19,853

Less: current portion
116

 
112

Long-term debt, net of current portion
$
19,739

 
$
19,741


*
We may redeem the above notes, in whole or in part, at our option at any time at a redemption price in U.S. Dollars equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semiannual basis at the adjusted treasury rate plus 10-50 basis points. The redemption price will also include interest accrued to the date of redemption on the principal balance of the notes being redeemed.
The junior subordinated notes are redeemable at our option, in whole or in part, on a date not earlier than August 1, 2017. The redemption price will be the principal amount, plus accrued and unpaid interest, if any, up to but excluding the redemption date. We may extend or eliminate the optional redemption date as part of a remarketing of the junior subordinated notes which could occur between April 29, 2015 and July 15, 2015 or between July 23, 2015 and July 29, 2015.
Includes notes and remaining fair market value adjustments that were assumed as a part of the Goodrich acquisition on July 26, 2012.
§ 
The three-month LIBOR rate as of March 31, 2014 was approximately 0.2%.
We have an existing universal shelf registration statement filed with the Securities and Exchange Commission (SEC) for an indeterminate amount of equity and debt securities for future issuance, subject to our internal limitations on the amount of equity and debt to be issued under this shelf registration statement.

10


Note 6: Income Taxes
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, Canada, China, France, Germany, Hong Kong, Italy, Japan, South Korea, Singapore, Spain, 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 2000.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. It is reasonably possible that a net reduction within a range of $325 million to $725 million of unrecognized tax benefits may occur within the next twelve months as a result of additional worldwide uncertain tax positions, the revaluation of current uncertain tax positions arising from developments in examinations, in appeals, or in the courts, or the closure of tax statutes. See Note 14, Contingent Liabilities, for discussion regarding uncertain tax positions which are not included in this range related to previously disclosed German tax litigation.
As previously disclosed, the French Tax Authority has assessed €237 million (approximately $327 million) related to the proposed disallowance of certain deductions claimed in France for tax years 2008 through 2011. This is a recurring issue and similar challenges may be raised in subsequent tax years until the issue is resolved. During the fourth quarter of 2013, the French Tax Authority approached the Company with an offer of proposed settlement. We are currently involved in ongoing negotiations with the French Tax Authority. We have made an accrual based upon a settlement amount that we believe has potential to result in resolution, which is included in the range mentioned in the paragraph above.
UTC tax years 2006 through 2008 are currently before the Appeals Division of the IRS (IRS Appeals) for resolution discussions regarding certain proposed adjustments with which UTC does not agree. Tax years 2009 and 2010 are under review by the Examination Division of the IRS. Both the 2006 - 2008 appeals proceedings and the 2009 - 2010 examination activity are expected to conclude during 2014. Examination activity for UTC tax years 2011 and 2012 is expected to commence during 2014.
The Company is engaged in litigation with respect to an issue involving the proper timing of deductions taken by Goodrich Corporation in its tax years 2005 and 2006, prior to its acquisition by UTC. This is a recurring issue and the IRS may continue to challenge it in subsequent tax years until the issue is resolved. Goodrich Corporation tax years 2007 through 2010 are currently before IRS Appeals for resolution discussions regarding certain proposed adjustments with which UTC does not agree, including the recurring timing issue described above. Both the 2005 - 2006 litigation and the 2007 - 2010 appeals proceedings, together with all final computations for open tax years through 2010, are expected to be resolved during 2014. Examination activity for Goodrich Corporation tax years 2011 and 2012, prior to its acquisition by UTC, is expected to commence during 2014.
The Examination Division of the Connecticut Department of Revenue Services commenced an examination of UTC’s 2010 - 2012 tax years during the first quarter. This examination is expected to conclude during 2014.
As a result of the anticipated conclusion of tax examination and appeals activity and associated re-evaluation of tax related liabilities and contingencies, we currently expect to recognize net gains, primarily non-cash, in the range of $325 million to $450 million prior to the end of 2014, including pre-tax interest in the range of $50 million to $100 million.
Note 7: Employee Benefit Plans
Pension and Postretirement Plans. We sponsor both funded and unfunded domestic and foreign defined pension and other postretirement benefit plans, and defined contribution plans. Contributions to our plans were as follows:
 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Defined Benefit Plans
$
84

 
$
29

Defined Contribution Plans
$
90

 
$
103

There were no contributions to our domestic defined benefit pension plans in the quarters ended March 31, 2014 and 2013.
The following table illustrates the components of net periodic benefit cost for our defined pension and other postretirement benefit plans:

11


 
Pension Benefits
Quarter Ended March 31,
 
Other Postretirement Benefits
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
 
2014
 
2013
Service cost
$
122

 
$
144

 
$
1

 
$
1

Interest cost
380

 
343

 
10

 
10

Expected return on plan assets
(554
)
 
(527
)
 

 

Amortization
(2
)
 
(9
)
 

 
(3
)
Recognized actuarial net loss (gain)
107

 
240

 
(1
)
 
(1
)
Net settlement and curtailment gain

 
(3
)
 

 

Total net periodic benefit cost
$
53

 
$
188

 
$
10

 
$
7

 
 
 
 
 
 
 
 
Net settlement and curtailment gain for pension benefits includes curtailment gains of approximately $5 million related to, and recorded in, discontinued operations for the quarter ended March 31, 2013.
Note 8: Restructuring Costs
During the quarter ended March 31, 2014, we recorded net pre-tax restructuring costs totaling $125 million for new and ongoing restructuring actions. We recorded charges in the segments as follows:
(Dollars in millions)
 
Otis
$
17

UTC Climate, Controls & Security
43

Pratt & Whitney
42

UTC Aerospace Systems
6

Sikorsky
17

Total
$
125

Restructuring charges incurred during the quarter ended March 31, 2014 primarily relate to actions initiated during 2014 and 2013, and were recorded as follows:
 
 
(Dollars in millions)
 
Cost of sales
$
86

Selling, general and administrative
39

Total
$
125

2014 Actions. During the quarter ended March 31, 2014, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We recorded net pre-tax restructuring costs totaling $90 million, including $56 million in cost of sales and $34 million in selling, general and administrative expenses.
We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2014. No specific plans for significant other actions have been finalized at this time. The following table summarizes the accrual balances and utilization by cost type for the 2014 restructuring actions:
(Dollars in millions)
 
Severance
 
Asset
Write-Downs
 
Facility Exit,
Lease
Termination and
Other Costs
 
Total
Net pre-tax restructuring costs
 
$
85

 
$
3

 
$
2

 
$
90

Utilization and foreign exchange
 
(5
)
 
(3
)
 
(2
)
 
(10
)
Balance at March 31, 2014
 
$
80

 
$

 
$

 
$
80


12


The following table summarizes expected, incurred and remaining costs for the 2014 restructuring actions by segment:
(Dollars in millions)
Expected
Costs
 
Costs incurred Quarter Ended
March 31, 2014
 
Remaining Costs at March 31, 2014
Otis
$
31

 
$
(18
)
 
$
13

UTC Climate, Controls & Security
33

 
(16
)
 
17

Pratt & Whitney
65

 
(37
)
 
28

UTC Aerospace Systems
3

 
(3
)
 

Sikorsky
16

 
(16
)
 

Total
$
148

 
$
(90
)
 
$
58

2013 Actions. During the quarter ended March 31, 2014, we recorded net pre-tax restructuring costs totaling $32 million for restructuring actions initiated in 2013, including $28 million in cost of sales and $4 million in selling, general and administrative expenses. The 2013 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations.
(Dollars in millions)
Severance
 
Asset
Write-Downs
 
Facility Exit,
Lease
Termination and
Other Costs
 
Total
Restructuring accruals at January 1, 2014
$
196

 
$

 
$
19

 
$
215

Net pre-tax restructuring costs
28

 

 
4

 
32

Utilization and foreign exchange
(52
)
 

 
(1
)
 
(53
)
Balance at March 31, 2014
$
172

 
$

 
$
22

 
$
194

The following table summarizes expected, incurred and remaining costs for the 2013 restructuring actions by segment:
(Dollars in millions)
Expected
Costs
 
Costs incurred through
December 31, 2013
 
Costs incurred Quarter Ended
March 31, 2014
 
Remaining Costs at March 31, 2014
Otis
$
74

 
$
(69
)
 
$
(1
)
 
$
4

UTC Climate, Controls & Security
124

 
(89
)
 
(24
)
 
11

Pratt & Whitney
162

 
(154
)
 
(6
)
 
2

UTC Aerospace Systems
89

 
(71
)
 
(1
)
 
17

Sikorsky
38

 
(38
)
 

 

Total
$
487

 
$
(421
)
 
$
(32
)
 
$
34

2012 Actions. As of March 31, 2014, we have approximately $97 million of accrual balances remaining related to 2012 actions.
Note 9: Financial Instruments
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures.
The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $12.2 billion and $12.3 billion at March 31, 2014 and December 31, 2013, respectively.

13


The following table summarizes the fair value of derivative instruments as of March 31, 2014 and December 31, 2013 which consist solely of foreign exchange contracts:
 
Asset Derivatives
 
Liability Derivatives
(Dollars in millions)
March 31, 2014
 
December 31, 2013
 
March 31, 2014
 
December 31, 2013
Derivatives designated as hedging instruments
$
55

 
$
59

 
$
164

 
$
103

Derivatives not designated as hedging instruments
63

 
31

 
62

 
54

The impact from foreign exchange derivative instruments that qualified as cash flow hedges was as follows:
 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Loss recorded in Accumulated other comprehensive loss
$
80

 
$
97

Loss reclassified from Accumulated other comprehensive loss into Product sales (effective portion)
$
18

 
$
8

Assuming current market conditions continue, a $95 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 March 31, 2014, all derivative contracts accounted for as cash flow hedges will mature by March 2016.
We recognized gains of $26 million and $32 million in Other income, net on the Condensed Consolidated Statement of Comprehensive Income from foreign exchange contracts not designated as hedging instruments in the quarters ended March 31, 2014 and 2013, respectively.
Note 10: Fair Value Measurements
The FASB ASC Topic "Fair Value Measurements and Disclosure" establishes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 - quoted prices in active markets for identical assets or liabilities;
Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly; and
Level 3 - unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.
The following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and nonrecurring basis in our Condensed Consolidated Balance Sheet as of March 31, 2014 and December 31, 2013: 
March 31, 2014 (Dollars in millions)
Total
 
Level 1
 
Level 2
 
Level 3
Recurring fair value measurements:
 
 
 
 
 
 
 
Available-for-sale securities
$
866

 
$
866

 
$

 
$

Derivative assets
118

 

 
118

 

Derivative liabilities
(226
)
 

 
(226
)
 

Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Business dispositions
55

 

 
55

 

December 31, 2013 (Dollars in millions)
Total
 
Level 1
 
Level 2
 
Level 3
Recurring fair value measurements:
 
 
 
 
 
 
 
Available-for-sale securities
$
988

 
$
988

 
$

 
$

Derivative assets
90

 

 
90

 

Derivative liabilities
(157
)
 

 
(157
)
 

Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Business dispositions
66

 

 
66

 


14


During the quarter ended March 31, 2013, we recorded an approximately $38 million net gain from UTC Climate, Controls & Security's ongoing portfolio transformation, primarily due to a gain on the sale of a business in Hong Kong.
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 and commodity derivatives 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 March 31, 2014, there were no significant transfers in and out of Level 1 and Level 2.
As of March 31, 2014, 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 March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
December 31, 2013
(Dollars in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term receivables
$
752

 
$
651

 
$
655

 
$
586

Customer financing notes receivable
291

 
276

 
394

 
366

Short-term borrowings
(188
)
 
(188
)
 
(388
)
 
(388
)
Long-term debt (excluding capitalized leases)
(19,808
)
 
(22,041
)
 
(19,807
)
 
(21,525
)
Long-term liabilities
(304
)
 
(268
)
 
(283
)
 
(253
)
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 as of March 31, 2014:
(Dollars in millions)
Total
 
Level 1
 
Level 2
 
Level 3
Long-term receivables
$
651

 
$

 
$
651

 
$

Customer financing notes receivable
276

 

 
276

 

Short-term borrowings
(188
)
 

 

 
(188
)
Long-term debt (excluding capitalized leases)
(22,041
)
 

 
(21,716
)
 
(325
)
Long-term liabilities
(268
)
 

 
(268
)
 

We had commercial aerospace financing and other contractual commitments totaling approximately $11 billion as of March 31, 2014 and December 31, 2013, related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms. Risks associated with changes in interest rates on these commitments are mitigated by the fact that 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. The fair value of these commitments is not readily determinable.
Note 11: Long-Term Financing Receivables
(Dollars in millions)
March 31, 2014
 
December 31, 2013
Long-term trade accounts receivable
$
771

 
$
714

Notes and leases receivable
543

 
583

Total long-term receivables
$
1,314

 
$
1,297

Long-term trade accounts receivable represent amounts arising from the sale of goods and services with a contractual maturity date of greater than one year and are recognized as Other assets in our Condensed Consolidated Balance Sheet. Notes and leases receivable represent notes and lease receivables other than receivables related to operating leases, and are recognized as Customer financing assets in our Condensed Consolidated Balance Sheet.

15


Customer credit ratings range from 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 8% and 9% of the total long-term receivables reflected in the table above were considered to bear high credit risk as of March 31, 2014 and December 31, 2013, respectively.
For long-term trade accounts receivable, we evaluate credit risk and collectability individually to determine if an allowance is necessary. Our long-term receivables reflected in the table above, which include reserves of $18 million and $49 million as of March 31, 2014 and December 31, 2013, respectively, are individually evaluated for impairment. At both March 31, 2014 and December 31, 2013, 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.

16


Note 12: Shareowners’ Equity and Noncontrolling Interest
A summary of the changes in shareowners’ equity and noncontrolling interest comprising total equity for the quarters ended March 31, 2014 and 2013 is provided below:
 
 
Quarter Ended March 31,
 
 
2014
 
2013
(Dollars in millions)
 
Share-owners’
Equity
 
Non-controlling Interest
 
Total
Equity
 
Share-owners’
Equity
 
Non-controlling Interest
 
Total
Equity
Equity, beginning of period
 
$
31,866

 
$
1,353

 
$
33,219

 
$
25,914

 
$
1,155

 
$
27,069

Comprehensive income for the period:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
1,213

 
93

 
1,306

 
1,266

 
82

 
1,348

Total other comprehensive loss
 
(61
)
 
(7
)
 
(68
)
 
(419
)
 
(21
)
 
(440
)
Total comprehensive income for the period
 
1,152

 
86

 
1,238

 
847

 
61

 
908

Common Stock issued under employee plans
 
165

 

 
165

 
251

 

 
251

Common Stock repurchased
 
(335
)
 

 
(335
)
 
(335
)
 

 
(335
)
Dividends on Common Stock
 
(514
)
 

 
(514
)
 
(465
)
 

 
(465
)
Dividends on ESOP Common Stock
 
(18
)
 

 
(18
)
 
(17
)
 

 
(17
)
Dividends attributable to noncontrolling interest
 


 
(56
)
 
(56
)
 


 
(56
)
 
(56
)
Purchase of subsidiary shares from noncontrolling interest
 
(3
)
 

 
(3
)
 
(1
)
 
(9
)
 
(10
)
Sale of subsidiary shares in noncontrolling interest
 
4

 
24

 
28

 

 
237

 
237

Redeemable noncontrolling interest in subsidiaries’ earnings
 


 
(6
)
 
(6
)
 


 

 

Redeemable noncontrolling interest in total other comprehensive income
 

 
2

 
2

 

 
4

 
4

Redeemable noncontrolling interest reclassification to noncontrolling interest
 

 
(25
)
 
(25
)
 

 
(23
)
 
(23
)
Equity, end of period
 
$
32,317

 
$
1,378

 
$
33,695

 
$
26,194

 
$
1,369

 
$
27,563

 
 
 
 
 
 
 
 
 
 
 
 
 
A summary of the changes in each component of accumulated other comprehensive loss, net of tax for the quarter ended March 31, 2014 are provided below:
(Dollars in millions)
Foreign
Currency
Translation
 
Defined
Benefit
Pension and
Post-
retirement
Plans
 
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
 
Unrealized
Hedging
(Losses)
Gains
 
Accumulated
Other
Comprehensive
(Loss) Income
Balance at December 31, 2013
$
170

 
$
(3,267
)
 
$
296

 
$
(79
)
 
$
(2,880
)
Other comprehensive (loss) income before reclassifications, net
(102
)
 
13

 
22

 
(65
)
 
(132
)
Amounts reclassified from accumulated other comprehensive income (loss)
3

 
70

 
(17
)
 
15

 
71

Balance at March 31, 2014
$
71

 
$
(3,184
)
 
$
301

 
$
(129
)
 
$
(2,941
)

17


Details of the reclassification out of accumulated other comprehensive loss for the quarter ended March 31, 2014 are provided below:
(Dollars in millions)
 
Amount of Income (Expense) Reclassified from Other Comprehensive Income (Loss)
 
Affected Line Item in the Condensed Consolidated Statement of Comprehensive Income
Foreign Currency Translation:
 
 
 
 
Recognized due to business disposition
 
$
(3
)
 
Other income, net
Defined Benefit Pension and Post-retirement Plans:
 
 
 
 
Amortization of prior-service costs and transition obligation
 
$
2

 
Note (1)
Recognized actuarial net loss
 
(106
)
 
Note (1)
Total before tax
 
(104
)
 
 
Tax benefit
 
34

 
Income tax expense
Net of tax
 
$
(70
)
 
 
Unrealized Gains on Available-for-Sale Securities:
 
 
 
 
Realized gain on sale of securities, before tax
 
$
24

 
Other income, net
Tax expense
 
(7
)
 
Income tax expense
Net of tax
 
$
17

 
 
Unrealized Hedging (Losses) Gains:
 
 
 
 
Foreign exchange contracts
 
$
(18
)
 
Product sales
Tax expense
 
3

 
Income tax expense
Net of tax
 
$
(15
)
 
 
Note (1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (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. A summary of the changes in redeemable noncontrolling interest recorded in the mezzanine section of the Condensed Consolidated Balance Sheet for the quarters ended March 31, 2014 and 2013 is provided below:
 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Redeemable noncontrolling interest, beginning of period
$
111

 
$
238

Net income
6

 

Foreign currency translation, net
(2
)
 
(4
)
Dividends attributable to noncontrolling interest
(3
)
 
(2
)
Redeemable noncontrolling interest reclassification to noncontrolling interest
25

 
23

Redeemable noncontrolling interest, end of period
$
137

 
$
255

Changes in noncontrolling interests that do not result in a change of control and where there is a difference between fair value and carrying value are accounted for as equity transactions. A summary of these changes in ownership interests in subsidiaries and the pro-forma effect on Net income attributable to common shareowners had they been recorded through net income for the quarters ended March 31, 2014 and 2013 is provided below:

18


 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Net income attributable to common shareowners
$
1,213

 
$
1,266

Transfers to noncontrolling interests:
 
 
 
Increase in common stock for sale of subsidiary shares
4

 

Decrease in common stock for purchase of subsidiary shares
(3
)
 
(1
)
Net income attributable to common shareowners after transfers to noncontrolling interests
$
1,214

 
$
1,265

Note 13: Guarantees
We extend a variety of financial, market value and product performance guarantees to third parties. Following the sale of substantially all operations of Rocketdyne on June 14, 2013, certain guarantees of Rocketdyne's performance under then existing contracts remained in place, which resulted in an increase in our performance guarantees of approximately $97 million, with no associated significant carrying amount of a liability as of March 31, 2014. There have been no other material changes to guarantees outstanding since December 31, 2013.
The changes in the carrying amount of service and product warranties and product performance guarantees for the quarters ended March 31, 2014 and 2013 are as follows:
(Dollars in millions)
 
2014
 
2013
Balance as of January 1
 
$
1,360

 
$
1,332

Warranties and performance guarantees issued
 
79

 
94

Settlements made
 
(71
)
 
(76
)
Other
 
(39
)
 
(14
)
Balance as of March 31
 
$
1,329

 
$
1,336

Note 14: Contingent Liabilities
Summarized below are the matters previously described in Note 17 of the Notes to the Consolidated Financial Statements in our 2013 Annual Report, incorporated by reference in our 2013 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 regulatory authorities with jurisdiction over our foreign operations. As described in Note 1 to the Consolidated Financial Statements in our 2013 Annual Report, we have accrued for the costs of environmental remediation activities 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 2013 Annual Report.
Government. 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. 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 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, which recommend that certain contract prices should be reduced to comply with various government regulations. Some of these audit reports involved substantial amounts. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and continue to litigate certain cases. 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 accrued the minimum amount.

19


Legal Proceedings.
F100 Engine Litigation
As previously disclosed, the United States government sued us in 1999 in the United States District Court for the Southern District of Ohio, claiming that Pratt & Whitney violated the civil False Claims Act and common law. The claims relate to the “Fighter Engine Competition” between Pratt & Whitney's F100 engine and General Electric's F110 engine. The government alleged that it overpaid for F100 engines under contracts awarded by the U.S. Air Force in fiscal years 1985 through 1990 because Pratt & Whitney inflated its estimated costs for some purchased parts and withheld data that would have revealed the overstatements. At trial, which ended in April, 2005, the government claimed Pratt & Whitney's liability to be approximately $624 million. On August 1, 2008, the trial court held that the Air Force had not suffered any actual damages because Pratt & Whitney had made significant price concessions after the alleged overstatements were made. However, the trial court judge found that Pratt & Whitney violated the False Claims Act due to inaccurate statements contained in its 1983 initial engine pricing proposal. In the absence of actual damages, the trial court awarded the government the maximum civil penalty of approximately $7 million, or $10,000 for each of the 709 invoices Pratt & Whitney submitted in 1989 and later under the contracts. In September 2008, both the government and UTC appealed the decision to the United States Court of Appeals for the Sixth Circuit. On November 18, 2010, the Sixth Circuit affirmed Pratt & Whitney's liability under the False Claims Act, but remanded the case to the trial court for further proceedings on the issues of False Claims Act damages and common law liability and damages.
On June 18, 2012, the trial court found that Pratt & Whitney had breached obligations imposed by common law based on the same conduct with respect to which the court previously found liability under the False Claims Act. Under the common law claims, the U.S. Air Force is entitled to seek damages for events occurring before March 3, 1989, which are not recoverable under the False Claims Act.
On June 17, 2013, the trial court awarded the government approximately $473 million in damages and penalties, plus prejudgment interest in an amount to be determined. On July 1, 2013, the trial court, after determining the amount of prejudgment interest, entered judgment in favor of the government in the amount of approximately $664 million. The trial court also awarded postjudgment interest on the full amount of the judgment to accrue from July 2, 2013, at the federal variable interest rate determined pursuant to 28 U.S.C. § 1961. The judgment included four different components of damages: (1) common law damages of approximately $109 million; (2) prejudgment interest on common law damages of approximately $191 million; (3) False Claims Act treble damages of approximately $357 million; and (4) penalties of approximately $7 million. The penalty component of the judgment previously was affirmed by the United States Court of Appeals in 2010.
We strongly disagree with the trial court's analysis and conclusions. We filed an appeal from the judgment to the United States Court of Appeals for the Sixth Circuit on August 26, 2013. Based on our analysis, we continue to believe that there is no basis for any common law liability for the inaccurate statements. We also believe that the government suffered no actual damages as a result of the inaccurate statements made in 1983 and, therefore, there is no basis in fact or law for the award of common law damages, prejudgment interest or False Claims Act treble damages. If, contrary to our expectations, all or any portion of the judgment should ultimately be affirmed, we estimate a range of reasonably possible loss from approximately $24 million to $657 million in excess of amounts previously accrued, plus postjudgment interest. The outcome of this matter could result in a material adverse effect on our results of operations in the period in which a liability would be recognized and cash flows for the period in which damages would be paid.
Cost Accounting Standards Claims
As previously disclosed, in December 2008, the Department of Defense (DOD) issued a contract claim against Sikorsky to recover overpayments the DOD alleges that it made to Sikorsky since January 2003 in connection with cost accounting changes approved by the DOD and implemented by Sikorsky in 1999 and 2006. These changes relate to the calculation of material overhead rates in government contracts. The DOD claimed that Sikorsky's liability was approximately $98 million (including interest through March 31, 2014). We believed this claim was without merit and Sikorsky filed an appeal in December 2009 with the U.S. Court of Federal Claims. Trial in the matter concluded in January 2013 and on March 22, 2013, the U.S. Court of Federal Claims issued a written decision in favor of Sikorsky determining that the DOD had failed to prove its claims because Sikorsky's calculation of material overhead complied with the cost accounting standards. The DOD has appealed this decision.
By letter dated December 24, 2013, a Divisional Administrative Contracting Officer of the Unites States Defense Contract Management Agency asserted a claim and demand for payment of $210,968,414 against Pratt & Whitney. 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. We believe this claim is without merit. On March 18, 2014, Pratt & Whitney filed an appeal to the Armed Services Board of Contract Appeals.

20


German Tax Office Appeal
As previously disclosed, UTC has been involved in administrative review proceedings with the German Tax Office, which concern €203 million (approximately $280 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. On August 3, 2012, we filed suit in the local German Tax Court (Berlin-Brandenburg). In 2008 the German Federal Tax Court ("FTC") denied benefits to another taxpayer in a case involving a German tax law relevant to our reorganization. The determination of the FTC on this other matter was appealed to the European Court of Justice ("ECJ") to determine if the underlying German tax law is violative of European Union (EU) principles. On September 17, 2009, the ECJ issued an opinion in this case that is generally favorable to the other taxpayer and referred the case back to the FTC for further consideration of certain related issues. In May 2010, the FTC released its decision, in which it resolved certain tax issues that may be relevant to our suit and remanded the case to a lower court for further development. In 2012, the lower court decided in favor of the other taxpayer and the government appealed the findings to the FTC. After consideration of the ECJ decision, the latest FTC decision and the lower court decision, we continue to believe that it is more likely than not that the relevant German tax law is violative of EU principles and we have not accrued for this matter. We intend to litigate vigorously the matter to conclusion.
Other.
As described in Note 16 to the Consolidated Financial Statements in our 2013 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 have accrued for environmental investigatory, remediation, operating and maintenance costs, performance guarantees and other litigation and claims based on our estimate of the probable outcome of these matters. While it is possible that the outcome of these matters may differ from the recorded liability, we believe that resolution of these matters will not have a material impact on our competitive position, results of operations, cash flows or financial condition.
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.
We are also subject to a number of routine lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the ordinary course of our business. We do not believe that these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Note 15: Segment Financial Data
Our operations are classified into five principal segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems and Sikorsky. 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.
Results for the quarters ended March 31, 2014 and 2013 are as follows:
 
Net Sales
 
Operating Profits
 
Operating Profit Margins
(Dollars in millions)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Otis
$
2,955

 
$
2,814

 
$
570

 
$
575

 
19.3
%
 
20.4
%
UTC Climate, Controls & Security
3,851

 
3,837

 
537

 
520

 
13.9
%
 
13.6
%
Pratt & Whitney
3,329

 
3,402

 
388

 
406

 
11.7
%
 
11.9
%
UTC Aerospace Systems
3,450

 
3,263

 
590

 
501

 
17.1
%
 
15.4
%
Sikorsky
1,361

 
1,249

 
86

 
90

 
6.3
%
 
7.2
%
Total segments
14,946

 
14,565

 
2,171

 
2,092

 
14.5
%
 
14.4
%
Eliminations and other
(201
)
 
(166
)
 
39

 
21

 
 
 
 
General corporate expenses

 

 
(112
)
 
(107
)
 
 
 
 
Consolidated
$
14,745

 
$
14,399

 
$
2,098

 
$
2,006

 
14.2
%
 
13.9
%
 
 
 
 
 
 
 
 
 
 
 
 
See Note 8 to the Condensed Consolidated Financial Statements for a discussion of restructuring costs included in segment operating results.

21


Note 16: Accounting Pronouncements
In April 2014, the FASB issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." This ASU relates to discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity's operations and financial results. The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2014. This ASU is not expected to have an impact on our financial statements or disclosures.

22


With respect to the unaudited condensed consolidated financial information of UTC for the quarters ended March 31, 2014 and 2013, 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 April 25, 2014, appearing below, states that the firm did not audit and does not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those that would have been necessary if their report had not been included. Accordingly, the degree of reliance on its report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of Section 11 of the Securities Act of 1933, as amended (the Act) for its report on the unaudited condensed consolidated financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7 and 11 of the Act.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareowners of United Technologies Corporation:

We have reviewed the accompanying condensed consolidated balance sheet of United Technologies Corporation and its subsidiaries as of March 31, 2014 and the related condensed consolidated statements of comprehensive income for the three-month periods ended March 31, 2014 and 2013 and the condensed consolidated statement of cash flows for the three-month periods ended March 31, 2014 and 2013. This interim financial information is the responsibility of the Corporation's management.

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

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

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2013, and the related consolidated statements of operations, of comprehensive income, of cash flows, and of changes in equity for the year then ended (not presented herein), and in our report dated February 6, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2013, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
April 25, 2014

23


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEW
We are a global provider of high technology products and services to the building systems and aerospace industries. Our operations are classified into five principal business segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems and Sikorsky. Otis and UTC Climate, Controls & Security are referred to as the “commercial businesses,” while Pratt & Whitney, UTC Aerospace Systems and Sikorsky are collectively referred to as the “aerospace businesses.” On September 23, 2013, we announced the formation of UTC Building and Industrial Systems, a new organizational structure consisting of Otis and UTC Climate, Controls & Security. This new organizational structure is expected to enhance our ability to deliver more integrated solutions to our customers and accelerate innovation in smart building technologies and sustainable designs. Otis and UTC Climate, Controls & Security each continue to report their financial and operational results as separate segments, which is consistent with how we allocate resources and measure the financial performance of these businesses.
Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The current status of significant factors affecting our business environment in 2014 is discussed below. For additional discussion, refer to the “Business Overview” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Annual Report, which is incorporated by reference in our 2013 Form 10-K.
General
Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. To limit the impact of any one industry, or the economy of any single country on our consolidated operating results, our strategy has been, and continues to be, the maintenance of a balanced and diversified portfolio of businesses. Our operations include original equipment manufacturing (OEM) and extensive related aftermarket parts and services in both our commercial and aerospace businesses. Our business mix also reflects the combination of shorter cycles at UTC Climate, Controls & Security and in our commercial aerospace aftermarket businesses, and longer cycles at Otis and in our aerospace OEM businesses. Our customers include companies in the private sector and governments, and our businesses reflect an extensive geographic diversification that has evolved with the continued globalization of world economies.
Growth in emerging markets continues to be led by China, where our sales for the quarter grew 15% over the prior year. Growth in China, along with U.S. economic expansion, is expected to drive global growth throughout 2014. The economic environment in North America has continued to rebound on improving consumer sentiment, lower unemployment rates, and an improving housing market. Although European economic conditions have continued to improve, rising political tensions in Eastern Europe may temper growth if escalation continues. UTC's sales to customers in Russia in 2013 were approximately $500 million, and while Russia is a key supplier of certain commodities, we are taking steps to minimize the potential for disruption to our business. To date, we have not seen any significant signs of disruption, although we continue to closely monitor developments in the region.
U.S. Government deficit reduction measures continue to pressure U.S. Department of Defense spending and adversely affect our military businesses. Total sales to the U.S. Government were $2.1 billion and $2.3 billion, or 14% and 16% of total UTC sales in the first quarter of 2014 and 2013, respectively. The defense portion of our aerospace business is affected by changes in market demand and the global political environment. Our participation in long-term production and development programs for the U.S. Government has, and is expected to contribute positively to our results in 2014.
Disposition Activity
As previously disclosed, we disposed of a number of businesses in 2013. On February 12, 2013, we completed the disposition of UTC Power to ClearEdge Power, and on June 14, 2013, we completed the sale of substantially all operations of Pratt & Whitney Rocketdyne (Rocketdyne) to GenCorp Inc. The results from these businesses were reclassified to Discontinued Operations in our Condensed Consolidated Statements of Comprehensive Income and Cash Flows. On May 17, 2013, we completed the sale of the Pratt & Whitney Power Systems business to Mitsubishi Heavy Industries (MHI) and entered into a long-term engineering and manufacturing agreement with MHI. Pratt & Whitney Power Systems was not reclassified to Discontinued Operations due to our level of continuing involvement in the business post-sale.
In connection with regulatory approval of the Goodrich acquisition, regulatory authorities required UTC to dispose of the Goodrich electric power systems and the pumps and engine controls businesses. Pursuant to these regulatory obligations, these businesses had been held separately from UTC's and Goodrich's ongoing businesses since the acquisition of Goodrich by UTC. On March 18, 2013, we completed the sale of the Goodrich pumps and engine controls business to Triumph Group, Inc., and on March 26, 2013, we completed the sale of the Goodrich electric power systems business to Safran S.A. Combined proceeds from the sales of the two businesses were approximately $600 million.

24


Acquisition Activity
Our growth strategy contemplates acquisitions. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated, and anticipated synergies or cost savings are achieved. During the quarter ended March 31, 2014, our cash investment in business acquisitions was approximately $17 million and consisted of a number of small acquisitions primarily in our commercial businesses. We expect cash investment in businesses of approximately $1 billion in 2014. However, actual acquisition spending may vary depending upon the timing, availability and value of acquisition opportunities.
Other
Government legislation, policies and regulations can have a negative impact on our worldwide operations. Government regulation of refrigerants and energy efficiency standards, elevator safety codes and fire protection regulations are important to our commercial businesses. Government and market-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, and government procurement practices can impact our aerospace and defense businesses.
Commercial airline financial distress and consolidation, global economic conditions, changes in raw material and commodity prices, interest rates, foreign currency exchange rates, energy costs, and the impact from natural disasters and weather conditions create uncertainties that could impact our earnings outlook for the remainder of 2014. See Part I, Item 1A, “Risk Factors” in our 2013 Form 10-K for further discussion.
CRITICAL ACCOUNTING ESTIMATES
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in our 2013 Annual Report, incorporated by reference in our 2013 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting estimates during the quarter ended March 31, 2014.
RESULTS OF OPERATIONS
Net Sales
 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Net Sales
$
14,745

 
$
14,399

The factors contributing to the total percentage change year-over-year in total net sales for the quarter ended March 31, 2014 are as follows:
 
Quarter Ended March 31, 2014
Organic change
5
 %
Foreign currency translation
(1
)%
Acquisitions and divestitures, net
(2
)%
Other

Total % Change
2
 %
During the quarter ended March 31, 2014, all five business segments experienced organic sales growth led by Sikorsky (9%), Otis (6%), and UTC Aerospace Systems (6%). Organic sales growth at Sikorsky was led by higher international military and commercial aircraft sales volume. Organic growth at Otis was primarily due to higher new equipment sales volume in the U.S. and China, while organic growth at UTC Aerospace Systems was due to higher commercial OEM and aftermarket volumes. Organic sales growth was also driven by Pratt & Whitney (4%) and by UTC Climate, Controls & Security (3%). See the Segment Review section of Management's Discussion and Analysis for further discussion of segment performance.
The sales decrease from divestitures for the quarter ended March 31, 2014 was primarily a result of the disposition of the Pratt & Whitney Power Systems business and portfolio transformation initiatives at UTC Climate, Controls & Security in 2013.

25


Cost of Products and Services Sold 
 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Cost of products sold
$
8,081

 
$
7,848

Percentage of product sales
75.6
%
 
76.5
%
Cost of services sold
$
2,609

 
$
2,617

Percentage of service sales
64.4
%
 
63.2
%
Total cost of products and services sold
$
10,690

 
$
10,465

The factors contributing to the percentage change year-over-year for the quarter ended March 31, 2014 in total cost of products and services sold are as follows: 
 
Quarter Ended March 31, 2014
Organic change
4
 %
Foreign currency translation
(1
)%
Acquisitions and divestitures, net
(2
)%
Restructuring
1
 %
Other

Total % Change
2
 %
The organic increase in total cost of products and services sold (4%) in the quarter ended March 31, 2014 was driven by the organic sales increase noted above, partially offset by the benefits of previous restructuring actions and lower commodity costs, particularly within UTC Climate, Controls & Security. The decrease in “Acquisitions and divestitures, net” (2%) is attributable to the disposition of the Pratt & Whitney Power Systems business and portfolio transformation initiatives at UTC Climate, Controls & Security in 2013.
Gross Margin
 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Gross margin
$
4,055

 
$
3,934

Percentage of net sales
27.5
%
 
27.3
%
The 20 basis point increase in gross margin as a percentage of sales for the quarter ended March 31, 2014 is due to the benefits of previous restructuring actions and lower commodity costs and productivity gains at UTC Climate, Controls & Security (30 basis points) and the favorable gross margin impact of higher aftermarket sales at Pratt & Whitney (20 basis points) partially offset by higher restructuring costs.
Research and Development 
 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Company-funded
$
624

 
$
610

Percentage of net sales
4.2
%
 
4.2
%
Customer-funded
$
523

 
$
543

Percentage of net sales
3.5
%
 
3.8
%
Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year fluctuations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses. The year-over-year increase in company-funded research and development (2%) in the quarter ended March 31, 2014 is primarily related to higher research and development spending within the UTC Aerospace Systems segment on increased spending on several commercial aerospace programs. Customer-funded research and development decreased (4%) due to lower customer-funded spending at UTC Aerospace Systems primarily on U.S. military and space programs (7%) and within U.S. Government programs at Sikorsky (6%), offset by higher customer-funded spending at Pratt & Whitney on U.S. military and commercial programs (10%).
We expect company-funded research and development for the full year 2014 to remain consistent with 2013 levels.

26


Selling, General and Administrative 
 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Selling, general and administrative expenses
$
1,596

 
$
1,627

Percentage of net sales
10.8
%
 
11.3
%
Selling, general and administrative expenses declined 2% in the quarter ended March 31, 2014 due to the impact of divestitures completed over the preceding twelve months (2%), lower divestiture costs (1%) and the benefit from savings from previous restructuring actions, all of which were partially offset by higher restructuring costs (1%).
Other Income, Net 
 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Other income, net
$
263

 
$
309

Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses as well as other ongoing and non-recurring items. The year-over-year decrease in other income, net in the quarter ended March 31, 2014 (15%) is a result of the absence of a settlement with an engine program partner recognized in the first quarter of 2013 (13%) and net gains related to the UTC Climate, Controls & Security portfolio transformation (12%), which included a net gain in the first quarter of 2013 of $38 million primarily on the sale of a business in Hong Kong. These factors were partially offset by higher licensing income (11%) and normal recurring operational activity as disclosed above.
Interest Expense, Net
 
Quarter Ended March 31,
(Dollars in millions)
2014
 
2013
Interest expense
$
243

 
$
255

Interest income
(18
)
 
(19
)
Interest expense, net
$
225

 
$
236

Average interest expense rate
4.2
%
 
4.0
%
The decrease in interest expense in the quarter ended March 31, 2014 is a result of lower average debt balances as a result of debt repayments made since March 31, 2013, partially offset by slightly higher average interest expense rates year-over-year.
Income Taxes
 
Quarter Ended March 31,
 
2014
 
2013
Effective tax rate
30.3
%
 
23.6
%
The increase in the effective tax rate for the quarter ended March 31, 2014, primarily reflects the absence of a $95 million tax benefit recorded during the first quarter of 2013, related to the retroactive impact of the legislative corporate tax extenders enacted in January 2013, as part of the American Taxpayer Relief Act of 2012.
We estimate our full year annual effective income tax rate in 2014 to be approximately 30%, absent one-time adjustments. We anticipate some variability in the tax rate quarter-to-quarter in 2014.
Net Income Attributable to Common Shareowners from Continuing Operations 
 
Quarter Ended March 31,
(Dollars in millions, except per share amounts)
2014
 
2013
Income from continuing operations attributable to common shareowners
$
1,213

 
$
1,270

Diluted earnings per share from continuing operations
$
1.32

 
$
1.39

Net income attributable to common shareowners from continuing operations for the quarter ended March 31, 2014 includes restructuring charges, net of tax benefit, of $83 million. The net effect on diluted earnings per share of restructuring charges was $0.09 per share. The results for the quarter ended March 31, 2013 included a $0.11 per share benefit from non-recurring items net of restructuring charges. The impact of foreign currency translation and hedging generated a favorable effect of $0.01 per diluted share on our operational performance in the quarter ended March 31, 2014.

27


Restructuring Costs
 
Quarter Ended March 31,
(Dollars in millions, except per share amounts)
2014
 
2013
Restructuring costs
$
125

 
$
50

Restructuring actions are an essential component of our operating margin improvement efforts and relate to both existing operations and those recently acquired. We now expect to incur restructuring costs in 2014 of approximately $375 million, including trailing costs related to prior actions associated with our continuing cost reduction efforts and the integration of acquisitions. The expected adverse impact on earnings in 2014 from anticipated additional restructuring costs is expected to be offset by the beneficial impact from gains and other items that are outside the normal operating activities of the Company. Although no specific plans for significant other actions have been finalized at this time, we continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.
As described below, the charges incurred in the quarter ended March 31, 2014 primarily relate to actions initiated during 2014 and 2013, while the charges incurred in the quarter ended March 31, 2013 primarily relate to actions initiated during 2013 and 2012.
2014 Actions. During the quarter ended March 31, 2014, we recorded net pre-tax restructuring charges of $90 million relating to ongoing cost reduction actions initiated in 2014. The charges include severance related to workforce reductions and asset write-downs and facility exit and lease termination costs related to the consolidation of field and manufacturing operations.
We are targeting the majority of the remaining workforce and facility related cost reduction actions for completion during 2014. Approximately 45% of the total pre-tax charge will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the quarter ended March 31, 2014, we had cash outflows of approximately $8 million related to the 2014 actions. We expect to incur additional restructuring and other charges of $58 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $140 million annually.
2013 Actions. During the quarters ended March 31, 2014 and 2013, we recorded net pre-tax restructuring charges of $32 million and $20 million, respectively, for actions initiated in 2013. The 2013 actions relate to ongoing cost reduction efforts, including severance related to workforce reductions and asset write-downs and facility exit and lease termination costs related to the consolidation of field and manufacturing operations.
We are targeting to complete in 2014 the majority of the remaining workforce and all facility related cost reduction actions initiated in 2013. Approximately 75% of the total pre-tax charge will require cash payments, which we have and expect to continue to fund with cash generated from operations. During the quarter ended March 31, 2014, we had cash outflows of approximately $49 million related to the 2013 actions. We expect to incur additional restructuring charges of $34 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $425 million annually, of which, approximately $88 million was realized during the quarter ended March 31, 2014.
For additional discussion of restructuring, see Note 8 to the Condensed Consolidated Financial Statements.
Segment Review
Segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. Adjustments to reconcile segment reporting to the consolidated results for the quarters ended March 31, 2014 and 2013 are included in “Eliminations and other” below, which also includes certain smaller subsidiaries. We attempt to quantify material cited factors within our discussion of the results of each segment whenever those factors are determinable. However, in some instances, the factors we cite within our segment discussion are based upon input measures or qualitative information that does not lend itself to quantification when discussed in the context of the financial results measured on an output basis and are not, therefore, quantified in the below discussions.
Commercial Businesses
Our commercial businesses generally serve customers in the worldwide commercial and residential property industries, and UTC Climate, Controls & Security also serves customers in the commercial and transport refrigeration industries. Sales in the commercial businesses are influenced by a number of external factors, including fluctuations in residential and commercial

28


construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, credit markets and other global and political factors. UTC Climate, Controls & Security’s financial performance can also be influenced by production and utilization of transport equipment, and, in the case of its residential business, weather conditions. To ensure adequate supply of products in the distribution channel, UTC Climate, Controls & Security customarily offers its customers incentives to purchase products. The principal incentive program provides reimbursements to distributors for offering promotional pricing on UTC Climate, Controls & Security products. We account for incentive payments made as a reduction to sales.
Within the UTC Climate, Controls & Security segment, North American residential heating, ventilation, and air conditioning (HVAC) orders increased 19% in the first quarter as the housing market continued to improve and distributors build stock for the summer season. Global commercial HVAC orders increased 2% with increases in Europe (15%) and Asia (4%) partially offset by lower order levels in North America (4%). Within the Otis segment, new equipment orders increased 9% in the first quarter of 2014 with growth in North America (37%) and in China (27%) due, in part, to several large product orders in the quarter. New equipment orders declined in Europe (5%) largely due to fewer large project orders in Russia.
Summary performance for each of the commercial businesses for the quarters ended March 31, 2014 and 2013 was as follows:
 
Otis
 
UTC Climate, Controls & Security
(Dollars in millions)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Net Sales
$
2,955

 
$
2,814

 
5
 %
 
$
3,851

 
$
3,837

 
 %
Cost of Sales
2,008

 
1,872

 
7
 %
 
2,726

 
2,754

 
(1
)%
 
947

 
942

 
1
 %
 
1,125

 
1,083

 
4
 %
Operating Expenses and Other
377

 
367

 
3
 %
 
588

 
563

 
4
 %
Operating Profits
$
570

 
$
575

 
(1
)%
 
$
537

 
$
520

 
3
 %
Operating Profit Margins
19.3
%
 
20.4
%
 
 
 
13.9
%
 
13.6
%
 
 
 
Otis –
Quarter Ended March 31, 2014 Compared with Quarter Ended March 31, 2013
 
Factors contributing to total % Change
 
Organic /
Operational
 
FX
Translation
 
Acquisitions /
Divestitures, net