10-Q 1 d10q.htm FORM 10-Q FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2011

OR

 

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

For the transition period from              to             

Commission file number 1-812

 

 

UNITED TECHNOLOGIES CORPORATION

 

 

 

DELAWARE   06-0570975

One Financial Plaza, Hartford, Connecticut 06103

(860) 728-7000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x.    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x.    No  ¨.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨.    No  x.

At June 30, 2011 there were 908,712,931 shares of Common Stock outstanding.

 

 

 


Table of Contents

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

Quarter Ended June 30, 2011

 

     Page  

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements:

     3   

Condensed Consolidated Statement of Operations for the quarters ended June 30, 2011 and 2010

     3   

Condensed Consolidated Statement of Operations for the six months ended June 30, 2011 and 2010

     4   

Condensed Consolidated Balance Sheet at June 30, 2011 and December 31, 2010

     5   

Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2011 and 2010

     6   

Notes to Condensed Consolidated Financial Statements

     7   

Report of Independent Registered Public Accounting Firm

     24   

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

     25   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     41   

Item 4. Controls and Procedures

     41   

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

     42   

Item 1A. Risk Factors

     42   

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

     47   

Item 6. Exhibits

     48   

SIGNATURES

     49   

EXHIBIT INDEX

     50   

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

 

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PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

     Quarter Ended June 30,  

(Dollars in millions, except per share amounts; shares in millions)

   2011     2010  

Net Sales:

    

Product sales

   $ 10,823     $ 9,967  

Service sales

     4,253       3,835  
                
     15,076       13,802  
                

Costs, Expenses and Other:

    

Cost of products sold

     8,099       7,466  

Cost of services sold

     2,806       2,549  

Research and development

     526       459  

Selling, general and administrative

     1,644       1,491  

Other income, net

     (219     (45
                

Operating profit

     2,220       1,882  

Interest expense, net

     141       149  
                

Income before income taxes

     2,079       1,733  

Income tax expense

     649       521  
                

Net income

     1,430       1,212  

Less: Noncontrolling interest in subsidiaries’ earnings

     112       102  
                

Net income attributable to common shareowners

   $ 1,318     $ 1,110  
                

Earnings Per Share of Common Stock:

    

Basic

   $ 1.48     $ 1.22  

Diluted

   $ 1.45     $ 1.20  

Dividends Per Share of Common Stock

   $ .480     $ .425  

Weighted average number of shares outstanding:

    

Basic shares

     892.9       910.4  

Diluted shares

     909.8       925.4  

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

     Six Months Ended June 30,  

(Dollars in millions, except per share amounts; shares in millions)

   2011     2010  

Net Sales:

    

Product sales

   $ 20,168     $ 18,352  

Service sales

     8,252       7,490  
                
     28,420       25,842  
                

Costs, Expenses and Other:

    

Cost of products sold

     15,051       13,825  

Cost of services sold

     5,495       4,922  

Research and development

     1,011       856  

Selling, general and administrative

     3,187       2,915  

Other income, net

     (323     (81
                

Operating profit

     3,999       3,405  

Interest expense, net

     290       320  
                

Income before income taxes

     3,709       3,085  

Income tax expense

     1,178       926  
                

Net income

     2,531       2,159  

Less: Noncontrolling interest in subsidiaries’ earnings

     201       183  
                

Net income attributable to common shareowners

   $ 2,330     $ 1,976  
                

Earnings Per Share of Common Stock:

    

Basic

   $ 2.60     $ 2.17  

Diluted

   $ 2.55     $ 2.13  

Dividends Per Share of Common Stock

   $ .905     $ .850  

Weighted average number of shares outstanding:

    

Basic shares

     895.9       912.1  

Diluted shares

     912.4       927.4  

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)

 

(Dollars in millions)

   June 30,
2011
    December 31,
2010
 
Assets     

Cash and cash equivalents

   $ 5,396     $ 4,083  

Accounts receivable, net

     9,801       8,925  

Inventories and contracts in progress, net

     8,795       7,766  

Future income tax benefits, current

     1,557       1,623  

Other assets, current

     880       1,113  
                

Total Current Assets

     26,429       23,510  
                

Customer financing assets

     1,059       1,118  

Future income tax benefits

     1,724       1,970  

Fixed assets

     16,365       15,914  

Less: Accumulated depreciation

     (10,036     (9,634
                

Fixed assets, net

     6,329       6,280  
                

Goodwill

     18,309       17,721  

Intangible assets, net

     4,141       4,060  

Other assets

     4,156       3,834  
                

Total Assets

   $ 62,147     $ 58,493  
                
Liabilities and Equity     

Short-term borrowings

   $ 1,270     $ 116  

Accounts payable

     5,686       5,206  

Accrued liabilities

     12,622       12,247  

Long-term debt currently due

     636       163  
                

Total Current Liabilities

     20,214       17,732  
                

Long-term debt

     9,492       10,010  

Future pension and postretirement benefit obligations

     3,528       3,592  

Other long-term liabilities

     4,826       4,510  
                

Total Liabilities

     38,060       35,844  
                

Redeemable noncontrolling interest

     348       317  

Shareowners’ Equity:

    

Common Stock

     13,036       12,597  

Treasury Stock

     (18,960     (17,468

Retained earnings

     31,701       30,191  

Unearned ESOP shares

     (158     (166

Accumulated other comprehensive loss

     (2,896     (3,769
                

Total Shareowners’ Equity

     22,723       21,385  

Noncontrolling interest

     1,016       947  
                

Total Equity

     23,739       22,332  
                

Total Liabilities and Equity

   $ 62,147     $ 58,493  
                

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

     Six Months Ended June 30,  

(Dollars in millions)

   2011     2010  

Operating Activities:

    

Net income attributable to common shareowners

   $ 2,330     $ 1,976  

Noncontrolling interest in subsidiaries’ earnings

     201       183  
                

Net income

     2,531       2,159  

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

    

Depreciation and amortization

     677       666  

Deferred income tax provision

     292       128  

Stock compensation cost

     128       88  

Change in:

    

Accounts receivable

     (624     (552

Inventories and contracts in progress

     (829     (653

Other current assets

     (7     (26

Accounts payable and accrued liabilities

     524       834  

Global pension contributions*

     (70     (261

Other operating activities, net

     (3     171  
                

Net cash flows provided by operating activities

     2,619       2,554  
                

Investing Activities:

    

Capital expenditures

     (390     (302

Investments in businesses

     (184     (2,368

Dispositions of businesses

     147       132  

Decrease (increase) in customer financing assets, net

     29       (28

Other investing activities, net

     91       207  
                

Net cash flows used in investing activities

     (307     (2,359
                

Financing Activities:

    

(Repayment) issuance of long-term debt, net

     (60     1,106  

Increase in short-term borrowings, net

     1,156       1,174  

Common Stock issued under employee stock plans

     168       162  

Dividends paid on Common Stock

     (781     (744

Repurchase of Common Stock

     (1,500     (1,150

Other financing activities, net

     (92     (143
                

Net cash flows (used in) provided by financing activities

     (1,109     405  
                

Effect of foreign exchange rate changes on cash and cash equivalents

     110       (52
                

Net increase in cash and cash equivalents

     1,313       548  

Cash and cash equivalents, beginning of year

     4,083       4,449  
                

Cash and cash equivalents, end of period

   $ 5,396     $ 4,997  
                

 

* Non-cash activities include contributions of UTC common stock of $250 million to domestic defined benefit pension plans in the second quarter of 2010. There were no contributions of UTC common stock in 2011.

See accompanying Notes to Condensed Consolidated Financial Statements

 

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UNITED TECHNOLOGIES CORPORATION

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Condensed Consolidated Financial Statements at June 30, 2011 and for the quarters and six months ended June 30, 2011 and 2010 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. Certain reclassifications have been made to the prior period amounts to conform to the current year presentation. We previously reported “Other income, net,” which included “Interest income,” as a component of “Revenues.” “Other income, net,” excluding “Interest income,” is now reflected as a component of “Costs, Expenses and Other,” while “Interest income” is now netted with “Interest expense” for financial statement presentation. 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 (2010 Annual Report) incorporated by reference to our Annual Report on Form 10-K for calendar year 2010 (2010 Form 10-K).

Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets

Business Acquisitions and Dispositions. During the first six months of 2011, our investment in business acquisitions was $184 million and consisted of a number of smaller acquisitions in both the aerospace and commercial businesses. As a result of Sikorsky’s contribution of a business into a new venture in the United Arab Emirates, we recognized a gain of approximately $73 million in the second quarter of 2011.

Goodwill. Changes in our goodwill balances for the first six months of 2011 were as follows:

 

(Dollars in millions)

   Balance as of
January 1, 2011
     Goodwill resulting from
business combinations
    Foreign currency
translation and other
     Balance as of
June  30, 2011
 

Otis

   $ 1,470      $ 27     $ 76      $ 1,573  

Carrier

     3,171        13       18        3,202  

UTC Fire & Security

     6,646        36       137        6,819  

Pratt & Whitney

     1,224        —          11        1,235  

Hamilton Sundstrand

     4,491        (10     22        4,503  

Sikorsky

     330        —          4        334  
                                  

Total Segments

     17,332        66       268        17,666  

Eliminations and other

     389        254       —           643  
                                  

Total

   $ 17,721      $ 320     $ 268      $ 18,309  
                                  

For the six months ended June 30, 2011, we recorded an additional $254 million of goodwill, reflected within “Eliminations and other” in the above table, related to the finalization of purchase accounting associated with the December 2010 acquisition of Clipper Windpower Plc (Clipper).

Intangible Assets. Identifiable intangible assets are comprised of the following:

 

     June 30, 2011     December 31, 2010  

(Dollars in millions)

   Gross Amount      Accumulated
Amortization
    Gross Amount      Accumulated
Amortization
 

Amortized:

          

Service portfolios

   $ 2,095      $ (1,059   $ 1,950      $ (942

Patents and trademarks

     468        (174     441        (153

Other, principally customer relationships

     3,395        (1,366     3,229        (1,222
                                  
     5,958        (2,599     5,620        (2,317
                                  

Unamortized:

          

Trademarks and other

     782          757     
                                  

Total

   $ 6,740      $ (2,599   $ 6,377      $ (2,317
                                  

 

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Amortization of intangible assets for the quarter and six months ended June 30, 2011 was $103 million and $203 million, respectively, compared with $90 million and $179 million for the same periods of 2010. Average amortization of these intangible assets for 2011 through 2015 is expected to approximate $315 million per year.

Note 2: Earnings Per Share

 

     Quarter Ended June 30,      Six Months Ended June 30,  

(Dollars in millions, except per share amounts; shares in millions)

   2011      2010      2011      2010  

Net income attributable to common shareowners

   $ 1,318      $ 1,110      $ 2,330      $ 1,976  
                                   

Basic weighted average number of shares outstanding

     892.9        910.4        895.9        912.1  

Stock awards

     16.9        15.0        16.5        15.3  
                                   

Diluted weighted average number of shares outstanding

     909.8        925.4        912.4        927.4  
                                   

Earnings Per Share of Common Stock:

           

Basic

   $ 1.48      $ 1.22      $ 2.60      $ 2.17  

Diluted

   $ 1.45      $ 1.20      $ 2.55      $ 2.13  

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 antidilutive. For the quarter and six months ended June 30, 2011, there were no antidilutive stock awards excluded from the computation. The number of stock awards excluded from the computation was 12.7 million for the quarter and six months ended June 30, 2010.

Note 3: Inventories and Contracts in Progress

 

(Dollars in millions)

   June 30, 2011     December 31, 2010  

Raw materials

   $ 1,361     $ 1,221  

Work-in-process

     3,709       3,259  

Finished goods

     3,426       3,026  

Contracts in progress

     6,795       6,340  
                
     15,291       13,846  

Less:

    

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

     (394     (275

Billings on contracts in progress

     (6,102     (5,805
                
   $ 8,795     $ 7,766  
                

As of June 30, 2011 and December 31, 2010, the above inventory balances include capitalized contract development costs of $843 million and $804 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 costs capitalized on Sikorsky’s CH-148 contract with the Canadian government. The CH-148 is a derivative of the H-92, a military variant of the S-92.

Note 4: Borrowings and Lines of Credit

 

(Dollars in millions)

   June 30, 2011      December 31, 2010  

Commercial paper

   $ 1,060      $ —     

Other borrowings

     210        116  
                 

Total short-term borrowings

   $ 1,270      $ 116  
                 

 

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At June 30, 2011, we had committed credit agreements from banks permitting aggregate borrowings of up to $3.0 billion under a $1.6 billion revolving credit agreement and a $1.4 billion multicurrency revolving credit agreement, both of which are available for general funding purposes, including acquisitions. As of June 30, 2011, there were no borrowings under either of these revolving credit agreements, which expire in November 2014 and December 2014, respectively. The undrawn portions under both of these agreements are also available to serve as backup facilities for the issuance of commercial paper. We generally use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions and repurchases of our common stock.

Long-term debt consisted of the following:

 

(Dollars in millions)

   June 30, 2011     December 31, 2010  

6.100% notes due 2012*

   $ 500     $ 500  

4.875% notes due 2015*

     1,200       1,200  

5.375% notes due 2017*

     1,000       1,000  

6.125% notes due 2019*

     1,250       1,250  

8.875% notes due 2019

     272       272  

4.500% notes due 2020*

     1,250       1,250  

8.750% notes due 2021

     250       250  

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  

6.125% notes due 2038*

     1,000       1,000  

5.700% notes due 2040*

     1,000       1,000  

Project financing obligations

     117       141  

Other (including capitalized leases)

     139       160  
                

Total long-term debt

     10,128       10,173  

Less current portion

     (636     (163
                

Long-term debt, net of current portion

   $ 9,492     $ 10,010  
                

 

  * We may redeem some or all of these series of notes at any time at a redemption price in U.S. dollars equal to the greater of 100% of the principal amount outstanding of the applicable series of notes to be redeemed, or the sum of the present values of the remaining scheduled payments of principal and interest on the applicable series of notes to be redeemed. The discounts applied on such redemptions are based on a semiannual calculation at an adjusted treasury rate plus 10-50 basis points, depending on the particular series. The redemption price will also include interest accrued to the date of redemption on the principal balance of the notes being redeemed.

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.

Note 5: 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 1998.

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. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest has also been recognized. Interest accrued in relation to unrecognized tax benefits is recorded in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense.

 

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It is reasonably possible that a net reduction within a range of $90 million to $280 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. A portion of this net reduction may impact the Company’s 2011 or 2012 income tax expense. Not included in the range is €197 million (approximately $280 million) of tax benefits that we have claimed related to a 1998 German reorganization. These tax benefits are currently being reviewed by the German Tax Office in the course of an audit of tax years 1999 to 2000. In 2008 the German Federal Tax Court denied benefits to another taxpayer in a case involving a German tax law relevant to our reorganization. The determination of the German Federal Tax Court 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 German Federal Tax Court for further consideration of certain related issues. In May 2010, the German Federal Tax Court released its decision, in which it resolved certain tax issues that may be relevant to our audit and remanded the case to a lower court for further development. After consideration of the ECJ decision and the latest German Federal Tax 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 tax expense for this matter. As we continue to monitor developments related to this matter, it may become necessary for us to accrue tax expense and related interest.

Tax years 2004 and 2005 are currently before the Appeals Division of the Internal Revenue Service (IRS) for resolution discussions regarding certain proposed tax adjustments with which the Company does not agree. The Company expects that the Appeals Division’s consideration will continue into 2012 and be completed within the next 12 months. Tax years 2006, 2007 and 2008 are under review by the Examination Division of the IRS, which review is expected to continue into 2012 and be completed within the next 12 months. Additionally, the Company has two refund claims pending for years prior to 2004. The Company expects that a final determination will be made with respect to these claims during 2011. These claims are included within the range of unrecognized tax benefits disclosed above.

Note 6: 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 these plans were as follows:

 

     Quarter Ended June 30,      Six Months Ended June 30,  

(Dollars in millions)

   2011      2010      2011      2010  

Defined Benefit Plans

   $ 41      $ 469      $ 70      $ 511  
                                   

Defined Contribution Plans

   $ 56      $ 46      $ 113      $ 96  
                                   

There were no contributions to our domestic defined benefit pension plans in the first six months of 2011. In the first six months of 2010, we made contributions of $451 million to our domestic defined benefit pension plans, almost entirely in the second quarter, including a $250 million contribution of UTC common stock.

The following tables illustrate the components of net periodic benefit cost for our defined pension and other postretirement benefit plans:

 

     Pension Benefits
Quarter Ended
June 30,
    Other Postretirement Benefits
Quarter Ended

June 30,
 

(Dollars in millions)

   2011     2010     2011     2010  

Service cost

   $ 111     $ 99     $ 1     $ —     

Interest cost

     326       320       10       12  

Expected return on plan assets

     (458     (428     —          —     

Amortization

     (3     (4     (1     —     

Recognized actuarial net loss (gain)

     116       71       (2     (1

Net settlement and curtailment loss

     13       11       —          —     
                                

Total net periodic benefit cost

   $ 105     $ 69     $ 8     $ 11  
                                

 

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     Pension Benefits
Six Months
Ended June 30,
    Other Postretirement Benefits
Six Months

Ended June 30,
 

(Dollars in millions)

   2011     2010     2011     2010  

Service cost

   $ 222     $ 198     $ 2     $ 1  

Interest cost

     650       642       20       23  

Expected return on plan assets

     (914     (859     —          —     

Amortization

     (6     (8     (2     (1

Recognized actuarial net loss (gain)

     231       142       (4     (1

Net settlement and curtailment loss

     13       17       —          —     
                                

Total net periodic benefit cost

   $ 196     $ 132     $ 16     $ 22  
                                

Note 7: Restructuring and Other Costs

During the first six months of 2011, we recorded net pre-tax restructuring and other costs in our business segments totaling $103 million for new and ongoing restructuring actions as follows:

 

(Dollars in millions)

      

Otis

   $ 6  

Carrier

     29  

UTC Fire & Security

     16  

Pratt & Whitney

     42  

Hamilton Sundstrand

     6  

Sikorsky

     3  

Eliminations and other

     1  
        

Total

   $ 103  
        

The net costs included $69 million recorded in cost of sales, $32 million in selling, general and administrative expenses and $2 million in other income, net. As described below, these costs primarily relate to actions initiated during 2011 and 2010.

2011 Actions. During the first six months of 2011, 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 and other costs totaling $69 million, including $46 million in cost of sales, $21 million in selling, general and administrative expenses and $2 million in other income, net.

We expect the actions initiated in the first six months of 2011 to result in net workforce reductions of approximately 1,200 hourly and salaried employees, the exiting of approximately 120,000 net square feet of facilities and the disposal of assets associated with exited facilities. As of June 30, 2011, we have completed net workforce reductions of approximately 500 employees. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2011 and 2012. 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 2011 restructuring actions:

 

(Dollars in millions)

   Severance     Asset
Write-Downs
    Facility Exit, Lease
Termination and
Other Costs
     Total  

Restructuring accruals at March 31, 2011

   $ 9     $ —        $ —         $ 9  

Net pre-tax restructuring costs

     54       3       1        58  

Utilization and foreign exchange

     (24     (3     —           (27
                                 

Balance at June 30, 2011

   $ 39     $ —        $ 1      $ 40  
                                 

 

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The following table summarizes expected, incurred and remaining costs for the 2011 restructuring actions by type:

 

(Dollars in millions)

   Severance     Asset Write-
Downs
    Facility Exit, Lease
Termination and
Other Costs
    Total  

Expected costs

   $ 78     $ 3     $ 7     $ 88  

Costs incurred - quarter ended March 31, 2011

     (11     —          —          (11

Costs incurred - quarter ended June 30, 2011

     (54     (3     (1     (58
                                

Balance at June 30, 2011

   $ 13     $ —        $ 6     $ 19  
                                

The following table summarizes expected, incurred and remaining costs for the 2011 restructuring actions by segment:

 

(Dollars in millions)

   Expected
Costs
     Costs Incurred
Quarter Ended
March 31, 2011
    Costs Incurred
Quarter Ended
June 30, 2011
    Remaining
Costs at
June 30, 2011
 

Otis

   $ 10      $ (3   $ (4   $ 3  

Carrier

     16        (3     (9     4  

UTC Fire & Security

     9        (2     (7     —     

Pratt & Whitney

     44        —          (33     11  

Hamilton Sundstrand

     4        (2     (2     —     

Sikorsky

     4        (1     (2     1  

Eliminations and other

     1        —          (1     —     
                                 

Total

   $ 88      $ (11   $ (58   $ 19  
                                 

2010 Actions. During the first six months of 2011, we recorded net pre-tax restructuring and other costs totaling $31 million for restructuring actions initiated in 2010, including $21 million in cost of sales and $10 million in selling, general and administrative expenses. The 2010 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations.

As of June 30, 2011, we have completed net workforce reductions of approximately 3,000 employees of an expected 5,000 employees, and have exited approximately 700,000 net square feet of facilities of an expected 3.9 million net square feet. We are targeting the majority of the remaining workforce and facility related cost reduction actions for completion during 2011 and 2012.

The following table summarizes the accrual balances and utilization by cost type for the 2010 restructuring actions:

 

(Dollars in millions)

   Severance     Asset Write-
Downs
     Facility Exit, Lease
Termination and
Other Costs
    Total  

Restructuring accruals at March 31, 2011

   $ 133     $ —         $ 19     $ 152  

Net pre-tax restructuring costs

     5       —           11       16  

Utilization and foreign exchange

     (40     —           (18     (58
                                 

Balance at June 30, 2011

   $ 98     $ —         $ 12     $ 110  
                                 

The following table summarizes expected, incurred and remaining costs for the 2010 restructuring actions by type:

 

(Dollars in millions)

   Severance     Asset Write-
Downs
    Facility Exit, Lease
Termination and
Other Costs
    Total  

Expected costs

   $ 329     $ 23     $ 109     $ 461  

Costs incurred through December 31, 2010

     (301     (19     (51     (371

Costs incurred - quarter ended March 31, 2011

     (5     (4     (6     (15

Costs incurred - quarter ended June 30, 2011

     (5     —          (11     (16
                                

Remaining costs at June 30, 2011

   $ 18     $ —        $ 41     $ 59  
                                

 

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The following table summarizes expected, incurred and remaining costs for the 2010 restructuring actions by segment:

 

(Dollars in millions)

   Expected Costs      Costs Incurred
through
December 31, 2010
    Costs Incurred
Quarter Ended
March 31, 2011
    Costs Incurred
Quarter Ended
June 30, 2011
    Remaining
Costs at
June 30, 2011
 

Otis

   $ 90      $ (87   $ (1   $ —        $ 2  

Carrier

     108        (74     (11     (6     17  

UTC Fire & Security

     92        (64     (2     (5     21  

Pratt & Whitney

     93        (84     (1     (4     4  

Hamilton Sundstrand

     42        (29     —          (1     12  

Sikorsky

     18        (15     —          —          3  

Eliminations and other

     18        (18     —          —          —     
                                         

Total

   $ 461      $ (371   $ (15   $ (16   $ 59  
                                         

2009 Actions. As of June 30, 2011, we have approximately $82 million of accrual balances remaining related to 2009 actions.

Note 8: 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (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.

By nature, all financial instruments involve market and credit risks. We enter into derivative and other financial instruments with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. We limit counterparty exposure and concentration of risk by diversifying counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.

Foreign Currency Forward Contracts. We manage our foreign currency transaction risks to acceptable limits through the use of derivatives that hedge forecasted cash flows associated with foreign currency transaction exposures, which are accounted for as cash flow hedges, as we deem appropriate. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria of the Derivatives and Hedging Topic of the FASB ASC, the changes in the derivatives’ fair values are not included in current earnings but are included in “Accumulated other comprehensive loss.” These changes in fair value will subsequently be reclassified into earnings as a component of product sales or expenses, as applicable, when the forecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period in which it occurs.

To the extent the hedge accounting criteria are not met, the foreign currency forward contracts are utilized as economic hedges and changes in the fair value of these contracts are recorded currently in earnings in the period in which they occur. These include hedges that are used to reduce exchange rate risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (e.g. payables, receivables) and other economic hedges where the hedge accounting criteria were not met.

The four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $9.6 billion and $8.5 billion at June 30, 2011 and December 31, 2010, respectively.

Commodity Forward Contracts. We enter into commodity forward contracts to reduce the risk of fluctuations in the price we pay for certain commodities (e.g., nickel) which are used directly in the production of our products, or are components of the products we procure to use in the production of our products. These hedges are economic hedges and the changes in fair value of these contracts are recorded currently in earnings in the period in which they occur. The fair value and outstanding notional amount of contracts hedging commodity exposures were insignificant at June 30, 2011 and December 31, 2010, respectively.

 

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The following table summarizes the fair value of derivative instruments as of June 30, 2011 and December 31, 2010:

 

(Dollars in millions)

  

Balance Sheet Asset Location

   June 30, 2011      December 31, 2010  

Derivatives designated as hedging instruments:

        

Foreign Exchange Contracts

   Other assets, current    $ 144      $ 73  

Foreign Exchange Contracts

   Other assets      19        24  
                    
        163        97  
                    

Derivatives not designated as hedging instruments:

        

Foreign Exchange Contracts

   Other assets, current      59        31  

Foreign Exchange Contracts

   Other assets      4        5  
                    
        63        36  
                    

Total Asset Derivative Contracts

      $ 226      $ 133  
                    
     

Balance Sheet Liability Location    

             

Derivatives designated as hedging instruments:

        

Foreign Exchange Contracts

   Accrued liabilities    $ 93      $ 16  

Foreign Exchange Contracts

   Other long-term liabilities      3        1  
                    
        96        17  
                    

Derivatives not designated as hedging instruments:

        

Foreign Exchange Contracts

   Accrued liabilities      33        33  

Foreign Exchange Contracts

   Other long-term liabilities      2        3  
                    
        35        36  
                    

Total Liability Derivative Contracts

      $ 131      $ 53  
                    

The impact from foreign exchange derivative instruments that qualified as cash flow hedges was as follows:

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(Dollars in millions)

   2011      2010     2011      2010  

Gain (loss) recorded in Accumulated other comprehensive loss

   $ 1      $ (74   $ 100      $ (19
                                  

Gain reclassified from Accumulated other comprehensive loss into Product sales (effective portion)

   $ 33      $ 18     $ 76      $ 41  
                                  

Assuming current market conditions continue, a $91 million pre-tax gain 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 June 30, 2011, all derivative contracts accounted for as cash flow hedges will mature by May 2013.

The effect on the Condensed Consolidated Statement of Operations from foreign exchange contracts not designated as hedging instruments was as follows:

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(Dollars in millions)

   2011      2010     2011      2010  
                                  

Gain (loss) recognized in Other income, net

   $ 32      $ (20   $ 28      $ (24
                                  

Fair Value Disclosure. The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The Topic indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability, and also defines fair value based upon an exit price model.

 

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Valuation Hierarchy. The Fair Value Measurements and Disclosure Topic of the FASB ASC 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. The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2011 and December 31, 2010:

 

(Dollars in millions)

   Total Carrying
Value at

June 30, 2011
     Quoted price in
active markets

(Level 1)
     Significant other
observable inputs

(Level 2)
     Unobservable
inputs

(Level 3)
 

Available-for-sale securities

   $ 1,047      $ 1,047      $ —         $ —     

Derivative assets

     226        —           226        —     

Derivative liabilities

     131        —           131        —     

(Dollars in millions)

   Total Carrying
Value at

December 31, 2010
     Quoted price in
active markets

(Level 1)
     Significant other
observable inputs

(Level 2)
     Unobservable
inputs

(Level 3)
 

Available-for-sale securities

   $ 829      $ 829      $ —         $ —     

Derivative assets

     133        —           133        —     

Derivative liabilities

     53        —           53        —     

Valuation Techniques. Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally. They are measured at fair value using closing stock prices from active markets and are classified within Level 1 of the valuation hierarchy. 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. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. Based on our continued ability to trade securities and enter into forward contracts, we consider the markets for our fair value instruments to be active. As of June 30, 2011, there were no significant transfers in and out of Level 1 and Level 2.

As of June 30, 2011, 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 at June 30, 2011 and December 31, 2010:

 

     June 30, 2011     December 31, 2010  

(Dollars in millions)

   Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Long-term receivables

   $ 300     $ 282     $ 300     $ 276  

Customer financing notes receivable

     356       340       376       346  

Long-term debt (excluding capitalized leases)

     (10,068     (11,428     (10,117     (11,500

The above fair values were computed based on comparable transactions, quoted market prices, discounted future cash flows or an estimate of the amount to be received or paid to terminate or settle the agreement, as applicable. Differences between carrying amounts and fair value are attributable to interest and or credit rate changes subsequent to when the transaction occurred. The fair values of Cash and cash equivalents, Accounts receivable, net, Short-term borrowings, and Accounts payable approximate the carrying amounts due to the short-term maturities of these instruments.

We had outstanding commercial aerospace financing and other contractual commitments totaling approximately $2.5 billion and $2.0 billion at June 30, 2011 and December 31, 2010, respectively. 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 the commitment itself is not readily determinable and is not considered significant.

 

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Note 9: Credit Quality of Long-Term Receivables

In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, “Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU is intended to enhance a financial statement user’s ability to evaluate the entity’s credit risk exposures and adequacy of its allowance for credit losses by requiring additional disclosure about the nature of credit risk inherent in the portfolio of receivables, factors and methodologies used in estimating the allowance for credit losses and activity that occurs during a period for both financing receivables and allowance for credit losses. The scope of this ASU is limited to financing receivables, as defined by the ASU, and excludes short-term trade accounts receivable and receivables measured at fair value or lower of cost or fair value. We adopted the disclosures under this ASU for the reporting period ended December 31, 2010, with the exception of disclosures about activity that occurs during a reporting period, which became effective for interim and annual periods beginning on or after December 15, 2010. We adopted the interim disclosures required under this ASU during the quarter ended March 31, 2011.

A long-term or financing receivable represents a contractual right to receive money on demand or on fixed and determinable dates, including trade receivable balances with maturity dates greater than one year. Our long-term and 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 are not significant.

Our classes within aerospace long-term receivables are comprised of long-term trade accounts receivable and notes and leases receivable. 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. The following table summarizes the balance by class of aerospace long-term receivables as of June 30, 2011 and December 31, 2010:

 

(Dollars in millions)

   June 30, 2011      December 31, 2010  

Long-term trade accounts receivable

   $ 203      $ 198  

Notes and leases receivable

     392        416  
                 

Total long-term receivables

   $ 595      $ 614  
                 

Economic conditions and air travel influence the operating environment for most airlines, and the financial performance of our aerospace businesses is directly tied to the economic conditions of the commercial aerospace and defense industries. Additionally, the value of the collateral is also closely tied to commercial airline performance and may be subject to exposure of reduced valuation as a result of market declines. We determine a receivable is impaired when, based on current information and events, it is probable that we will be unable to collect amounts due according to the contractual terms of the receivable agreement. Factors considered in assessing collectability and risk include, but are not limited to, examination of credit quality indicators and other evaluation measures, underlying value of any collateral or security interests, significant past due balances, historical losses, and existing economic conditions.

Long-term receivables can be considered delinquent if payment has not been received in accordance with the underlying agreement. If determined delinquent, long-term trade accounts receivable and notes and leases receivable balances accruing interest may be placed on nonaccrual status. We record potential losses related to long-term receivables when identified. The reserve for credit losses on these receivables relates to specifically identified receivables that are evaluated individually for impairment. For notes and leases receivable, we determine a specific reserve for exposure based on the difference between the carrying value of the receivable and the estimated fair value of the related collateral in connection with the evaluation of credit risk and collectability. For long-term trade accounts receivable, we evaluate credit risk and collectability individually to determine if an allowance is necessary. Uncollectible long-term receivables are written-off when collection of the indebtedness has been pursued for a reasonable period of time without collection; the customer is no longer in operation; or judgment has been levied, but the underlying assets are not adequate to satisfy the indebtedness. At both June 30, 2011 and December 31, 2010, we do 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.

 

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The following table provides the balance of aerospace long-term receivables at June 30, 2011, and summarizes the associated changes in the reserve for estimated credit losses and exposure for the quarter ended June 30, 2011:

 

(Dollars in millions)

      

Beginning balance of the reserve for credit losses and exposure

   $ 42  

Provision

     1  

Charge-offs

     —     

Recoveries

     (8

Other

     —     
        

Ending balance of the reserve for credit losses and exposure: individually evaluated for impairment

   $ 35  
        

Ending balance of long-term receivables: individually evaluated for impairment

   $ 595  
        

We determine credit ratings for each customer in the portfolio based upon public information and information obtained directly from our customers. We conduct a review of customer credit ratings, published historical credit default rates for different rating categories, and multiple third party aircraft value publications as a basis to validate the reasonableness of the allowance for losses on these balances quarterly or when events and circumstances warrant. The credit ratings listed below range from “A” which indicates an extremely strong capacity to meet financial obligations and the receivable is either collateralized or uncollateralized, to “D” which indicates that payment is in default and the receivable is uncollateralized. 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.

The following table summarizes the credit risk profile by creditworthiness category for aerospace long-term receivable balances at June 30, 2011 and December 31, 2010:

 

     June 30, 2011      December 31, 2010  

(Dollars in millions)

   Long-term
trade accounts
receivable
     Notes and
leases
receivable
     Long-term
trade accounts
receivable
     Notes and
leases
receivable
 

A - (low risk, collateralized/uncollateralized)

   $ 197      $ —         $ 193      $ —     

B - (moderate risk, collateralized/uncollateralized)

     6        316        5        336  

C - (high risk, collateralized/uncollateralized)

     —           76        —           80  

D - (in default, uncollateralized)

     —           —           —           —     
                                   

Total

   $ 203      $ 392      $ 198      $ 416  
                                   

 

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Note 10: Shareowners’ Equity and Noncontrolling Interest

A summary of the changes in shareowners’ equity and noncontrolling interest (excluding redeemable noncontrolling interest) comprising total equity for the quarters and six months ended June 30, 2011 and 2010 is provided below:

 

      Quarter Ended June 30,  
     2011     2010  

(Dollars in millions)

   Shareowners’
Equity
    Noncontrolling
Interest
    Total
Equity
    Shareowners’
Equity
    Noncontrolling
Interest
    Total
Equity
 

Equity, beginning of period

   $ 22,126     $ 1,000     $ 23,126     $ 19,964     $ 960     $ 20,924  

Comprehensive income for the period:

            

Net income

     1,318       112       1,430       1,110       102       1,212  

Other comprehensive income (loss):

            

Foreign currency translation, net

     136       2       138       (447     (25     (472

Increases (decreases) in unrealized gains from available-for-sale securities, net

     26         26       (27       (27

Cash flow hedging losses

     (24       (24     (68       (68

Change in pension and post-retirement benefit plans, net

     67         67       50         50  
                                                

Total other comprehensive income (loss)

     205       2       207       (492     (25     (517
                                                

Total comprehensive income for the period

     1,523       114       1,637       618       77       695  

Common Stock issued under employee plans

     253         253       139         139  

Common Stock repurchased

     (750       (750     (660       (660

Common Stock contributed to pension plans

     —            —          250         250  

Dividends on Common Stock

     (413       (413     (371       (371

Dividends on ESOP Common Stock

     (16       (16     (15       (15

Dividends attributable to noncontrolling interest

       (90     (90       (58     (58

Purchase of subsidiary shares from noncontrolling interest

     —          —          —          —          (3     (3

Sale of subsidiary shares in noncontrolling interest

     —          —          —          —          4       4  

Redeemable noncontrolling interest in subsidiaries’ earnings

       (6     (6       (10     (10

Redeemable noncontrolling interest in total other comprehensive income

       (2     (2       12       12  

Change in redemption value of put options

     —            —          8         8  
                                                

Equity, end of period

   $ 22,723     $ 1,016     $ 23,739     $ 19,933     $ 982     $ 20,915  
                                                

 

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     Six Months Ended June 30,  
     2011     2010  

(Dollars in millions)

   Shareowners’
Equity
    Noncontrolling
Interest
    Total
Equity
    Shareowners’
Equity
    Noncontrolling
Interest
    Total
Equity
 

Equity, beginning of period

   $ 21,385     $ 947     $ 22,332     $ 20,066     $ 933     $ 20,999  

Comprehensive income for the period:

            

Net income

     2,330       201       2,531       1,976       183       2,159  

Other comprehensive income (loss):

            

Foreign currency translation, net

     669       38       707       (797     (48     (845

Increases in unrealized gains from available-for-sale securities, net

     71         71       8         8  

Cash flow hedging gains (losses)

     19         19       (43       (43

Change in pension and post-retirement benefit plans, net

     114         114       81         81  
                                                

Total other comprehensive income (loss)

     873       38       911       (751     (48     (799
                                                

Total comprehensive income for the period

     3,203       239       3,442       1,225       135       1,360  

Common Stock issued under employee plans

     447         447       326         326  

Common Stock repurchased

     (1,500       (1,500     (1,160       (1,160

Common Stock contributed to pension plans

     —            —          250         250  

Dividends on Common Stock

     (781       (781     (744       (744

Dividends on ESOP Common Stock

     (31       (31     (31       (31

Dividends attributable to noncontrolling interest

       (166     (166       (147     (147

Purchase of subsidiary shares from noncontrolling interest

     —          —          —          (2     (4     (6

Sale of subsidiary shares in noncontrolling interest

     3       8       11       —          27       27  

Acquisition of noncontrolling interest

       5       5         29       29  

Redeemable noncontrolling interest in subsidiaries’ earnings

       (11     (11       (16     (16

Redeemable noncontrolling interest in total other comprehensive income (loss)

       (6     (6       25       25  

Change in redemption value of put options

     (3       (3     3         3  
                                                

Equity, end of period

   $ 22,723     $ 1,016     $ 23,739     $ 19,933     $ 982     $ 20,915  
                                                

Consistent with the requirements under the Business Combinations Topic of the FASB ASC and the accounting for redeemable equity instruments, 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.

 

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A summary of the changes in redeemable noncontrolling interest recorded in the mezzanine section of the Condensed Consolidated Balance Sheet for the quarters and six months ended June 30, 2011 and 2010 is provided below:

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Redeemable noncontrolling interest, beginning of period

   $ 319     $ 377     $ 317     $ 389  

Net income

     6       10       11       16  

Foreign currency translation, net

     2       (12     6       (25

Dividends attributable to noncontrolling interest

     (1     (3     (11     (13

Purchase of subsidiary shares from noncontrolling interest

     —          (65     —          (65

Change in redemption value of put options

     —          (8     3       (3

Other changes in redeemable noncontrolling interest

     22       12       22       12  
                                

Redeemable noncontrolling interest, end of period

   $ 348     $ 311     $ 348     $ 311  
                                

Consistent with the requirements under the Business Combinations Topic of the FASB ASC and the accounting for noncontrolling interests in consolidated financial statements, 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 effect on shareowners’ equity for the quarters and six months ended June 30, 2011 and 2010 is provided below:

 

     Quarter Ended June 30,      Six Months Ended June 30,  

(Dollars in millions)

   2011      2010      2011      2010  

Net income attributable to common shareowners

   $ 1,318      $ 1,110      $ 2,330      $ 1,976  
                                   

Transfers to noncontrolling interests:

           

Increase in common stock for sale of subsidiary shares

     —           —           3        —     

Decrease in common stock for purchase of subsidiary shares

     —           —           —           (2
                                   

Change from net income attributable to common shareowners and transfers to noncontrolling interests

   $ 1,318      $ 1,110      $ 2,333      $ 1,974  
                                   

Note 11: Guarantees

We extend a variety of financial, market value and product performance guarantees to third parties. There have been no material changes to guarantees outstanding since December 31, 2010.

The changes in the carrying amount of service and product warranties and product performance guarantees for the six months ended June 30, 2011 and 2010 are as follows:

 

(Dollars in millions)

   2011     2010  

Balance as of January 1

   $ 1,136     $ 1,072  

Warranties and performance guarantees issued

     289       189  

Settlements made

     (253     (174

Other

     325       2  
                

Balance as of June 30

   $ 1,497     $ 1,089  
                

The increase reflected in “Other” in the above table primarily reflects the impact of finalizing purchase accounting on the recent acquisition of Clipper.

 

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Note 12: Collaborative Arrangements

In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into certain collaboration arrangements in which costs, sales and risks are shared. Sales generated from engine programs, spare parts, and aftermarket business under collaboration arrangements are recorded as earned in our financial statements. Amounts attributable to our collaborative partners for their share of sales are recorded as an expense in our financial statements based upon the terms and nature of the arrangement. Costs associated with engine programs under collaborative arrangements are expensed as incurred. Under these arrangements, collaborators contribute their program share of engine parts, incur their own production costs and make certain payments to Pratt & Whitney for shared or joint program costs. The reimbursement of the collaborators’ share of program costs is recorded as a reduction of the related expense item at that time. As of June 30, 2011, the collaborators’ interests in all commercial engine programs ranged from 12% to 48%. Pratt & Whitney directs those programs and is the principal participant in all existing collaborative arrangements. There are no individually significant collaborative arrangements, and none of the individual partners’ shares exceed 31% of an individual program.

Note 13: Contingent Liabilities

Summarized below are the matters previously described in Note 17 of the Notes to the Consolidated Financial Statements in our 2010 Annual Report, incorporated by reference in our 2010 Form 10-K, updated as applicable.

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. We accrue for the costs of environmental investigatory, remediation, operating and maintenance costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site, including existing technology, current laws and regulations and prior remediation experience. Where no amount within a range of estimates is more likely, we accrue the minimum. For sites with multiple responsible parties, we consider our likely proportionate share of the anticipated remediation costs and the ability of the other parties to fulfill their obligations in establishing a provision for those costs. We discount liabilities with fixed or reliably determinable future cash payments. We do not reduce accrued environmental liabilities by potential insurance reimbursements. We periodically reassess these accrued amounts. We believe that the likelihood of incurring losses materially in excess of amounts accrued is remote.

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 involve substantial amounts. We have made voluntary refunds in those cases we believe appropriate and continue to litigate certain other 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 accrue the minimum amount.

As previously disclosed, the Department of Justice (DOJ) sued us in 1999 in the U.S. District Court for the Southern District of Ohio, claiming that Pratt & Whitney violated the civil False Claims Act and common law. This lawsuit relates to the “Fighter Engine Competition” between Pratt & Whitney’s F100 engine and General Electric’s F110 engine. The DOJ alleges that the government overpaid for F100 engines under contracts awarded by the U.S. Air Force in fiscal years 1985 through 1990 because Pratt & Whitney inflated its estimated costs for some purchased parts and withheld data that would have revealed the overstatements. At trial of this matter, completed in December 2004, the government claimed Pratt & Whitney’s liability to be $624 million. On August 1, 2008, the trial court judge held that the Air Force had not suffered any actual damages because Pratt & Whitney had made significant price concessions. However, the trial court judge found that Pratt & Whitney violated the False Claims Act due to inaccurate statements contained in the 1983 offer. In the absence of actual damages, the trial court judge awarded the DOJ the maximum civil penalty of $7.09 million, or $10,000 for each of the 709 invoices Pratt & Whitney submitted in 1989 and later under the contracts. In September 2008, both the DOJ and UTC appealed the decision to the Sixth Circuit Court of Appeals. In November 2010, the Sixth Circuit affirmed Pratt & Whitney’s liability under the False Claims Act and remanded the case to the U.S. District Court for further proceedings on the question of damages. Should the government ultimately prevail, the outcome of this matter could result in a material effect on our results of operations in the period in which a liability would be recognized or cash flows for the period in which damages would be paid.

 

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As previously disclosed, in December 2008, the Department of Defense (DOD) issued a contract claim against Sikorsky to recover overpayments the DOD alleges it has incurred since January 2003 in connection with cost accounting changes approved by the DOD and implemented by Sikorsky in 1999 and 2006. These changes relate to the calculation of material overhead rates in government contracts. The DOD claims that Sikorsky’s liability is approximately $89 million (including interest through June 2011). We believe this claim is without merit and Sikorsky filed an appeal in December 2009 with the U.S. Court of Federal Claims, which is pending.

Other. As previously disclosed, on August 27, 2010, Rolls-Royce plc (Rolls-Royce) sued Pratt & Whitney in the U.S. District Court for the Eastern District of Virginia, alleging that fan blades on certain engines manufactured by Pratt & Whitney infringe a U.S. patent held by Rolls-Royce. Rolls-Royce sought damages plus interest, an injunction, attorney’s fees, and a finding of willful infringement. On May 20, 2011, the Court granted Pratt & Whitney’s motion for summary judgment of non-infringement and denied Rolls-Royce’s cross motion in which it alleged Pratt & Whitney had infringed the patent. Further, as previously disclosed, in November 2010, Pratt & Whitney filed complaints against Rolls-Royce in the High Court of Justice, Chancery Division, Patent Court (HCJ) in the United Kingdom (UK), with the U.S. International Trade Commission (ITC), and against Rolls-Royce and its parent, Rolls-Royce Group plc (Rolls-Royce Group) in the U.S. District Court for the District of Connecticut. The HCJ action alleged that certain turbomachinery blades, engines and components manufactured by Rolls-Royce infringe a UK patent held by Pratt & Whitney and sought damages plus interest and all other relief to which Pratt & Whitney is entitled, including attorney’s fees, expenses, and a permanent order preventing further infringements. The ITC complaint sought a permanent exclusion order barring the importation into the U.S. of infringing turbomachinery blades, engines and engine components manufactured by Rolls-Royce and Rolls-Royce Group, and requested a permanent cease-and-desist order against Rolls-Royce and Rolls-Royce Group preventing further importing, marketing, advertising, demonstrating, testing, distributing, licensing, offering for sale, or use of such infringing turbomachinery blades, engines and engine components. In the Connecticut District Court action, Pratt & Whitney alleged similar infringement claims based on a U.S. patent held by Pratt & Whitney and sought an injunction, damages, interest, attorney’s fees and other relief. On July 14, 2011, the parties entered into an amicable, confidential settlement agreement to dismiss all of the foregoing matters, resulting in no adverse impact to UTC.

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.

Except as otherwise noted above, we do not believe that resolution of any of these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition. All forward-looking statements concerning the possible or anticipated outcome of environmental, investigatory and litigation matters involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. For further information as to these risks and uncertainties, see “Cautionary Note Concerning Factors That May Affect Future Results” and Part II, Item 1A, “Risk Factors” in this Form 10-Q.

Note 14: Segment Financial Data

Our operations are classified into six principal segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand 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.

 

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Results for the quarters and six months ended June 30, 2011 and 2010 are as follows:

 

Quarter Ended June 30,    Net Sales     Operating Profits     Operating Profit Margins  

(Dollars in millions)

   2011     2010     2011     2010     2011     2010  

Otis

   $ 3,192     $ 2,838     $ 743     $ 641       23.3     22.6

Carrier

     3,393       3,093       458       333       13.5     10.8

UTC Fire & Security

     1,746       1,615       206       168       11.8     10.4

Pratt & Whitney

     3,452       3,279       454       522       13.2     15.9

Hamilton Sundstrand

     1,524       1,379       267       204       17.5     14.8

Sikorsky

     1,786       1,692       277       169       15.5     10.0
                                                

Total segments

     15,093       13,896       2,405       2,037       15.9     14.7

Eliminations and other

     (17     (94     (81     (62    

General corporate expenses

     —          —          (104     (93    
                                                

Consolidated

   $ 15,076     $ 13,802     $ 2,220     $ 1,882       14.7     13.6
                                                
Six Months Ended June 30,    Net Sales     Operating Profits     Operating Profit Margins  

(Dollars in millions)

   2011     2010     2011     2010     2011     2010  

Otis

   $ 5,964     $ 5,564     $ 1,373     $ 1,237       23.0     22.2

Carrier

     6,159       5,560       768       472       12.5     8.5

UTC Fire & Security

     3,374       3,030       368       291       10.9     9.6

Pratt & Whitney

     6,547       6,120       925       958       14.1     15.7

Hamilton Sundstrand

     2,972       2,705       511       425       17.2     15.7

Sikorsky

     3,368       3,050       418       314       12.4     10.3
                                                

Total segments

     28,384       26,029       4,363       3,697       15.4     14.2

Eliminations and other

     36       (187     (171     (122    

General corporate expenses

     —          —          (193     (170    
                                                

Consolidated

   $ 28,420     $ 25,842     $ 3,999     $ 3,405       14.1     13.2
                                                

See Note 7 to the Condensed Consolidated Financial Statements for a discussion of restructuring and other costs included in segment operating results.

Note 15: Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement.” This ASU clarifies the concepts related to highest and best use and valuation premise, blockage factors and other premiums and discounts, the fair value measurement of financial instruments held in a portfolio and of those instruments classified as a component of shareowners’ equity. The guidance includes enhanced disclosure requirements about recurring Level 3 fair value measurements, the use of nonfinancial assets, and the level in the fair value hierarchy of assets and liabilities not recorded at fair value. The provisions of this ASU are effective prospectively for interim and annual periods beginning on or after December 15, 2011. Early application is prohibited. We are currently evaluating the impact of this new ASU.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income.” This ASU intends to enhance comparability and transparency of other comprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This ASU eliminates the option to present other comprehensive income components as part of the statement of changes in shareowners’ equity. The provisions of this ASU will be applied retrospectively for interim and annual periods beginning after December 15, 2011. Early application is permitted. We are currently evaluating the impact of this new ASU.

 

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With respect to the unaudited condensed consolidated financial information of UTC for the quarters and six months ended June 30, 2011 and 2010, 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 July 25, 2011, 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 (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 (the “Corporation”) as of June 30, 2011, and the related condensed consolidated statement of operations for the three-month and six-month periods ended June 30, 2011 and 2010 and the condensed consolidated statement of cash flows for the six-month periods ended June 30, 2011 and 2010. 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, 2010, and the related consolidated statements of operations, of cash flows and of changes in equity for the year then ended (not presented herein), and in our report dated February 10, 2011 (which included an explanatory paragraph with respect to the Corporation’s change in the manner of accounting for business combinations and noncontrolling interests), 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, 2010, 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

July 25, 2011

 

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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 six principal business segments: Otis, Carrier, UTC Fire & Security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Otis, Carrier and UTC Fire & Security are collectively referred to as the “commercial businesses,” while Pratt & Whitney, Hamilton Sundstrand and Sikorsky are collectively referred to as the “aerospace businesses.” Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. We previously reported “Other income, net,” which included “Interest income,” as a component of “Revenues.” “Other income, net,” excluding “Interest income,” is now reflected as a component of “Costs, Expenses and Other,” while “Interest income” is now netted with “Interest expense” for financial statement presentation. The current status of significant factors impacting our business environment in 2011 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 2010 Annual Report, which is incorporated by reference in our 2010 Form 10-K.

General

With worldwide operations, our businesses 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 businesses include both commercial and aerospace operations, original equipment manufacturing (OEM) and extensive related aftermarket parts and services businesses, as well as the combination of shorter cycles at Carrier and in our commercial aerospace aftermarket businesses, and longer cycles at Otis and at 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.

Although the global economy improved as compared with 2010, many economic indicators continue to point to a slow and uneven recovery. High unemployment and a weak housing sector in the United States (U.S.) continue to dampen consumer sentiment domestically, while concerns over European sovereign debt issues and the deficit debate in Washington, D.C. continue to plague financial markets and constrain government spending in certain countries. In contrast, certain emerging markets continue to grow despite measures by various governments to control inflation in these markets. Notwithstanding these uneven economic conditions, we continue to see sales and order rate growth consistent with our full year expectations for most of our businesses. Carrier’s Transicold business remains exceptionally strong, more than offsetting the softer U.S. residential heating, ventilating, and air conditioning (HVAC) market. Otis new equipment orders and Carrier global commercial HVAC equipment orders also grew in the second quarter of 2011, as compared with the same period of 2010. Similarly, orders in emerging markets continue to grow across the commercial businesses, with particular strength in China, Russia, and India. We also continue to see strong order trends in the aerospace aftermarket businesses within both Pratt & Whitney and Hamilton Sundstrand. These improvements contributed to improved organic sales growth in the second quarter of 2011.

Consolidated net sales increased 9% in the second quarter of 2011, as compared to the same period of 2010. This reflects organic sales growth (6%) and the benefit from foreign currency translation (4%), partially offset by the impact from net dispositions (1%), as further discussed below within “Results of Continuing Operations.” Along with the consolidated net sales increase, consolidated operating profit increased 18% in the second quarter of 2011, as compared with the same period of 2010. This year-over-year improvement reflects an increase in operational profit (6%), driven by higher volumes partially offset by higher research and development and commodity costs, favorable foreign exchange (5%), lower year-over-year restructuring costs (1%), and the beneficial year-over-year impact from non-recurring items (8%), less the net year-over-year impact from business divestiture activity (2%). The year-over-year impact from non-recurring items reflects a gain of approximately $73 million recognized at Sikorsky from the contribution of a business into a new venture in the United Arab Emirates in the second quarter of 2011 and the absence of net charges recorded in the second quarter of 2010. These prior year net charges consisted of an approximately $47 million net charge recorded at Carrier from dispositions associated with its ongoing portfolio transformation and approximately $28 million of asset impairment charges recorded at Hamilton Sundstrand related primarily to the disposition of an aerospace business. We now expect an adverse impact on operating profits for the full year of 2011 from incremental research and development investment of at least $275 million as we ramp up multiple next generation aerospace product platforms.

Commercial Businesses

Our commercial businesses generally serve customers in the worldwide commercial and residential property industries, although Carrier 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 construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, credit markets

 

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and other global and political factors. Carrier’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 Carrier products in the distribution channel, Carrier customarily offers its customers incentives to purchase products. The principal incentive program provides reimbursements to distributors for offering promotional pricing on Carrier products. We account for incentive payments made as a reduction to sales.

Within the Otis segment, sales increased 12% in the second quarter of 2011, compared with the same period of 2010, primarily due to the favorable impact of foreign currency translation (8%). Organic sales growth of 3% reflects an increase in new equipment sales and continued growth in contractual maintenance and repair volume. New equipment orders in the second quarter of 2011 increased 23% (including 8% attributable to foreign exchange) compared with the same period of 2010, driven principally by order growth in China, Russia and North America. Pricing remained under pressure in most markets.

Within Carrier, the continued rebound of the transport refrigeration market drove 11% organic sales growth during the second quarter of 2011. Carrier’s Transicold business demonstrated strong performance across all products and geographies, with sales up organically more than 40%, led by the refrigerated container business. North America residential shipments moderated in the second quarter of 2011, after a strong start to the year.

UTC Fire & Security experienced 4% organic sales growth in the second quarter of 2011, led by growth within the products businesses driven by the petroleum, oil and gas sectors and infrastructure spending. Organic sales growth within the service and install businesses, primarily in Asia and Australia, was partially offset by organic sales contraction within the U.K. businesses.

Aerospace Businesses

The aerospace businesses serve both commercial and government aerospace customers. In addition, elements of Pratt & Whitney and Hamilton Sundstrand also serve customers in the industrial markets. Revenue passenger miles (RPMs), U.S. government military and space spending, and the general economic health of airline carriers are all barometers for our aerospace businesses. Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits.

The commercial airline industry rebounded in 2010 and remained generally strong through the first half of 2011. However, while airlines have maintained pricing and capacity discipline, higher oil prices have recently led to reduced airline profitability forecasts for 2011, and could lead to further capacity reductions and lower commercial aerospace aftermarket demand. Despite these potential future adverse impacts, we continue to see strong aerospace aftermarket order trends. Commercial aerospace spares orders at Pratt & Whitney’s large commercial engine business and at Hamilton Sundstrand increased 23% and 25% in the second quarter of 2011, respectively, as compared with the same period of 2010. These increases in order rates have led to a corresponding increase in commercial aerospace aftermarket volume at both Pratt & Whitney and Hamilton Sundstrand. Accordingly, consolidated commercial aerospace aftermarket sales, including Sikorsky, increased 14% in the second quarter of 2011, as compared with the same period of 2010.

Total sales at Sikorsky increased 6% in the second quarter of 2011, as compared to the same period of 2010, driven by increased aftermarket volumes and higher commercial aircraft deliveries, partially offset by lower international military aircraft deliveries. Sikorsky continued to benefit from U.S. government spending, although deficit reduction measures by the U.S. government are expected to pressure the U.S. Department of Defense budget in coming years, resulting in a decline in U.S. Department of Defense spending. Notwithstanding these expected pressures, Sikorsky’s military backlog remains very strong.

Acquisition and Disposition 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 first six months of 2011, our investment in business acquisitions was $184 million, and consisted primarily of a number of smaller acquisitions in both our commercial and aerospace businesses. We recorded the excess of the purchase price over the estimated fair value of the assets acquired as an increase in goodwill. As a result of acquisition activity, goodwill increased approximately $320 million, primarily related to the finalization of purchase accounting associated with the December 2010 acquisition of Clipper Windpower Plc (Clipper), in the first six months of 2011. We expect to invest less than $1.5 billion in acquisitions in 2011, including those investments made during the first six months of 2011, although this will depend upon the timing, availability and the appropriate value of potential acquisition opportunities.

Other

During the first six months of 2011, we have not experienced any significant disruptions in our businesses as a result of the earthquake and related events that occurred in Japan during March 2011. We have assessed our operations and supply chain and do

 

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not anticipate that any potential impacts will have a significant effect on our cash flows, competitive position, financial condition or results of operations. Of principal focus in our assessments were electronics, including microprocessors, capacitors, and other such components which are included in many of our products and across many of our businesses. In light of these circumstances, we have also evaluated our self-insurance reserves and believe we have adequately provided for current estimates of potential exposure.

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 2011. See Part II, Item 1A, “Risk Factors” in this Form 10-Q 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 2010 Annual Report, incorporated by reference in our 2010 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 first six months of 2011.

RESULTS OF CONTINUING OPERATIONS

Net Sales

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Net Sales

   $ 15,076     $ 13,802     $ 28,420     $ 25,842  

Percentage change year-over-year

     9.2     5.7     10.0     2.3

The 9% increase in net sales for the second quarter of 2011, as compared with the same period of 2010, reflects organic sales growth (6%), and the beneficial impact of foreign currency translation (4%), partially offset by the impact of net dispositions (1%). During the second quarter of 2011, all six business segments experienced organic sales growth in the quarter, led by Carrier which experienced 11% organic sales growth. This is the first time since the second quarter of 2008 in which all six of our business segments reported organic sales growth. The organic growth at Carrier was led by the continued rebound of the transport refrigeration market. Organic growth at Pratt & Whitney was driven by higher overall aerospace aftermarket sales, while organic growth at Hamilton Sundstrand was driven by continuing strength in the aerospace aftermarket and industrial businesses. Growth at Otis was due to an increase in new equipment sales and continued growth in contractual maintenance and repair volume.

The 10% increase in net sales for the first six months of 2011, as compared with the same period of 2010, reflects organic sales growth (7%) and the beneficial impact of foreign currency translation (3%). All six business segments experienced organic sales growth for the first six months of 2011, led by Carrier which reported 14% organic sales growth. While the strong organic growth partially reflects favorable comparisons to a weaker first six months of 2010, it is also evidence of a broader improvement in our end markets as noted above. The organic growth at Carrier was driven primarily by the transport refrigeration markets, while Sikorsky’s organic growth reflects higher sales driven by increased international development aircraft and higher aftermarket volumes. Higher commercial aerospace aftermarket sales volumes led the organic growth at both Pratt & Whitney and Hamilton Sundstrand in the first six months of 2011.

 

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Cost of Products and Services Sold

 

      Quarter Ended June 30,     Six Months Ended June 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Cost of products sold

   $ 8,099     $ 7,466     $ 15,051     $ 13,825  

Percentage of product sales

     74.8     74.9     74.6     75.3

Cost of services sold

   $ 2,806     $ 2,549     $ 5,495     $ 4,922  

Percentage of service sales

     66.0     66.5     66.6     65.7

Total cost of products and services sold

   $ 10,905     $ 10,015     $ 20,546     $ 18,747  

Percentage change year-over-year

     8.9     4.3     9.6     0.2

The factors contributing to the total percentage change year-over-year for the quarter and six months ended June 30, 2011 in total cost of products and services sold are as follows:

 

     Quarter Ended
June 30, 2011
    Six Months Ended
June 30, 2011
 

Organic volume

        

Foreign currency translation

        

Acquisitions and divestitures, net

     (1 )%      —     

Other

     (1 )%      (1 )% 
                

Total % Change

         10 
                

For both the second quarter and first six months of 2011, both total cost of products and services sold and overall sales volumes increased, as compared with the same periods of 2010. For the second quarter of 2011, total cost of products and services sold grew 7% organically at a rate in line with the 6% organic sales growth, and for the first six months of 2011 total cost of products and services sold grew 8% organically at a rate in line with the 7% organic sales growth for the same period. For both the second quarter and first six months of 2011, the organic change in total cost of products and services sold was principally driven by increased sales volumes. The organic volume change of total cost of product and services sold in both the second quarter and first six months of 2011 include the adverse impact of higher gross commodity costs (1%). The decrease contributed by “other” primarily reflects the absence of asset impairment charges recorded in the second quarter of 2010 at both Carrier and Hamilton Sundstrand. For the first six months of 2011, the year-over-year increase in cost of services sold, as a percentage of service sales, was primarily attributable to the timing of long-term aerospace service contracts.

Gross Margin

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Gross margin

   $ 4,171     $ 3,787     $ 7,874     $ 7,095  

Percentage of net sales

     27.7     27.4     27.7     27.5

The increase in gross margin as a percentage of sales for both the second quarter and first six months of 2011, as compared to the same period of 2010, reflects the benefit from increased sales volumes of higher margin products and services, continued focus on cost reduction, savings from previously initiated restructuring actions, and net operational efficiencies. The increase also reflects the beneficial impact from the absence of approximately $86 million of asset impairment charges recorded in the second quarter of 2010 at Carrier and Hamilton Sundstrand. These improvements were partially offset by higher year-over-year net commodity costs for the second quarter and first six months of the year.

 

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Research and Development

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Company-funded

   $ 526     $ 459     $ 1,011     $ 856  

Percentage of net sales

     3.5     3.3     3.6     3.3

Customer-funded

   $ 427     $ 485     $ 849     $ 977  

Percentage of net sales

     2.8     3.5     3.0     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 in both the quarter ended and the first six months of 2011, as compared to the same periods of 2010, primarily reflects an increase at Pratt & Whitney to further advance the development of multiple geared turbo fan platforms. The amount of company-funded research and development for the full year 2011 is now expected to increase at least $275 million, as compared with 2010, as we ramp up multiple next generation aerospace platforms.

The decrease in customer-funded research and development in the second quarter and first six months of 2011, compared to the same periods of 2010, was primarily driven by a decrease at Pratt & Whitney related to a reduction in development spending on the Joint Strike Fighter engine program.

Selling, General and Administrative

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Selling, general and administrative expenses

   $ 1,644     $ 1,491     $ 3,187     $ 2,915  

Percentage of net sales

     10.9     10.8     11.2     11.3

The increase in selling, general and administrative expenses in the second quarter of 2011, as compared to the same period of 2010, was due primarily to the impact of adverse foreign exchange translation, higher pension related costs, and acquisitions completed over the preceding twelve months, including the acquisition of Clipper in December 2010. These adverse impacts were partially offset by lower year-over-year restructuring costs.

The increase in selling, general and administrative expenses in the first six months of 2011, as compared to the same period of 2010, was due primarily to the impact of acquisitions completed over the preceding twelve months, including the acquisition of the GE Security business in March 2010 and the acquisition of Clipper in December 2010, adverse foreign exchange translation, and higher pension related costs, partially offset by lower year-over-year restructuring costs. As a percentage of sales, the 10 basis point year-over-year decrease primarily reflects the beneficial impact from increased sales, Carrier’s ongoing portfolio transformation and the impact of lower year-over-year restructuring costs, partially offset by the impact from recent acquisitions.

Other Income, Net

 

     Quarter Ended June 30,      Six Months Ended June 30,  

(Dollars in millions)

   2011      2010      2011      2010  

Other income, net

   $ 219      $ 45      $ 323      $ 81  
                                   

Other income, net includes the operational impact of equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses as well as other ongoing and non-recurring items. The year-over-year change in other income, net in the second quarter of 2011, as compared with the same period of 2010, largely reflects a gain of approximately $73 million recognized at Sikorsky from the contribution of a business into a new venture in the United Arab Emirates, approximately $25 million from the favorable resolution of litigation at UTC Fire & Security, and higher joint venture income across the business including approximately $15 million of earnings improvement in Carrier’s Japan joint venture. The year-over-year increase also reflects the absence of charges related to the early redemption of long-term debt in the second quarter of 2010.

The year-over-year change in other income, net in the first six months of 2011, as compared with the same period of 2010, largely reflects divestiture related activity, including a gain of approximately $73 million recognized in the second quarter of 2011 at

 

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Sikorsky from the contribution of a business into a new venture in the United Arab Emirates, and gains in the first quarter of 2011 at Pratt & Whitney and UTC Fire & Security (combined $30 million). The gain at Pratt & Whitney resulted from the sale of an equity interest in a venture and the gain at UTC Fire & Security related to the disposition of the U.K. Guarding business. The year-over-year change also includes approximately $25 million from the favorable resolution of litigation at UTC Fire & Security, higher joint venture income across the business including approximately $35 million of earnings improvement in Carrier’s Japan joint venture, and the absence of charges related to the early redemption of long-term debt in the second quarter of 2010.

Interest Expense, Net

 

     Quarter Ended June 30,     Six Months Ended June 30,  

(Dollars in millions)

   2011     2010     2011     2010  

Interest expense

   $ 165     $ 192     $ 331     $ 378  

Interest income

     (24     (43     (41     (58
                                

Interest expense, net

   $ 141     $ 149     $ 290     $ 320  
                                

Average interest expense rate

     5.5     5.8     5.7     5.9

The decrease in interest expense, net in both the second quarter and first six months of 2011, as compared with the same periods of 2010, was led by the impact from lower average long-term debt balances and lower average interest expense rates year-over-year. Interest expense also reflects the low cost associated with our commercial paper borrowings. The decline in interest income in both the second quarter and first six months of 2011, as compared with the same periods of 2010, reflects the absence of a favorable pre-tax interest adjustment of approximately $24 million associated with the resolution of an uncertain tax item in the second quarter of 2010.

Income Taxes

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2011     2010     2011     2010  

Effective tax rate

     31.2     30.0     31.8     30.0

The effective tax rate for the quarter ended June 30, 2011 increased as compared to the same period of 2010 primarily reflecting an increase to the annual effective tax rate as a result of 2010 U.S. tax legislation, partially offset by the absence of the tax impacts of impairment charges recorded in 2010. The effective tax rate for the six months ended June 30, 2011 increased as compared to the same period of 2010, primarily reflecting an increase to the annual effective tax rate, as noted above, partially offset by the absence of the tax impact from health care legislation related to the Medicare Part D program in the first quarter of 2010. We expect our full year annual effective income tax rate in 2011 to be approximately 31%, before the impact of non-recurring items. As a result of 2010 U.S. tax legislation and the impact on our tax rate, we anticipate variability in the tax rate quarter to quarter. This is due to the tax impacts associated with planned internal legal entity reorganizations that have occurred in the second quarter of 2011 and are expected to occur during the remaining six months of the year.

Net Income and Earnings Per Share

 

     Quarter Ended June 30,      Six Months Ended June 30,  

(Dollars in millions, except per share amounts)

   2011      2010      2011      2010  

Net income

   $ 1,430      $ 1,212      $ 2,531      $ 2,159  

Less: Noncontrolling interest in subsidiaries’ earnings

     112        102        201        183  
                                   

Net income attributable to common shareowners

   $ 1,318      $ 1,110      $ 2,330      $ 1,976  
                                   

Diluted earnings per share

   $ 1.45      $ 1.20      $ 2.55      $ 2.13  

Diluted earnings per share for the second quarter of 2011 includes $.05 per share of restructuring charges, offset by a $.05 per share benefit from non-recurring items. The results for the second quarter of 2010 included a net charge for restructuring and non-recurring items of $.12 per share. For the first six months of 2011, diluted earnings per share includes a net charge for restructuring and non-recurring items of $.02 per share compared with a $.17 per share net charge for the same period of 2010. The impact of foreign currency generated a positive impact of $.06 and $.07 per diluted share on our operational performance in the second quarter and first six months of 2011, respectively. This year-over-year impact also includes the beneficial impact of foreign currency hedging, which was more than offset by the net adverse foreign currency translation impact at Pratt & Whitney Canada (P&WC). At P&WC, the weakness of the U.S. dollar in the second quarter of 2011 generated an adverse foreign currency translation impact as the

 

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majority of P&WC’s sales are denominated in U.S. dollars, while a significant portion of its costs are incurred in local currencies. To help mitigate the volatility of foreign currency exchange rates on our operating results, we maintain foreign currency hedging programs, the majority of which are entered into by P&WC. As a result of hedging programs currently in place, P&WC’s 2011 full year operating results are expected to include a net adverse impact of foreign currency translation and hedging of approximately $75 million, of which approximately $15 million has impacted our operating results in the first six months of 2011. For additional discussion of hedging, refer to Note 8 to the Condensed Consolidated Financial Statements.

Restructuring and Other Costs

During the first six months of 2011, we recorded net pre-tax restructuring and other costs totaling $103 million for new and ongoing restructuring actions as follows:

 

(Dollars in millions)

      

Otis

   $ 6  

Carrier

     29  

UTC Fire & Security

     16  

Pratt & Whitney

     42  

Hamilton Sundstrand

     6  

Sikorsky

     3  

Eliminations and other

     1  
        

Total

   $ 103  
        

The net costs included $69 million recorded in cost of sales, $32 million in selling, general and administrative expenses and $2 million in other income, net. As described below, these costs primarily relate to actions initiated during 2011 and 2010.

2011 Actions. During the first six months of 2011, 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 and other costs totaling $69 million as follows: Otis $7 million, Carrier $12 million, UTC Fire & Security $9 million, Pratt & Whitney $33 million, Hamilton Sundstrand $4 million, Sikorsky $3 million, and Eliminations and other $1 million. The charges included $46 million in cost of sales, $21 million in selling, general and administrative expenses and $2 million in other income, net. These costs include $65 million for severance and related employee termination costs, $3 million for asset write-downs and $1 million for facility exit, lease termination costs and other related costs.

We expect the 2011 actions that were initiated in the first six months to result in net workforce reductions of approximately 1,200 hourly and salaried employees, the exiting of approximately 120,000 net square feet and the disposal of assets associated with exited facilities. As of June 30, 2011, we have completed net workforce reductions of approximately 500 employees. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2011 and 2012. Approximately 95% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During the first six months of 2011, we had cash outflows of approximately $12 million related to the 2011 actions. We expect to incur additional restructuring and other costs of $19 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating these actions to approximately $90 million annually.

2010 Actions. During the first six months of 2011, we recorded net pre-tax restructuring and other costs totaling $31 million for restructuring actions initiated in 2010. The 2010 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We recorded the charges for the first six months of 2011 as follows: Otis $1 million, Carrier $17 million, UTC Fire & Security $7 million, Pratt & Whitney $5 million, and Hamilton Sundstrand $1 million. The charges included $21 million in cost of sales and $10 million in selling, general and administrative expenses. Those costs included $10 million for severance and related employee termination costs, $4 million for asset write-downs and $17 million for facility exit, lease termination costs and other related costs.

We expect the 2010 actions to result in net workforce reductions of approximately 5,000 hourly and salaried employees, the exiting of approximately 3.9 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of June 30, 2011, we completed net workforce reductions of approximately 3,000 employees and exited approximately 700,000 net square feet of facilities. We are targeting the majority of the remaining workforce and facility related cost reduction actions for completion during 2011 and 2012. Approximately 80% of the total pre-tax charge will require cash payments, which we will fund with cash generated from operations. During the first six months of 2011, we had cash outflows of approximately $138 million related to the 2010 actions. We expect to incur additional restructuring and other costs of $59 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating these actions to approximately $350 million annually.

 

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Additional 2011 Actions. We expect to initiate additional restructuring actions during the remainder of 2011. Including trailing costs related to previously initiated actions, we expect full year 2011 restructuring costs of approximately $200 million, including the $103 million of charges incurred during the first six months of 2011. The expected adverse impact on full year earnings in 2011 from anticipated restructuring costs is expected to be offset by the beneficial impact from non-recurring items. Except for those actions described above, no specific plans for significant other actions have been finalized at this time.

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 and six months ended June 30, 2011 and 2010 are included in “Eliminations and other” below, which also includes certain smaller subsidiaries.

Results for the quarters ended June 30, 2011 and 2010 are as follows:

 

     Net Sales     Operating Profits     Operating Profit Margins  

(Dollars in millions)

   2011     2010     2011     2010     2011     2010  

Otis

   $ 3,192     $ 2,838     $ 743     $ 641       23.3     22.6

Carrier

     3,393       3,093       458       333       13.5     10.8

UTC Fire & Security

     1,746       1,615       206       168       11.8     10.4

Pratt & Whitney

     3,452       3,279       454       522       13.2     15.9

Hamilton Sundstrand

     1,524       1,379       267       204       17.5     14.8

Sikorsky

     1,786       1,692       277       169       15.5     10.0
                                                

Total segments

     15,093       13,896       2,405       2,037       15.9     14.7

Eliminations and other

     (17     (94     (81     (62    

General corporate expenses

     —          —          (104     (93    
                                                

Consolidated

   $ 15,076     $ 13,802     $ 2,220     $ 1,882       14.7     13.6
                                                

Second quarter 2011 and 2010 restructuring and other costs included in consolidated operating profit totaled $72 million and $85 million, respectively, as follows:

 

     Quarter Ended June 30,  

(Dollars in millions)

   2011      2010  

Otis

   $ 4      $ 17  

Carrier

     15        15  

UTC Fire & Security

     9        19  

Pratt & Whitney

     38        9  

Hamilton Sundstrand

     3        7  

Sikorsky

     2        7  

Eliminations and other

     1        11  
                 

Total

   $ 72      $ 85  
                 

 

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Results for the six months ended June 30, 2011 and 2010 are as follows:

 

     Net Sales     Operating Profits     Operating Profit Margins  

(Dollars in millions)

   2011      2010     2011     2010     2011     2010  

Otis

   $ 5,964      $ 5,564     $ 1,373     $ 1,237       23.0     22.2

Carrier

     6,159        5,560       768       472       12.5     8.5

UTC Fire & Security

     3,374        3,030       368       291       10.9     9.6

Pratt & Whitney

     6,547        6,120       925       958       14.1     15.7

Hamilton Sundstrand

     2,972        2,705       511       425       17.2     15.7

Sikorsky

     3,368        3,050       418       314       12.4     10.3
                                                 

Total segments

     28,384        26,029       4,363       3,697       15.4     14.2

Eliminations and other

     36        (187     (171     (122    

General corporate expenses

     —           —          (193     (170    
                                                 

Consolidated

   $ 28,420      $ 25,842     $ 3,999     $ 3,405       14.1     13.2
                                                 

For the first six months of 2011 and 2010, restructuring and other costs included in consolidated operating profit totaled $103 million and $152 million, respectively, as follows:

 

     Six Months Ended June 30,  

(Dollars in millions)

   2011      2010  

Otis

   $ 6      $ 28  

Carrier

     29        33  

UTC Fire & Security

     16        29  

Pratt & Whitney

     42        35  

Hamilton Sundstrand

     6        9  

Sikorsky

     3        7  

Eliminations and other

     1        11  
                 

Total

   $ 103      $ 152  
                 

The tables and segment discussions that follow address the factors that contributed to the year-over-year changes in net sales and operating profits:

Otis –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended June 30, 2011     Six Months Ended June 30, 2011  
     Net Sales     Operating
Profits
    Net Sales     Operating
Profits
 

Organic sales / Operational operating profit

                

Foreign currency translation

         10         

Acquisitions and divestitures, net

         —              —     

Restructuring and other costs

     —              —         

Other

     —              —         
                                

Total % change

     12      16          11 
                                

Quarter ended June 30, 2011 Compared with Quarter ended June 30, 2010

Sales increased $354 million (12%) in the second quarter of 2011, compared with the same period of 2010. The organic sales increase in the quarter was due to an increase in new equipment sales, led by China and Russia, and continued growth in contractual maintenance and repair volume.

 

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Operating profits increased $102 million (16%) in the second quarter of 2011, compared with the same period of 2010. Operational profit improvement in the quarter was primarily due to benefits from higher volume. Ongoing cost reduction initiatives helped to mitigate the impact of lower new equipment pricing.

Six months ended June 30, 2011 Compared with Six months ended June 30, 2010

Sales increased $400 million (7%) in the first six months of 2011, compared with the same period of 2010. The organic sales increase in the period was principally due to an increase in service sales, driven by contractual maintenance and repair volume across all regions.

Operating profits increased $136 million (11%) in the first six months of 2011, compared with the same period of 2010. Operational profit improvement in the period was due primarily to benefits from higher service volume. Ongoing cost reduction initiatives helped to mitigate the impact of lower new equipment pricing.

Carrier –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended June 30, 2011     Six Months Ended June 30, 2011  
     Net Sales     Operating
Profits
    Net Sales     Operating
Profits
 

Organic sales / Operational operating profit

     11      27      14      52 

Foreign currency translation

                

Acquisitions and divestitures, net

     (6 )%      (5 )%      (6 )%      (5 )% 

Restructuring and other costs

     —          —          —         

Other

     —          11      —          11 
                                

Total % change

     10      38      11      63 
                                

Quarter ended June 30, 2011 Compared with Quarter ended June 30, 2010

Sales increased $300 million (10%) in the second quarter of 2011, compared with the same period of 2010. Organic sales growth of 11% was driven primarily by improvement in the transport refrigeration markets. The 6% decrease in “Acquisitions and divestitures, net” reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months.

Operating profit increased $125 million (38%) in the second quarter of 2011, compared with the same period of 2010. Operational profit improvement of 27% was driven by volume, strong conversion from continued productivity and cost reduction, and $15 million earnings improvement in Carrier’s Japan joint venture. This was partly offset by higher net commodity costs (7%). The 11% increase in “Other” primarily reflects the net year-over-year impact of items associated with Carrier’s ongoing portfolio transformation. Included in “Other” is the absence of an asset impairment charge of approximately $58 million associated with the disposition of a business, partially offset by a gain on the sale of another business, both of which were recorded in the second quarter of 2010.

Six months ended June 30, 2011 Compared with Six months ended June 30, 2010

Sales increased $599 million (11%) in the first six months of 2011, compared with the same period of 2010. Organic sales growth of 14% was driven primarily by improvements in the transport refrigeration markets. The 6% decrease in “Acquisitions and divestitures, net” reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months.

Operating profit increased $296 million (63%) in the first six months of 2011, compared with the same period of 2010. Operational profit improvement of 52% was driven by volume, strong conversion from continued productivity and cost reduction and approximately $35 million of earnings improvement in Carrier’s Japan joint venture. This was partly offset by higher net commodity costs (14%). The 11% increase in “Other” primarily reflects the net year-over-year impact of items associated with Carrier’s ongoing portfolio transformation. Included in “Other” is the absence of an asset impairment charge of approximately $58 million associated with the disposition of a business, partially offset by a gain on the sale of another business, both of which were recorded in the second quarter of 2010.

 

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UTC Fire & Security –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended June 30, 2011     Six Months Ended June 30, 2011  
     Net Sales     Operating
Profits
    Net Sales     Operating
Profits
 

Organic sales / Operational operating profit

         (8 )%          —     

Foreign currency translation

                

Acquisitions and divestitures, net

     (3 )%      (1 )%         

Restructuring and other costs

     —              —         

Other

     (1 )%      18      (1 )%      15 
                                

Total % change

         23      11      26 
                                

Quarter ended June 30, 2011 Compared with Quarter ended June 30, 2010

Sales increased $131 million (8%) in the second quarter of 2011, compared with the same period of 2010. The 4% organic sales growth reflects increases within both the products businesses (3%) and the service and install businesses (1%). Among the service and install businesses, the organic growth was driven by stronger volume in Asia and Australia, partially offset by declines in the U.K. The decrease contributed by “Acquisitions and divestitures, net” in the second quarter of 2011 reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months, primarily due to the divestiture in March 2011 of the U.K. Guarding business.

Operating profits increased $38 million (23%) in the second quarter of 2011, as compared with the same period of 2010. The 8% operational profit decline reflects lower results in the U.K. due to a decline in sales and productivity, partially offset by the benefits of higher sales volume across other businesses. The decrease contributed by “Acquisitions and divestitures, net” in the second quarter of 2011 reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months, primarily due to the divestiture in March 2011 of the U.K. Guarding business. The increase contributed by “Other” is primarily related to the favorable resolution of litigation.

Six months ended June 30, 2011 Compared with Six months ended June 30, 2010

Sales increased $344 million (11%) in the first six months of 2011, compared with the same period of 2010. Organically, the sales increase reflects growth in the products businesses (2%) and the service and install businesses (1%). Among the service and install businesses, the organic growth was driven by stronger volume in Asia and Australia, partially offset by declines in the U.K. The increase contributed by “Acquisitions and divestitures, net” in the first six months of 2011 reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months.

Operating profits increased $77 million (26%) for the first six months of 2011, compared with the same period of 2010. Operational profit was flat year-over-year, reflecting the benefits of higher sales volume across most businesses, offset by lower results in the U.K. due to lower sales and productivity. The increase contributed by “Acquisitions and divestitures, net” in the first six months of 2011 reflects the net year-over-year impact from acquisitions and divestitures completed in the preceding twelve months. The increase contributed by “Other” was primarily related to the favorable resolution of litigation in the second quarter of 2011 combined with the gain in the first quarter of 2011 on the disposition of the U.K. Guarding business.

Pratt & Whitney –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended June 30, 2011     Six Months Ended June 30, 2011  
     Net Sales     Operating
Profits
    Net Sales     Operating
Profits
 

Organic sales* / Operational operating profit*

         (6 )%          (3 )% 

Foreign currency (including P&WC net hedging)*

     (1 )%      (1 )%      (1 )%      (1 )% 

Restructuring and other costs

     —          (6 )%      —          (1 )% 

Other

     —          —          —         
                                

Total % change

         (13 )%          (3 )% 
                                

 

*

As discussed further in the “Business Overview” and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, for Pratt & Whitney only, the transactional impact of foreign exchange hedging at P&WC has been netted against the translational foreign exchange impact for presentation purposes in the above table. For all other segments, these foreign exchange transactional impacts are included within the organic sales/operational operating

 

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  profit caption in their respective tables. Due to its significance to Pratt & Whitney’s overall operating results, we believe it is useful to segregate the foreign exchange transactional impact in order to clearly identify the underlying financial performance.

Quarter ended June 30, 2011 Compared with Quarter ended June 30, 2010

Sales increased $173 million (5%) in the second quarter of 2011, compared with the same period of 2010. Organic sales growth in the quarter was primarily attributable to higher overall aftermarket volumes.

Operating profits decreased $68 million (13%) in the second quarter of 2011, compared with the same period of 2010. The 6% operational profit decrease was primarily driven by higher research and development costs (13%) and unfavorable engine mix (14%) partially offset by the benefit from higher sales volumes (21%), driven by higher overall aftermarket volume.

Six months ended June 30, 2011 Compared with Six months ended June 30, 2010

Sales increased $427 million (7%) in the first six months of 2011, compared with the same period of 2010. The organic sales growth was primarily attributable to an increase in the large commercial engine business (7%) and P&WC (3%) driven by higher overall aftermarket volumes. These increases were partially offset by a decline in the military engine business (2%) driven by lower military engine deliveries.

Operating profits decreased $33 million (3%) in the first six months of 2011, compared with the same period of 2010. The operational profit decline (3%) was primarily driven by the unfavorable impact of higher research and development cost (15%) and unfavorable engine mix (8%), mostly offset by the benefit from higher overall sales volumes (20%), led by increased commercial spares and aftermarket volumes. The 2% contributed by “Other” reflects a gain on the sale of an equity interest in a venture in the first quarter of 2011.

Hamilton Sundstrand –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended June 30, 2011     Six Months Ended June 30, 2011  
     Net Sales     Operating
Profits
    Net Sales     Operating
Profits
 

Organic sales / Operational operating profit

         14          12 

Foreign currency translation

                

Restructuring and other costs

     —              —         

Other

     —          12      —         
                                

Total % change

     11      31      10      20 
                                

Quarter ended June 30, 2011 Compared with Quarter ended June 30, 2010

Sales increased $145 million (11%) in the second quarter of 2011, compared with the same period of 2010. The organic sales growth reflects higher volumes in both the aerospace (5%) and industrial (3%) businesses. The increase within aerospace was primarily attributed to higher aftermarket volume (6%), driven by commercial spares, partially offset by a decline in OEM sales volume (1%). The industrial business increase was led by the compressor business attributable to general increases in the manufacturing and energy sectors.

Operating profits increased $63 million (31%) in the second quarter of 2011, compared with the same period of 2010. The increase in operational profit was driven by higher volume and also includes the benefit of lower research and development costs (3%), partially offset by higher aerospace program costs (5%), including warranty. The increase contributed by “Other” reflects the impact from the absence of approximately $28 million of asset impairment charges recorded in the second quarter of 2010. These charges related primarily to the disposition of an aerospace business as part of Hamilton Sundstrand’s efforts to implement low cost sourcing initiatives.

Six months ended June 30, 2011 Compared with Six months ended June 30, 2010

Sales increased $267 million (10%) in the first six months of 2011, compared with the same period of 2010. The organic sales growth primarily reflects volume increases in the aerospace (6%) and industrial (3%) businesses. The increase within the aerospace business was primarily attributable to higher aftermarket volume (5%), driven by commercial spares, and within the industrials business was primarily due to the compressor business.

Operating profits increased $86 million (20%) in the first six months of 2011, compared with the same period of 2010. The increase in operational profit was driven by higher volume and was partially offset by both higher research and development costs (1%) and aerospace program costs (5%), including warranty. The increase contributed by “Other” reflects the impact from the absence of approximately $28 million of asset impairment charges recorded in the second quarter of 2010. These charges were related

 

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primarily to the disposition of an aerospace business as part of Hamilton Sundstrand’s efforts to implement low cost sourcing initiatives.

Sikorsky –

 

     Factors Contributing to Total % Change Year-Over-Year  in:  
     Quarter Ended June 30, 2011     Six Months Ended June 30, 2011  
     Net Sales     Operating
Profits
    Net Sales     Operating
Profits
 

Organic sales / Operational operating profit

         17         

Acquisitions and divestitures, net

                 —     

Restructuring and other costs

     —              —         

Other

     —          43      —          23 
                                

Total % change

         64      10      33 
                                

Quarter ended June 30, 2011 Compared with Quarter ended June 30, 2010

Sales increased $94 million (6%) in the second quarter of 2011, as compared with the same period in 2010. The organic sales growth was primarily attributable to increased aftermarket support (3%), due primarily to higher military aftermarket volume and increased aircraft deliveries from commercial operations (2%). Net sales from military operations were essentially flat year-over-year as fewer aircraft deliveries were offset by the impact from favorable aircraft configuration mix.

Operating profits increased $108 million (64%) in the second quarter of 2011, as compared with the same period in 2010. The operational profit improvement primarily reflects the benefits from higher aftermarket volumes, lower manufacturing costs, and favorable configuration mix from U.S. government programs (combined 17%) and lower year-over-year research and development costs (5%). These increases more than offset the adverse impact on operating profit from losses (5%) associated with international development aircraft sales. The 43% increase in “Other” reflects the gain recognized on contribution of a business to a venture in the United Arab Emirates.

Six months ended June 30, 2011 Compared with Six months ended June 30, 2010

Sales increased $318 million (10%) in the first six months of 2011 as compared with the same period in 2010. The organic sales growth was primarily driven by higher international development aircraft sales (including Canadian Maritime helicopters) and favorable configuration mix from U.S. government programs (combined 7%). Increased aftermarket support (4%) was partially offset by lower sales from commercial operations (1%) due to unfavorable aircraft configuration mix.

Operating profits increased $104 million (33%) in the first six months of 2011 as compared to the same period in 2010. The operational profit improvement was primarily attributable to increased aftermarket support and favorable configuration mix from U.S. government programs (combined 9%). Lower profit within commercial operations, primarily due to unfavorable mix of aircraft and the impact of losses associated with international development aircraft sales (combined 8%) was mostly offset by the beneficial impact from lower research and development costs and increased volume on customer funded development. The 23% increase in “Other” reflects the gain recognized on contribution of a business to a venture in the United Arab Emirates.

Eliminations and other –

Eliminations and other reflects the elimination of sales, other income and operating profit transacted between segments, as well as the operating results of certain smaller businesses such as UTC Power and Clipper. The year-over-year change in sales for both the second quarter and first six months of 2011, as compared with the same period of 2010, primarily reflects the impact from the acquisition of Clipper. The year-over-year change in operating profit for the second quarter of 2011, as compared with the same period of 2010, primarily reflects the impact from the acquisition of Clipper and higher legal costs, partially offset by the absence of costs related to the early redemption of debt in the second quarter of 2010. The year-over-year change in operating profit for the first six months of 2011, as compared with the same period of 2010, primarily reflects the impact from the acquisition of Clipper, and higher self-insurance reserves and legal costs.

 

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LIQUIDITY AND FINANCIAL CONDITION

 

(Dollars in millions)

   June 30,
2011
    December 31,
2010
    June 30,
2010
 

Cash and cash equivalents

   $ 5,396     $ 4,083     $ 4,997  

Total debt

     11,398       10,289       12,065  

Net debt (total debt less cash and cash equivalents)

     6,002       6,206       7,068  

Total equity

     23,739       22,332       20,915  

Total capitalization (debt plus equity)

     35,137       32,621       32,980  

Net capitalization (debt plus equity less cash and cash equivalents)

     29,741       28,538       27,983  

Debt to total capitalization

     32     32     37

Net debt to net capitalization

     20     22     25

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows, which, after netting out capital expenditures, we target to equal or exceed net income attributable to common shareowners. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, customer financing requirements, investments in businesses, dividends, common stock repurchases, pension funding, access to the commercial paper markets, adequacy of available bank lines of credit, and the ability to attract long-term capital at satisfactory terms.

Although the global economy has improved as compared with 2010, most measures are pointing to a slow and uneven recovery. High unemployment and a weak housing sector in the U.S. continue to dampen consumer sentiment domestically, while concerns over European sovereign debt issues and the deficit debate in Washington, D.C. continue to plague financial markets and constrain government spending in certain countries. In light of these circumstances, we continue to assess our current business and closely monitor the impact on our customers and suppliers, and have determined that overall there has not been a significant effect on our financial position, results of operations or liquidity during the first six months of 2011. Due to the continued improvement in equity markets during the first six months of 2011, our domestic pension funds experienced a positive return on assets of approximately 6%. The continued recognition of prior pension losses and the impact of a lower discount rate, partially offset by additional funding and the positive returns experienced during 2010, are expected to increase pension expense in 2011 by approximately $150 million as compared to 2010.

Approximately 88% of our domestic pension plans are invested in readily-liquid investments, including equity, fixed income, asset-backed receivables and structured products. The balance of our domestic pension plans (12%) is invested in less-liquid but market-valued investments, including real estate and private equity.

Our strong debt ratings and financial position have historically enabled us to issue long-term debt at favorable market rates, including our issuance of $2.25 billion of long-term debt in February 2010. Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing debt-to-total-capitalization level as well as our current credit standing.

At June 30, 2011, we had committed revolving credit agreements from banks permitting aggregate borrowings of up to $3.0 billion under a $1.6 billion revolving credit agreement and a $1.4 billion multicurrency revolving credit agreement, which expire in November 2014 and December 2014, respectively. As of June 30, 2011, there were no borrowings under these revolving credit agreements. The undrawn portions of our revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of June 30, 2011, our maximum commercial paper borrowing authority was $3 billion.

We continue to have access to the commercial paper markets and our existing credit facilities, and expect to continue to generate strong operating cash flows. While the impact of market volatility cannot be predicted, we believe we have sufficient operating flexibility, cash reserves and funding sources to maintain adequate amounts of liquidity and to meet our future operating cash needs.

Given our extensive international operations, most of our cash is denominated in foreign currencies. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to capital controls; however, those balances are generally available without legal restrictions to fund ordinary business operations. With few exceptions, U.S. income taxes have not been provided on undistributed earnings of international subsidiaries. Our intention is to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so.

 

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On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions or divestitures or other legal obligations. Restricted cash as of June 30, 2011 and 2010 was not significant.

We believe our future operating cash flows will be sufficient to meet our future operating cash needs. Further, our ability to obtain debt or equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate.

Cash Flow - Operating Activities

 

     Six Months Ended June 30,  

(Dollars in millions)

   2011      2010  

Net cash flows provided by operating activities

   $ 2,619      $ 2,554  
                 

The increase in cash generated from operating activities in the first six months of 2011 as compared with the same period in 2010 was due largely to the increase in net income attributable to common shareowners as a result of higher sales volumes and to lower global pension cash contributions. These benefits were partially offset by higher working capital cash requirements. During the first six months of 2011, the net increase in working capital resulted in a cash outflow of $936 million compared to a cash outflow of $397 million during the first six months of 2010. This increase of $539 million was primarily driven by the higher working capital requirements associated with increased sales volumes, as well as the timing of cash receipts, disbursements and product shipments.

The funded status of our defined benefit pension plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. We can contribute cash or company stock to our plans at our discretion, subject to applicable regulations. Total cash contributions to our global defined benefit pension plans during the first six months of 2011 and 2010 were $70 million and $261 million, respectively. During the first six months of 2010, we also contributed $250 million in UTC common stock to our defined benefit pension plans. We did not contribute any UTC common stock to our defined benefit pension plans in the first six months of 2011. Improved investment returns and additional voluntary pension contributions during 2010 improved the funded status of all plans, helping to minimize future funding requirements. Contributions to our defined benefit pension plans in 2011 are expected to meet or exceed the current funding requirements.

Cash Flow - Investing Activities

 

     Six Months Ended June 30,  

(Dollars in millions)

   2011     2010  

Net cash flows used in investing activities

   $ (307   $ (2,359
                

The decrease in cash used in investing activities was largely a result of a decrease in acquisition activity in the first six months of 2011, as compared with the same period of 2010. Investments in businesses in the first six months of 2011 consisted of a number of small acquisitions in both our commercial and aerospace businesses. Investments in businesses in the first six months of 2010 primarily reflected the acquisition of the GE Security business for approximately $1.8 billion and the acquisition of a 49.9% equity stake in Clipper for approximately $270 million. We expect total investments in businesses in 2011 to be less than $1.5 billion, including acquisitions completed during the first six months of 2011, however, actual acquisition spending may vary depending upon the timing, availability and appropriate value of acquisition opportunities. Capital expenditures increased $88 million primarily at Carrier and Hamilton Sundstrand, which included expenditures related to new product launches and investment in low-cost manufacturing facilities.

Customer financing activities were a net source of cash of $29 million for the first six months of 2011, compared to a net use of cash of $28 million for the same period in 2010. While we expect that 2011 customer financing activity will be a net use of funds, actual funding is subject to usage under existing customer financing commitments during the remainder of the year. We may also arrange for third-party investors to assume a portion of our commitments. We had commercial aerospace financing and other contractual commitments of approximately $2.5 billion and $2.0 billion related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms at June 30, 2011 and December 31, 2010, respectively, of which as much as $261 million may be required to be disbursed during 2011.

 

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Cash Flow - Financing Activities

 

     Six Months Ended June 30,  

(Dollars in millions)

   2011     2010  

Net cash flows (used in) provided by financing activities

   $ (1,109   $ 405  
                

The timing and levels of certain cash flow activities, such as acquisitions and repurchases of our stock, have resulted in the issuance of both long-term and short-term debt. Commercial paper borrowings and revolving credit facilities provide short-term liquidity to supplement operating cash flows and are used for general corporate purposes, including the funding of potential acquisitions and repurchases of our stock. We had $1,060 million of commercial paper outstanding at June 30, 2011.

We repurchased $1.5 billion of our common stock in the first six months of 2011, under an existing 60 million share repurchase program. Share repurchases in the first six months of 2011 represented approximately 17.8 million shares. In addition to management’s view that the repurchase of our common stock is a beneficial investment, we also repurchase to offset the dilutive effect of the issuance of stock and options under the stock-based employee benefit programs. At June 30, 2011, approximately 16 million shares remain available for repurchase under the share repurchase program. We expect total share repurchases in 2011 of more than $2.5 billion; however, total repurchases may vary depending upon various factors including the level of other investing activities.

We paid dividends on Common Stock of $0.425 per share in the first quarter of 2011 totaling $368 million in the aggregate and $0.48 per share in the second quarter of 2011 totaling $413 million in the aggregate. On June 8, 2011, the Board of Directors declared, effective as of July 5, 2011, a dividend of $0.48 per share payable September 10, 2011 to shareowners of record at the close of business on August 19, 2011.

We have an existing universal shelf registration statement filed 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 this shelf registration statement.

Off-Balance Sheet Arrangements and Contractual Obligations

In our 2010 Annual Report, incorporated by reference in our 2010 Form 10-K, we disclosed our off-balance sheet arrangements and contractual obligations. At June 30, 2011, there have been no material changes to these off-balance sheet arrangements and contractual obligations outside the ordinary course of business except as otherwise disclosed.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no significant change in our exposure to market risk during the first six months of 2011. For discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in our 2010 Form 10-K.

 

Item 4. Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (Exchange Act), we carried out an evaluation under the supervision and with the participation of our management, including the Chairman & Chief Executive Officer (CEO), the Senior Vice President and Chief Financial Officer (CFO) and the Vice President, Controller (Controller), of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2011. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our CEO, our CFO and our Controller have concluded that, as of June 30, 2011, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our CEO, our CFO and our Controller, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Cautionary Note Concerning Factors That May Affect Future Results

This Form 10-Q contains statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements” under the securities laws. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These forward-looking statements are intended to provide management’s current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “will,” “should,” “see,” “guidance,” “confident” and other words of similar meaning in connection with a discussion of future operating or financial performance. These include, among others, statements relating to:

 

   

future sales, earnings, cash flow, results of operations, uses of cash and other measures of financial performance;

 

   

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

 

   

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

 

   

new business opportunities;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the outcome of legal proceedings and other contingencies;

 

   

future repurchases of our common stock;

 

   

future levels of indebtedness and capital research and development spending;

 

   

future availability of credit;

 

   

pension plan assumptions and future contributions; and