Annual Report — Form 10-K
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26
EXHIBIT 13
Financial Section
27 Five-Year Summary
28 Management's Discussion and Analysis
35 Comparative Stock Data
36 Management's Responsibility for
Financial Statements
36 Report of Independent Accountants
37 Consolidated Financial Statements
and Notes
55 Selected Quarterly Financial Data
27
[Enlarge/Download Table]
Five-Year Summary
In Millions of Dollars (except per share amounts) 1993 1992 1991 1990 1989
--------------------------------------------------------------------------------------------------------------
For the Year
Sales $ 20,736 $ 21,641 $ 20,840 $ 21,442 $ 19,532
Percent to United States Government 19% 21% 21% 22% 24%
Research and development 1,137 1,221 1,133 1,028 1,030
Restructuring provision - 85 1,275 - -
Income (loss) before cumulative effect of accounting
principle changes 487 35 (1,021) 751 702
Net income (loss) 487 (287) (1,021) 751 702
Earnings (loss) applicable to Common Stock 444 (329) (1,083) 715 687
Earnings (loss) per share before cumulative effect of
accounting principle changes:
Primary 3.53 (.05) (8.91) 5.91 5.34
Fully diluted 3.30 (.05) (8.91) 5.53 5.20
Earnings (loss) per share:
Primary 3.53 (2.67) (8.91) 5.91 5.34
Fully diluted 3.30 (2.67) (8.91) 5.53 5.20
Cash dividends on Common Stock 224 222 219 218 206
Per share 1.80 1.80 1.80 1.80 1.60
Average number of shares of Common Stock
outstanding (thousands):
Primary 125,997 123,238 121,537 120,845 128,693
Fully diluted 139,614 137,157 136,012 133,192 133,840
Return on average common shareowners' equity, after tax 13.1% (8.7)% (20.9)% 14.5% 14.2%
At Year End
Net working capital $ 786 $ 1,064 $ 2,354 $ 3,061 $ 2,131
Current asset ratio 1.1 to 1 1.2 to 1 1.4 to 1 1.5 to 1 1.3 to 1
Total assets 15,618 15,928 15,985 15,918 14,598
Short-term borrowings 780 377 292 342 1,281
Long-term debt, including current portion 2,179 2,769 3,101 3,220 2,312
Debt to total capitalization 45% 48% 46% 40% 43%
ESOP Preferred Stock, net 176 151 126 81 -
Shareowners' equity 3,598 3,370 3,961 5,343 4,739
Equity per common share 28.54 27.23 32.49 44.10 39.14
Business backlog 18,414 21,175 20,700 20,875 20,125
Number of employees:
United States 81,700 91,400 98,000 108,100 115,100
International:
Europe 40,300 40,600 41,800 38,200 38,300
Other 46,600 46,000 45,300 46,300 48,000
Total 168,600 178,000 185,100 192,600 201,400
Number of common shareowners 30,000 32,600 35,400 37,200 39,500
<FN>
Equity per common share is based on shares outstanding at each year end.
See Note 2 of Notes to Financial Statements for discussion of 1992 accounting
changes.
For Pratt and Whitney, backlog is based on the terms of firm orders received and
does not include discounts granted directly to airline and other customers.
28
Management's Discussion and Analysis
Management's Discussion and Analysis of Results of
Operations and Financial Position
The following discussion and analysis sets forth major factors affecting
the Corporation's results of operations during the three-year period ended
December 31, 1993. It also comments on the Corporation's financial position at
that date as presented in the accompanying financial statements. Operating
results for the Corporation's business segments are shown in the Consolidated
Summary of Business Segment Financial Data on pages 51 through 54 of this Annual
Report.
Business Environment
The Corporation's major business units serve government and commercial
aerospace, commercial property and residential housing, and automotive
manufacturing customers. Like many businesses, these operations are increasingly
affected by global, as well as regional, economic cycles.
In 1993, the U.S. economy continued to strengthen while key international
economies were mixed and will continue to exert a negative influence on the
Corporation's results of operations in the near term. In the U.S., residential
housing starts increased for the second consecutive year, up 14% over 1992 which
itself was up 18% over 1991, but U.S. commercial vacancy rates improved only
marginally to 17% from the 1992 all-time high of 18% and commercial construction
starts remained weak. Construction activity in Europe and Japan remained weak
while China and other Pacific Rim countries showed continued strength.
North American car and light truck production surged 12% in 1993 to 12.8
million units, only slightly below the recent peak of 12.9 million units in
1988. However, European car production, an increasingly important market to the
Corporation, was adversely affected by the recession in Europe with production
declining 14% in 1993 to the lowest levels since 1985.
The financial performance of the Corporation's Pratt & Whitney segment, and
to a lesser extent, the Flight Systems segment, is directly tied to the
commercial airline industry. The Pratt & Whitney segment is a major supplier of
commercial engines and spare parts. The Flight Systems segment, through Hamilton
Standard, provides fuel and environmental control systems and propellers for
commercial aircraft.
The poor financial condition of the commercial airline industry has had a
significant impact on the Corporation's 1992 and 1993 results. However, during
1993, the commercial airline industry experienced moderate, but distinct
financial improvement, and traffic for the U.S. domestic airlines increased
approximately 5% over 1992. Some airlines recorded operating profits for the
first time in several years. This improvement over prior years' performance
principally resulted from restructuring actions and other adjustments in airline
operating strategies, rather than significant improvement in the economic
conditions which caused the current decline in the industry.
Beginning in 1992, in response to the depressed levels of business, several
major domestic and foreign airlines negotiated extensions in delivery schedules
of aircraft on firm order and, in some cases, canceled existing orders and
options for future delivery. Changes in engine contract terms and schedules
generally involve economic concessions by the airline and more favorable
financial terms to the supplier. However, these actions adversely affect the
production schedules for new engines and exacerbate the already significant
engine pricing competition for new engine orders. Pratt & Whitney's large
commercial engine shipments totaled 442 in 1993, down from 610 in 1992 and 692
in 1991. In addition, the mix of engine sales has continued to shift to newer,
lower margin engines.
The follow-on spare parts sales for Pratt & Whitney engines in service has
traditionally been an important source of profit to the Corporation, and its
decline has had a significantly adverse impact on operating results of Pratt &
Whitney. Spare parts sales in 1993 were somewhat lower than 1992 which had been
flat against the depressed levels of 1991. However, sales in the fourth quarter
1993 were higher than prior quarters and higher than the prior year fourth
quarter. In addition, orders for spare parts in 1993 were higher than those
received in 1992.
The development of commercial aircraft engines requires substantial
investment by the Corporation. Over the past decade, Pratt & Whitney has
developed three new families of engines which are in production and airline
service today; the V2500, the PW2000 and the PW4000. Presently, the PW4084 and
PW4168 engines, derivatives of the PW4000 family of engines, are being
introduced for the Boeing 777 and Airbus A330 aircraft, respectively. Pratt &
Whitney's research and development expense in 1993 was $632 million compared to
$723 million in 1992. With the PW4168 engine certified in August 1993 and the
PW4084 scheduled for certification in April 1994, Pratt & Whitney's research and
development expenses are expected to continue to decline.
BAR CHART DESCRIPTION:
Revenues ($ Billions)
1989 - $19.8
1990 - $21.8
1991 - $21.3
1992 - $22.0
1993 - $21.1
29
In view of the global nature of the commercial aircraft industry and the
risk and cost associated with launching new engine development programs, Pratt &
Whitney has developed strategic alliances and collaboration arrangements on
commercial engine programs. These alliances also facilitate access to
international markets and technology. At December 31, 1993, other participants
in these alliances represented 29% and 20% of the PW2000 and PW4000 programs,
respectively, and 30% of the PW4084. Also, Pratt & Whitney has a 33% interest in
International Aero Engines, an international consortium of five partners for the
V2500 commercial aircraft engine.
The Corporation's aerospace and defense businesses continue to respond to a
changing global political environment. The defense industry is downsizing
further as the U.S. Defense budget shrinks and as the threat of large scale
conflict between superpowers has diminished. However, management believes the
Corporation is well positioned as a major supplier for key domestic and foreign
defense programs that will be important to military needs in the 1990's and
beyond.
The Corporation will continue to supply Black Hawk helicopters to the U.S.
and foreign governments under contracts extending to 1997 and 1998. The
Corporation is also well positioned on three major U.S. Defense programs of the
future, the F-22 fighter, powered by the Pratt & Whitney F119 engine, and RAH-66
Comanche helicopter, both in development, and the C-17 airlifter, powered by
Pratt & Whitney's F117 engine, which became operational with the Air Force in
1993. While these programs are expected to retain support by the U.S. military
and Congress, these and other U.S. military programs will continue to compete
for available defense funds.
The Corporation has, however, continued to reduce its reliance on U.S.
Defense contracts over the past few years and its exposure to loss from fixed-
price development contracts. This trend has been partially offset by increased
foreign military sales. Business derived from the U.S. Government declined from
24% of total sales in 1989 to 19% in 1993.
While the changing world political climate has reduced defense spending,
ongoing changes in the former Soviet Union and the People's Republic of China,
where potentially enormous markets for aircraft engines are developing, present
significant opportunities for the commercial aircraft industry. The Corporation
has been developing strategic alliances in these markets and believes it is well
positioned to take advantage of these opportunities.
Pratt & Whitney is aggressively reducing manufacturing costs to remain
competitive and regain the profit margins commensurate with the risks and
investment this industry requires. From 1991 to December 31, 1993, Pratt &
Whitney's workforce was reduced from 44,600 to 33,700 employees and
manufacturing space has been reduced by 1.1 million square feet. Pratt & Whitney
plans to reduce its workforce to no more than 30,000 during 1994, and further
reductions may be required if commercial engine volumes continue to decline.
Restructuring and Other Actions
In December 1992 the Corporation recorded charges of $447 million for
credit and other exposures related to the airline industry, $169 million for
various contract matters and $85 million for restructuring actions. The 1992
restructuring actions were incremental to the $1.275 billion pre-tax
restructuring charge recorded in 1991. The 1991 restructuring program included
eliminating jobs, closing or consolidating facilities, and improving design,
engineering and manufacturing processes.
Program to date workforce reductions total 24,710 positions. Workforce
reductions during 1993 totaled 11,690 positions. Manufacturing floor space
totaling 2.8 million and 5.6 million square feet has been eliminated during 1993
and program to date, respectively. This represents 57% of the goal to eliminate
9.9 million square feet of manufacturing space by 1995.
Results of Operations
Revenues:
Decreased 4% or $951 million from 1992 to 1993;
Increased 4% or $770 million from 1991 to 1992.
[Download Table]
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Product sales $16,671 $17,559 $17,054
Service sales 4,065 4,082 3,786
Financing revenues and other 345 391 422
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The negative impact of the commercial airline industry and unfavorable
foreign currency translation impacts are the principal causes for the overall
reduction in 1993 sales.
It is estimated that increases in selling prices to customers averaged
approximately 2% in 1993 and were not significant in 1992. The net impact of
translating sales of foreign subsidiaries decreased
30
sales by 3% in 1993 and was not significant in 1992, indicating that the real
volume of sales decreased 3% in 1993 and increased 4% in 1992.
Financing revenues and other income, less other deductions, decreased $46
million and $31 million in 1993 and 1992, respectively. The 1993 decrease
resulted primarily from lower royalties and interest income partially offset by
an increase in the amount of commercial aircraft engine participation fees. The
decrease in 1992 resulted primarily from lower commercial aircraft engine
participation fees partially offset by higher licensing and royalty fees.
Revenues of the Corporation's principal business segments for the years
ended December 31 were:
[Download Table]
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Pratt & Whitney $5,942 $6,894 $7,133
Flight Systems 3,930 4,045 4,024
Carrier 4,480 4,328 3,843
Otis 4,418 4,512 4,304
Automotive 2,382 2,378 2,084
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Pratt & Whitney segment revenues decreased $952 million (14%) in 1993 and
$239 million (3%) in 1992. The decrease in 1993 reflects decreases in commercial
and government engine and spare parts sales. Although commercial spare parts
sales were lower than the depressed levels of 1992, sales during the second half
of 1993 showed modest growth and exceeded the comparable 1992 period. The
overall decrease was partially offset by revenues resulting from the
renegotiation of certain aircraft leases during the second quarter of 1993. The
decrease in 1992 resulted from reductions in commercial and government engine
sales offset somewhat by a slight increase in government spare parts sales.
Flight Systems segment revenues for 1993 decreased $115 million (3%)
compared to 1992. As a result of substantially increased international Black
Hawk shipments, helicopter business revenues in 1993 contributed 59% of Flight
Systems segment revenues (51% in 1992 and 50% in 1991). This increase was more
than offset by reductions in defense electronics and commercial aerospace
volumes in the segment's other businesses. Flight Systems segment revenues in
1992 remained essentially unchanged from 1991.
Carrier segment revenues increased $152 million (4%) in 1993 and $485
million (13%) in 1992. The translation impact of a stronger U.S. dollar
negatively impacted 1993 revenues by approximately $115 million (3%). Revenues
for 1992 were positively impacted by approximately $30 million (1%) as a result
of foreign currency translation. Both 1993 and 1992 revenues reflect continuing
volume increases in the North American and Asia-Pacific regions as well as the
transportation refrigeration business. Revenues were also positively impacted by
increased Latin American volumes during 1993. These increases were partially
offset by the effects of the continuing recession in Europe, particularly
affecting the Spanish and Italian operations.
Otis segment revenues decreased $94 million (2%) in 1993 and increased
$208 million (5%) in 1992. The impact of currency exchange rates versus the U.S.
dollar reduced revenues by approximately $278 million (6%) in 1993 and increased
revenues by approximately $107 million (2%) in 1992. Revenues in 1993 and 1992,
exclusive of the translation impact, reflect the continuing increase in service
volumes in all regions. In addition, new equipment revenues were slightly higher
in 1993 primarily due to higher volumes in the European and Latin American
regions offset partially by lower North American volume. New equipment revenues
in 1992 were lower than 1991 levels primarily due to decreases in the North
American and Latin American regions.
Automotive segment revenues were essentially unchanged from 1992. Revenues
in 1992 were $294 million (14%) higher than 1991. During 1993 and 1992, the
segment was positively impacted by increased North American car and light truck
production and European market penetration. North American car and light truck
production increased 12% in 1993 over 1992 and 9% in 1992 over 1991. During
1993, these increases were substantially offset by the overall reduction in
European vehicle production, the negative translation impact of the stronger
U.S. dollar of approximately $112 million (5%), and the absence of sales in 1993
from certain automotive business units divested in the third quarter of 1992.
Cost of products and services sold as a percent of sales decreased:
1% from 1992 to 1993;
1% from 1991 to 1992.
[Download Table]
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Cost of products sold $13,666 $14,642 $14,331
Product margin % 18.0% 16.6% 16.0%
Cost of services sold $ 2,571 $ 2,591 $ 2,408
Service margin % 36.8% 36.5% 36.4%
-------------------------------------------------------------------------------
The cost of products sold as a percentage of sales, excluding the impact of
special charges recorded in 1992 and 1991, remained
31
relatively constant in 1993 and 1992 from the respective prior years. The on-
going efforts of the Corporation's cost reduction programs were offset by a
shift in the mix of commercial aircraft engines sold to newer, lower margin en-
gines and lower spare parts sales in the commercial aircraft and general avia-
tion businesses.
--------------------------------------------------------------------------------
Research and development expenses:
decreased 7% or $84 million from 1992 to 1993;
increased 8% or $88 million from 1991 to 1992.
--------------------------------------------------------------------------------
Gross research and development expenditures in 1993 and 1992, before the
reductions described below, were 5% lower and 2% higher than in 1992 and 1991,
respectively. The reduction in expenditures during 1993 occurred primarily at
Pratt & Whitney where the PW4084 and PW4168 commercial engine development
programs are reaching maturity. Overall, expenditures for military aircraft
engine programs during 1993 and 1992 were substantially lower than in previous
years and in 1992 were offset by higher expenditures for commercial engine
programs, as well as increased expenditures at Carrier and Otis.
Billings to participants for certain advanced commercial aircraft engine
program expenditures and partial sponsorship of military aircraft engine
programs aggregating $84 million, $67 million, and $134 million in 1993, 1992,
and 1991, respectively, have been applied as reductions of research and
development expenses. While billings remained relatively constant in 1993, the
decrease in billings during 1992 is the result of lower fees from reduced
sponsorship of military aircraft engine programs, partially offset by higher
commercial engine program fees.
BAR CHART DESCRIPTION:
R&D Expenses ($ Millions)
1989 - $1,030
1990 - $1,028
1991 - $1,133
1992 - $1,221
1993 - $1,137
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Selling, general and administrative expenses:
decreased 15% or $464 million from 1992 to 1993;
increased 13% or $344 million from 1991 to 1992.
-------------------------------------------------------------------------------
The decrease from 1992 to 1993 results from the effects of the Corporation's
restructuring efforts initiated in the first quarter of 1992 which have
increasingly reduced ongoing general and administrative expenses and the absence
of the $360 million charges recorded during the fourth quarter of 1992 for
commercial airline industry exposures and other contract matters. The effects of
the restructuring efforts were overshadowed in 1992 primarily from the $360
million charges as well as the incremental 1992 impact of FAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
BAR CHART DESCRIPTION:
SG&A Expenses ($ Millions)
1989 - $2,811
1990 - $3,094
1991 - $2,667
1992 - $3,011
1993 - $2,547
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Operating profits increased:
123% or $725 million from 1992 to 1993;
$1,086 million from 1991 to 1992.
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Operating profits (losses) of the Corporation's principal business segments
for the years ended December 31 were:
[Download Table]
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Pratt & Whitney $156 $(288) $(282)
Flight Systems 385 275 (224)
Carrier 226 152 (159)
Otis 377 313 163
Automotive 148 111 2
-------------------------------------------------------------------------------
In the first quarter of 1993, the Corporation changed its presentation of
general corporate expenses to report those costs which do not directly benefit
the reporting segments as general corporate items. This change in presentation
is consistent with the manner in which the individual operating units are both
managed and measured from an internal profitability perspective. Operating
profits (losses) for 1992 are shown below on both the current and former bases
of presentation. The comparisons below of operating results between 1993 and
1992 are based on the current presentation while comparisons between 1992 and
1991 are based on the former presentation. In addition, the operating profits
(losses) above include the restructuring provisions recorded in 1992 and 1991
and discussed previously. For purposes of analysis and comparison, the operating
profits (losses) below exclude these amounts.
[Download Table]
1992 1992
In Millions of Dollars 1993 Current Former 1991
-------------------------------------------------------------------------------
Pratt & Whitney $156 $(171) $(218) $406
Flight Systems 385 316 290 (82)
Carrier 226 183 152 31
Otis 377 346 313 296
Automotive 148 128 111 61
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Pratt & Whitney segment operating profits increased $327 million in 1993.
The 1992 results include the impact of the special charges recorded during the
fourth quarter for commercial airline exposures. Excluding the impact of these
charges, the 1993 results decreased due to lower commercial and government
engine and spare parts sales, partially offset by an increase in a partner's
interest in the PW4000 engine program during 1993. In addition, Pratt & Whitney
reduced research and development expenditures during 1993 as the PW4084 and
PW4168 commercial engine programs
32
reach maturity. The decrease in 1992 resulted from the previously discussed
charges recorded in the fourth quarter of 1992, reduced commercial engine
shipments, lower margins on the mix of sales, and lower commercial aircraft
engine participation fees.
Flight Systems segment operating profits increased $69 million (22%) and
$372 million in 1993 and 1992, respectively. The increase in 1993 results
primarily from improved operating performance and increased Black Hawk shipments
by Sikorsky and better than expected contract performance related principally to
Norden's Multi Mode Radar System contract. These increases were partially offset
by declines in commercial aerospace volumes at Hamilton Standard and the absence
of the favorable impacts of the settlement of several government contracting
claims recorded in 1992. The 1992 increase in profitability resulted primarily
from improved operating performance at Sikorsky, the absence of the 1991 $148
million charge relating to Norden's Multi Mode Radar System and other contract
matters, and the absence of the $148 million charge for environmental
remediation activities recorded in 1991.
Carrier segment operating profits increased $43 million (23%) in 1993 and
$121 million (390%) in 1992. Improved operating profits resulting from increased
volumes and margins in the Asia-Pacific and Latin American regions were
partially offset by the effects of the continuing recession in Europe. The 1992
increase was primarily a result of increased new equipment volumes, most notably
in the North American region and the transportation refrigeration business, as
well as a more profitable mix of sales.
Otis segment operating profits increased $31 million (9%) and $17 million
(6%) in 1993 and 1992, respectively. The translation impact of the stronger U.S.
dollar negatively impacted segment operating profits in 1993 by $38 million. The
improved operating profits reflect the effect of continued growth in service
volumes during both 1992 and 1993. During 1993, increases in Latin American and
European new equipment volumes and improvement in Latin American new equipment
margins contributed to the growth. New equipment revenues in 1992 were lower
than 1991 levels primarily due to decreases in the North American and Latin
American regions.
Automotive segment operating profits increased $20 million (16%) and $50
million (82%) in 1993 and 1992, respectively. Operating profits during 1993 and
1992 reflect the impact of increased North American production volumes and
European market penetration. During 1993, these increases were partially offset
by the reduction in European vehicle production and the absence of the operating
results of certain automotive business units divested during the third quarter
of 1992. In addition, 1992 results include the gain on sale of these units.
-------------------------------------------------------------------------------
Interest expense decreased:
11% or $31 million from 1992 to 1993;
17% or $57 million from 1991 to 1992.
-------------------------------------------------------------------------------
The Corporation's interest expense continues to be favorably impacted by
reductions in the amount of debt outstanding during 1993 and 1992 combined with
reductions in interest rate levels for both years.
The weighted-average interest rate on the Corporation's short-term
borrowings in 1993 was 5.5% (8.9% in 1992 and 11.4% in 1991), and the average
composite rate for short-term borrowings and long-term debt, excluding the ESOP
debt guarantee, for 1993 was 7.2% (7.8% in 1992 and 8.9% in 1991). The average
rate applicable to debt outstanding at December 31, 1993 was 5.4% for short-term
borrowings, and the average composite rate, including all long-term debt other
than the ESOP debt guarantee, was 6.8%.
-------------------------------------------------------------------------------
Net income increased $774 million from 1992 to 1993;
Net loss decreased $734 million from 1991 to 1992.
-------------------------------------------------------------------------------
In addition to the matters previously discussed, the Corporation adopted
FAS 106 in the fourth quarter of 1992 with effect from January 1, 1992. The
transition obligation at that date of $482 million, net of tax, was recorded as
a charge to earnings. The incremental expense associated with FAS 106 was $23
million and $71 million in 1993 and 1992, respectively. This reduction was
attributable to revisions in the Corporation's substantive postretirement
medical plan for certain of its employee population.
The Corporation also adopted the provisions of FAS 109, "Accounting for
Income Taxes," in the fourth quarter of 1992, with effect from January 1, 1992,
resulting in a credit to earnings of $160 million representing recognition of
previously unrecognized tax benefits. This standard requires, among other
things, recognition of deferred tax assets (representing future tax benefits)
attributable to deductible temporary differences between financial statement and
income tax bases of assets and liabilities and to tax carryforwards to the
extent that realization of these benefits is more likely than not. If the more
likely than not threshold cannot be met, valuation allowances must be recorded
to reduce the deferred tax assets to amounts expected to be realized.
Deductible and taxable temporary differences in the same taxing
jurisdiction are offset for presentation in the Consolidated Balance Sheet. The
following table summarizes the future income tax
33
benefits arising from net deductible temporary differences and tax carryforwards
at December 31, 1993:
[Download Table]
In Millions of Dollars
-------------------------------------------------------------------------------
Net deductible temporary differences $1,463
Tax carryforwards:
Acquired loss carryforwards 18
Foreign and state loss carryforwards 155
Foreign and state tax credit carryforwards 69
Alternative minimum tax credits (MTC) 84
-------
1,789
Valuation allowance (297)
--------
Total future income tax benefits $1,492
========
The future tax benefit arising from net deductible temporary differences of
$1,463 million relates to expenses recognized for financial reporting purposes
which will result in tax deductions over varying future periods. The realization
of this amount is dependent upon the generation of sufficient taxable income,
primarily in the United States, over the varying future periods in which the tax
deductions will be recognized, including applicable carryforward periods. Future
tax benefits of $368 million attributable to postretirement benefits will be
realized as paid over a period of forty years or more based on the Corporation's
healthcare plans for retirees. Conversely, expenses associated with the
Corporation's restructuring program (tax benefits of $182 million) are expected
to result in tax deductions primarily within two years. Other future tax
benefits of $913 million relate to such matters as environmental accruals,
warranty provisions and the timing of inventory and contract cost recognition
which are expected to result in tax deductions in periods up to generally ten
years.
Prior to 1992, the Corporation's U.S. operations consistently produced
taxable income, averaging $300 million of domestic source taxable income per
year for the five years ending in 1991. In 1992 and 1993, primarily as a result
of depressed conditions in the commercial airline industry and actual
expenditures relating to the 1991 restructuring provision, domestic tax losses
were incurred which have been utilized by carryback to prior years.
Based on the Corporation's business plans, including the benefits of the
cost reductions resulting from the restructuring program, and the tax planning
strategies available, management believes that the Corporation's domestic
earnings during the periods identified above will be sufficient to realize these
future income tax benefits.
Minimum tax credit and certain state tax credit carryforwards have no
expiration date. Foreign and state tax loss carryforwards arise in a number of
different taxing jurisdictions with expiration dates ranging from 1994 to 2008.
For those jurisdictions where the expiration date or the projected operating
results indicate that realization is not likely, a valuation allowance has been
provided. Foreign tax credit carryforwards, which require future foreign source
income to be utilized, expire after five years and generally are fully reserved
through valuation allowances.
Liquidity and Financing Commitments
Management assesses the Corporation's liquidity in terms of its overall
ability to generate cash to fund its operating and investing activities. Of
particular importance in the management of liquidity are cash flows generated
from operating activities, capital expenditure levels, adequate bank lines of
credit, and financial flexibility to attract long-term capital on satisfactory
terms.
Set forth below is selected key cash flow data from the Consolidated
Statement of Cash Flows:
[Download Table]
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Net Cash Flows from
Operating Activities $ 1,508 $ 1,203 $ 1,890
======= ======= =======
Purchases of fixed assets $ (846) $ (920) $(1,048)
(Acquisitions) dispositions
of business units, net - 64 (7)
Other investing activities (180) (70) 27
------- ------- -------
Net Cash Flows from
Investing Activities $(1,026) $ (926) $(1,028)
======= ======= =======
Net Cash Flows from
Financing Activities $ (379) $ (435) $ (517)
======= ======= =======
Net cash flows from operating activities in 1993 improved over 1992
primarily due to operating results. Operating cash flows remain lower than the
1991 level primarily because of the impact of the Corporation's restructuring
activities.
BAR CHART DESCRIPTION:
Operating Cash Flows ($ Millions)
1989 - $1,129
1990 - $1,333
1991 - $1,890
1992 - $1,203
1993 - $1,508
The substantial fixed asset additions during the period 1991 through 1993,
while decreasing in each year, have been necessary to increase productivity, to
modernize certain of the Corporation's facilities and to provide for expansion
of some product lines. The great
34
majority of these expenditures were for machinery and equipment and were made
across all business segments. Cash used for financing activities during the
period included dividends to preferred and common shareowners.
BAR CHART DESCRIPTION:
Capital Expenditures and Depreciation ($ Millions)
Capital
Expenditures Depreciation
1989 - $1,023 $591
1990 - $1,200 $675
1991 - $1,048 $735
1992 - $ 920 $777
1993 - $ 846 $777
During the years ended December 31, 1993 and 1992, the Corporation met its
net financing requirements by adjusting its level of short-term borrowings as
required and issuing long-term debt when conditions were considered favorable.
The results of the foregoing activities upon the Corporation's financial
structure are shown in the following tabulation:
[Download Table]
In Millions of Dollars 1993 1992
-------------------------------------------------------------------------------
Short-term borrowings and current
portion of long-term debt $ 1,020 $ 788
Long-term debt 1,560 1,964
Capital lease obligations 379 394
Shareowners' equity 3,598 3,370
Debt to total capitalization 45% 48%
The Corporation's ratio of debt to total capitalization reflects a three
percentage point decrease from 1992. Operating results in 1993 combined with the
improved cash flow caused the decrease in this ratio. The impact of fourth
quarter charges combined with the net charge taken as a result of the adoption
of FAS 106 and FAS 109 caused a decrease in shareowners' equity which more than
offset the effect of debt reductions and increased the Corporation's debt to
total capitalization ratio two percentage points at December 31, 1992. The
Corporation expects the costs of the restructuring actions will be funded from
operations and from the cash flow benefits associated with the restructuring.
Consequently, the Corporation's restructuring actions are not expected to result
in significant increases in borrowing levels.
The Corporation believes that existing sources of liquidity are adequate
to meet anticipated short-term borrowing needs at similar risk-based interest
rates for the foreseeable future. While Moody's Investor Services reduced the
Corporation's debt rating from A1 to A2 in 1993, Standard & Poor's reaffirmed
the Corporation's debt rating at A+. Accordingly, the Corporation does not
believe its long-term borrowing costs will be materially impacted.
At December 31, 1993, the Corporation had credit commitments from banks
totaling $1.0 billion under two Revolving Credit Agreements. Each agreement
provides for borrowings of $500 million at interest rates up to the prime rate.
One commitment expires October 14, 1994 and the other on January 1, 1996. At
December 31, 1993, there were no borrowings under either Revolving Credit
Agreement. Long-term financing will continue to be considered in the future if
conditions are advantageous, and in that regard, under an effective Registration
Statement on file with the Securities and Exchange Commission at December 31,
1993, up to $871 million of medium-term and long-term debt of the Corporation
might be issued.
In addition to the requirements discussed above, the Corporation had
commitments to finance or arrange financing for customers at December 31, 1993
of approximately $1.3 billion of commercial aircraft, of which $174 million may
be required to be disbursed in 1994.
New FASB Pronouncement
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 112 (FAS 112), "Employers' Accounting for
Postemployment Benefits," in November 1992. FAS 112 requires that the liability
for certain postemployment benefits, including salary continuation, supplemental
unemployment benefits and job training, be recognized over the employees'
service lives when certain conditions are met. Liabilities for FAS 112 type
benefits have already been recorded pursuant to FAS 106 and other pre-existing
policies of the Corporation.
Environmental Matters
The Corporation's operations are subject to environmental regulation by
federal, state, and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations.
The Corporation has been identified as a potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or Superfund) for environmental remediation at 84 federal Superfund
sites, many of which relate to formerly-owned businesses. To date, the
Corporation has made expenditures of $37 million for remediation at these
Superfund sites and its share of future expenditures at these Superfund sites is
estimated to be in the range of $110-$140 million. Additionally, the Corporation
is potentially responsible for remediation under federal, state and/or local
regulations at other sites. The Corporation has adequately provided for its
share of future remediation and related expenditures at Superfund and other
known sites for which it may have some remediation responsibility.
35
The Corporation had expenditures related to remediation at Superfund and
other sites of $64 million in 1993, $58 million in 1992 and $57 million in 1991.
These expenditures are not expected to exceed $100 million in each of the next
two years.
Since environmental laws are becoming increasingly more stringent, the
Corporation's capital expenditures and costs for environmental compliance may
increase in the future.
The Corporation has instituted legal proceedings against its insurers
seeking insurance coverage for remediation and related expenditures. These
proceedings are expected to last several years. As no prediction can be made as
to the outcome of these proceedings, potential insurance reimbursements are not
recorded. The above uncertainties notwithstanding, the Corporation believes that
expenditures necessary to comply with the present regulations governing
environmental protection will not have a material effect upon its capital
expenditures, competitive position, financial position or results of operations.
Other Contingencies
In June 1989, Sikorsky Aircraft submitted a voluntary disclosure report to
the Department of Defense describing the conditions that gave rise to a $75
million downward adjustment of progress payments in April 1988 and related
matters. An employee filed a "qui tam" action under the Civil False Claims Act
based on matters that he learned while working on the Corporation's
investigation of the matter. The Civil Division of the Department of Justice has
stated that it would accept $150 million in full settlement of the matter, which
compensates the Government for damages it has suffered, but the terms and
conditions of such a settlement are the subject of continuing negotiations. The
Corporation has accrued its estimated liability for this matter based on
available information. If the Corporation is unable to negotiate a satisfactory
settlement, it intends to litigate.
The Corporation is now and believes that, in light of the current
government contracting environment, it will be the subject of one or more
government investigations. If the Corporation or one of its business units were
charged with wrongdoing as a result of any of these investigations, the
Corporation or one of its business units could be suspended from bidding on or
receiving awards of new government contracts pending the completion of legal
proceedings. If convicted or found liable, the Corporation could be fined and
debarred from new government contracting for a period generally not to exceed
three years. Any contracts found to be tainted by fraud could be voided by the
Government.
Subsequent Event
On January 19, 1994, the Corporation filed a registration statement with
the Securities and Exchange Commission pursuant to its plan to sell to the
public a 40 to 44 percent equity interest in UT Automotive, the Corporation's
Automotive segment. The Corporation has not made decisions regarding the use of
proceeds, which for purposes of the filing were estimated at $470 million.
[Download Table]
Comparative Stock Data 1993 1992
---------------------------------------------------- -------------------------
Common Stock High Low Dividend High Low Dividend
First Quarter 49 7/8 43 3/4 $.45 56 5/8 49 $.45
Second Quarter 55 7/8 46 1/4 .45 56 50 1/4 .45
Third Quarter 59 3/8 51 1/2 .45 57 1/4 47 3/4 .45
Fourth Quarter 66 1/8 56 1/2 .45 49 42 1/4 .45
The Corporation's Common Stock is listed on the New York Stock Exchange. The
high and low prices are based on the Composite Tape. There were 30,000 common
shareowners of record at December 31, 1993.
36
Management's Responsibility for Financial Statements
The financial statements of United Technologies Corporation and subsidiaries,
and all other information presented in this Annual Report, are the
responsibility of the management of the Corporation. The financial statements
have been prepared in accordance with generally accepted accounting principles.
Management is responsible for the integrity and objectivity of the
financial statements, including estimates and judgments reflected in them. It
fulfills this responsibility primarily by establishing and maintaining
accounting systems and practices adequately supported by internal accounting
controls. These controls include the selection and training of management and
supervisory personnel; maintenance of an organizational structure providing for
delegation of authority and establishment of responsibilities; communication of
requirements for compliance with approved accounting, control and business
practices throughout the organization; business planning and review; and a
program of internal audit. Management believes the internal accounting controls
in use provide reasonable assurance that the Corporation's assets are
safeguarded, that transactions are executed in accordance with management's
authorizations, and that the financial records are reliable for the purpose of
preparing financial statements.
Independent accountants are elected annually by the Corporation's
shareowners to audit the financial statements in accordance with generally
accepted auditing standards. Their report appears in this Annual Report. Their
audits, as well as those of the Corporation's internal audit department, include
a review of internal accounting controls and selective tests of transactions.
The Audit Review Committee of the Board of Directors, consisting of six
directors who are not officers or employees of the Corporation, meets regularly
with management, the independent accountants and the internal auditors, to
review matters relating to financial reporting, internal accounting controls and
auditing.
/s/ Robert F. Daniell /s/ George David
Robert F. Daniell George David
Chairman and President and
Chief Executive Officer Chief Operating Officer
/s/ Stephen F. Page
Stephen F. Page
Executive Vice President
and Chief Financial Officer
Report of Independent Accountants
To the Shareowners of United Technologies Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareowners' equity and of
cash flows present fairly, in all material respects, the financial position of
United Technologies Corporation and its subsidiaries at December 31, 1993 and
1992, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2, the Corporation changed its methods of accounting
for postretirement benefits other than pensions and for income taxes in 1992.
/s/ Price Waterhouse
One Financial Plaza
Hartford, Connecticut
January 26, 1994
37
[Enlarge/Download Table]
Consolidated Statement of Operations United Technologies Corporation
Years Ended December 31,
----------------------------
In Millions of Dollars (except per share amounts) 1993 1992 1991
--------------------------------------------------------------------------------------------------------
Revenues
Product sales $ 16,671 $ 17,559 $ 17,054
Service sales 4,065 4,082 3,786
Financing revenues and other income, less other deductions 345 391 422
-------- -------- --------
21,081 22,032 21,262
-------- -------- --------
Costs and Expenses
Cost of products sold 13,666 14,642 14,331
Cost of services sold 2,571 2,591 2,408
Research and development 1,137 1,221 1,133
Selling, general and administrative 2,547 3,011 2,667
Interest 251 282 339
Restructuring provision - 85 1,275
-------- -------- --------
20,172 21,832 22,153
-------- -------- --------
Income (loss) before income taxes and minority interests 909 200 (891)
Income taxes 336 77 75
-------- -------- --------
Income (loss) before minority interests 573 123 (966)
Less-Minority interests in subsidiaries' earnings 86 88 55
-------- -------- --------
Income (loss) before cumulative effect of accounting principle changes 487 35 (1,021)
Cumulative effect of changes in accounting principles for:
Income taxes - 160 -
Postretirement benefits other than pensions - (482) -
-------- -------- --------
Net Income (Loss) $ 487 $ (287) $ (1,021)
======== ======== ========
Preferred Stock Dividend Requirement $ 43 $ 42 $ 62
-------- -------- --------
Earnings (Loss) Applicable to Common Stock $ 444 $ (329) $ (1,083)
-------- -------- --------
Per Share of Common Stock:
Primary:
Earnings (loss) before cumulative effect of accounting principle changes $ 3.53 $ (0.05) $ (8.91)
Cumulative effect of changes in accounting principles for:
Income taxes - 1.29 -
Postretirement benefits other than pensions - (3.91) -
-------- -------- --------
Earnings (Loss) $ 3.53 $ (2.67) $ (8.91)
======== ======== ========
Fully Diluted:
Earnings (loss) before cumulative effect of accounting principle changes $ 3.30 $ (0.05) $ (8.91)
Cumulative effect of changes in accounting principles for:
Income taxes - 1.29 -
Postretirement benefits other than pensions - (3.91) -
-------- -------- --------
Earnings (Loss) $ 3.30 $ (2.67) $ (8.91)
======== ======== ========
<FN>
See accompanying Notes to Financial Statements
38
[Enlarge/Download Table]
Consolidated Balance Sheet United Technologies Corporation
December 31,
-----------------
In Millions of Dollars 1993 1992
-----------------------------------------------------------------------------------------------
Assets
Cash and short-term cash investments $ 421 $ 354
Accounts receivable (net of allowance for doubtful accounts of $336 and $447) 2,981 3,135
Future income tax benefits 794 802
Inventories and contracts in progress 4,635 5,095
Less-Progress payments and billings on contracts in progress (1,482) (1,587)
Prepaid expenses 357 302
------- -------
Total Current Assets 7,706 8,101
------- -------
Investments and receivables due after one year 457 416
------- -------
Customer financing assets 914 647
------- -------
Fixed assets (net of accumulated depreciation of $5,231 and $4,928) 4,565 4,602
------- -------
Future income tax benefits 698 783
------- -------
Deferred charges:
Costs in excess of net assets of acquired companies (net of accumulated
amortization of $254 and $230) 544 577
Prepaid pension costs and other 734 802
------- -------
1,278 1,379
------- -------
Total Assets $15,618 $15,928
======= =======
Liabilities and Shareowners' Equity
Short-term borrowings $ 780 $ 377
Accounts payable 1,815 2,097
Accrued salaries, wages and employee benefits 912 945
Accrued restructuring costs 245 435
Other accrued liabilities 2,053 2,056
Long-term debt - currently due 240 411
Income taxes currently payable 314 232
Advances on sales contracts 561 484
------- -------
Total Current Liabilities 6,920 7,037
------- -------
Future income taxes payable 177 186
------- -------
Long-term debt 1,939 2,358
------- -------
Future pension and postretirement benefit obligations 1,440 1,395
------- -------
Other long-term liabilities 999 1,085
------- -------
Commitments and contingent liabilities (Notes 5 and 13)
Minority interests in subsidiary companies 369 346
------- -------
Series A ESOP Convertible Preferred Stock, $1 par value (Authorized -
20,000,000 shares)
Outstanding-12,459,932 and 12,661,738 shares 822 836
ESOP deferred charge and note receivable (646) (685)
------- -------
176 151
------- -------
Shareowners' Equity:
Capital Stock:
Preferred Stock, $1 par value (Authorized - 230,000,000 shares; none issued
and outstanding) - -
Common Stock, $5 par value (Authorized - 500,000,000 shares)
Issued-138,712,505 and 136,438,880 shares 2,075 1,965
Cost of 12,665,188 and 12,664,188 common shares in treasury (677) (677)
Retained earnings 2,466 2,247
Deferred foreign currency translation adjustments (227) (135)
Minimum pension liability adjustment (39) (30)
------- -------
Total Shareowners' Equity 3,598 3,370
------- -------
Total Liabilities and Shareowners' Equity $15,618 $15,928
======= =======
<FN>
See accompanying Notes to Financial Statements
39
[Enlarge/Download Table]
Consolidated Statement of Cash Flows United Technologies Corporation
Years Ended December 31,
---------------------------
In Millions of Dollars 1993 1992 1991
---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 487 $ (287) $(1,021)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Restructuring provision - 85 1,275
Environmental remediation provision, less portion in current liabilities 30 39 291
Depreciation and amortization 815 852 764
(Increase) decrease in:
Accounts receivable 45 239 302
Inventories, net of progress payments 335 328 168
Prepaid expenses (55) (135) 96
Increase (decrease) in:
Accounts and taxes payable, and accrued liabilities (25) 359 501
Future income taxes payable and future income tax benefits 33 (626) (346)
Noncurrent postretirement benefit obligation 37 808 -
Advances on sales contracts 77 (133) 84
Restructuring liabilities (393) (354) (208)
Environmental liabilities (54) (52) (41)
Minority interests in subsidiaries' earnings 86 88 55
Gains from dispositions of business units - (16) -
Other, net 90 8 (30)
------- ------- -------
Net Cash Flows from Operating Activities 1,508 1,203 1,890
Cash flows from investing activities: ------- ------- -------
Purchases of fixed assets (846) (920) (1,048)
Sales of fixed assets 47 95 64
Increase in customer financing assets (356) (202) (81)
Decrease in customer financing assets 148 - 74
Investments - other companies (20) 29 (31)
Acquisitions of business units - - (7)
Dispositions of business units - 64 -
Other, net 1 8 1
------- ------- -------
Net Cash Flows from Investing Activities (1,026) (926) (1,028)
Cash flows from financing activities: ------- ------- -------
Issuance of long-term debt 27 13 509
Repayments of long-term debt (636) (355) (690)
Increase (decrease) in short-term borrowings 403 85 (64)
Decrease in ESOP note receivable and debt guarantee, net of $14 million,
$16 million and $7 million ESOP Preferred Stock retirements 25 25 45
Common Stock issued for employee stock plans and other 110 87 28
Dividends paid on Common and ESOP Preferred Stocks (267) (264) (281)
Other, net (41) (26) (64)
------- ------- -------
Net Cash Flows from Financing Activities (379) (435) (517)
------- ------- -------
Effect of foreign exchange rate changes on cash and short-term cash investments (36) (11) (23)
------- ------- -------
Net Increase (Decrease) in Cash and Short-Term Cash Investments 67 (169) 322
Cash and Short-Term Cash Investments, Beginning of year 354 523 201
------- ------- -------
Cash and Short-Term Cash Investments, End of year $ 421 $ 354 $ 523
Supplemental Disclosure of Cash Flow Information: ======= ======= =======
Interest paid, net of amounts capitalized $ 239 $ 293 $ 330
Income taxes paid, net of refunds 179 403 436
Non-cash investing and financing activities:
Assets of businesses acquired - - 191
Liabilities of businesses acquired - - 155
Assets of businesses sold - 64 -
Liabilities of businesses sold - 16 -
<FN>
See accompanying Notes to Financial Statements
40
[Enlarge/Download Table]
Consolidated Statement of Changes in Shareowners' Equity United Technologies Corporation
In Millions of Dollars
-----------------------------------
Common Treasury Retained
Stock Stock Earnings Other
---------------------------------------------------------------------------------------------------------------------
Balance December 31, 1990 $1,850 $(677) $4,089 $ 81
Issued under employee incentive plans, with no tax benefit (742,147 shares
of Common Stock, net of 25,761 shares purchased and reissued) 28
Net loss (1,021)
Dividends on -Common Stock ($1.80 per share) (219)
-ESOP Preferred Stock ($4.80 per share), with no tax benefit (62)
Deferred foreign currency translation adjustments:
Translation and hedging adjustments, with no tax benefit (107)
Sale of foreign investments (1)
---------------------------------------------------------------------------------------------------------------------
Balance December 31, 1991 1,878 (677) 2,787 (27)
Issued under employee incentive plans, and related tax benefit (1,868,645 shares
of Common Stock, net of 160,002 shares purchased and reissued) 87 (1)
Redemption of Common Stock Rights (12)
Net loss (287)
Dividends on -Common Stock ($1.80 per share) (222)
-ESOP Preferred Stock ($4.80 per share), net of
income tax benefits of $19 million (42)
-Recognition of previously unrecognized tax benefit on
ESOP Preferred Stock dividends 24
Deferred foreign currency translation adjustments:
Translation and hedging adjustments, including income taxes of $12 million (108)
Minimum pension liability adjustment, net of income tax benefits of $19 million (30)
---------------------------------------------------------------------------------------------------------------------
Balance December 31, 1992 1,965 (677) 2,247 (165)
Issued under employee incentive plans, and related tax benefit (2,273,625 shares
of Common Stock, net of 21,409 shares purchased and reissued) 110 (1)
Net income 487
Dividends on -Common Stock ($1.80 per share) (224)
-ESOP Preferred Stock ($4.80 per share), net of
income tax benefits of $18 million (43)
Deferred foreign currency translation adjustments:
Translation and hedging adjustments, including income taxes of $4 million (92)
Minimum pension liability adjustment, net of income tax benefits of $7 million (9)
---------------------------------------------------------------------------------------------------------------------
Balance December 31, 1993 $2,075 $(677) $2,466 $(266)
<FN>
See accompanying Notes to Financial Statements
41
Notes to Financial Statements
Note 1
Summary of Accounting Principles
Principles of Consolidation: The consolidated financial statements include
the accounts of the Corporation and its subsidiaries. International operating
subsidiaries are included generally on the basis of fiscal years ending November
30. All material intercompany transactions have been eliminated. Certain
reclassifications have been made to 1992 and 1991 amounts to conform with 1993
presentation.
Revenue Recognition: Sales under government and commercial fixed-price
contracts and government fixed-price-incentive contracts are recorded at the
time deliveries are made or, in some cases, on a percentage of completion basis.
Sales under cost-reimbursement contracts are recorded as work is performed and
billed. Sales of commercial aircraft engines sometimes require significant
participation by the Corporation in aircraft financing arrangements; when
appropriate, such sales are accounted for as operating leases. Sales under
elevator and escalator installation and modernization contracts are accounted
for under the percentage of completion method.
Prospective losses, if any, on contracts are provided for when the losses
become anticipated. Loss provisions are based upon any anticipated excess of
inventoriable manufacturing or engineering cost and estimated warranty costs
over the net revenue from the products contemplated by the specific order.
Service sales, representing aftermarket repair and maintenance activities
performed on produced or similar use equipment, are recognized over the
contractual period or as services are performed.
Inventories and Contracts in Progress: Inventories and contracts in
progress are stated at the lower of cost or estimated realizable value.
Inventories consist primarily of raw materials and work in process. Materials in
excess of requirements for contracts and orders currently in effect or
anticipated have been eliminated. A considerable portion of inventories is based
on cost standards which are adjusted to reflect approximate current costs. The
remainder of inventories is stated either at average cost or at actual cost
accumulated against specific contracts or orders or, in the case of a sub-
stantial portion of inventories in the Carrier and Automotive businesses, at
last-in, first-out (LIFO) cost. Manufacturing tooling costs are charged to
inventories or to fixed assets depending upon their nature, general
applicability and useful lives. Tooling costs included in inventory are charged
to cost of sales based on usage, generally within two years after they enter
productive use. All other manufacturing costs are allocated to current
production; no such costs are deferred and assigned to future production.
Contracts in progress relate to elevator and escalator contracts and
include standard cost of manufactured components, accumulated installation costs
and estimated earnings on uncompleted contracts.
Depreciation and Amortization: Provisions for depreciation of plant and
equipment related to the Corporation's aerospace operations have generally been
made using accelerated methods. Provisions for depreciation of other plant and
equipment have primarily been made using the straight-line method. Estimated
useful lives principally range from 30 to 50 years for buildings and
improvements, from 8 to 20 years for machinery and equipment, and from 5 to 10
years for office equipment. Improvements to leased property are amortized over
the life of the lease.
Environmental Activities: Provisions for environmental remediation
activities are recorded when assessments are made, remedial efforts are probable
and related amounts can be reasonably estimated; potential insurance
reimbursements are not recorded. The Corporation periodically assesses its
environmental liabilities through reviews of contractual commitments, site
assessments, feasibility studies and formal remedial design and action plans.
Research and Development and Other Costs: Research and development costs
not specifically covered by contracts and those related to the Corporation-
sponsored share of research and development activity in connection with cost-
sharing arrangements are charged to operations as incurred. General and
administrative expenses also are charged to operations as incurred. Costs
pertaining to fulfillment of the Corporation's warranty and service policies and
product guarantees are estimated on the basis of past experience and current
product performance and, where believed to be significant and reasonably
predictable in amount, are accrued at the time products are sold.
Goodwill: Costs in excess of values assigned to the underlying net assets
of acquired companies are included in deferred charges and are generally being
amortized over periods ranging from 25 to 40 years.
Hedging Activity: The Corporation enters into a variety of interest rate
futures, options, currency swaps and forward contracts in its management of
interest rate and foreign currency exposures. Realized and unrealized gains and
losses are deferred and either recognized as interest expense over the
borrowing period or recognized in shareowners' equity, depending on the
exposure hedged.
The Corporation enters into forward foreign exchange contracts to hedge
foreign currency denominated receivables and payables. Such contracts generally
have maturities of one year or less and the counterparties are typically major
international financial institutions.
42
Cash flows attributable to the forward foreign exchange contracts are
generally included with the cash flows from the associated hedged receivables or
payables.
Income Taxes: Provisions for income taxes are based upon income and
expenses recorded in accordance with the Corporation's regular accounting
practices and as shown in the financial statements. The income tax effects of
differences in the time when items of income and expense are reflected in
accordance with such regular accounting practices and the time they are
recognized for income tax purposes are shown in the balance sheet as future
income tax benefits or as future income taxes payable, as appropriate.
Earnings Per Share: Primary earnings per share computations are based on
the average number of shares of Common Stock outstanding during the year. Fully
diluted earnings per share reflect the maximum dilution of per share earnings,
if applicable, which would have occurred if all the ESOP Convertible Preferred
Stock of the Corporation had been converted as of the date of issue. Each share
of the ESOP Preferred Stock is convertible into one share of Common Stock. A
reduction in earnings applicable to common shares is required in the calculation
of fully diluted earnings per share representing the Corporation's assumed
additional contribution to the ESOP to enable it to meet its debt repayment
responsibilities were the preferred dividends not available for this purpose.
Cash and Cash Equivalents: Short-term cash investments are highly liquid in
nature and have original maturities of three months or less.
Note 2
Accounting and Reporting Changes
Effective January 1, 1992, the Corporation adopted Statement of Financial
Accounting Standards No. 106 (FAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions," using the immediate recognition
transition option. The after-tax cumulative effect attributable to prior years
as of January 1, 1992 for this change in accounting for retiree health care and
life insurance benefits reduced 1992 earnings by $482 million ($3.91 per share).
Prior to 1992 the Corporation recognized the cost of providing these benefits as
premiums were incurred. The incremental expense associated with FAS 106 was $23
million and $71 million in 1993 and 1992, respectively. This reduction was
attributable to revisions in the Corporation's substantive postretirement
medical plan for certain of its employee population.
Effective January 1, 1992, the Corporation adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." The
Statement requires the liability method of accounting for income taxes rather
than the deferred method previously used. The cumulative effect attributable to
prior years as of January 1, 1992 for this change in accounting for income taxes
increased 1992 earnings by $160 million ($1.29 per share).
Prior years' financial statements were not restated.
Note 3
Restructuring and Employee Severance Plans
On January 20, 1992, the Corporation's Board of Directors approved
restructuring plans which resulted in a $1.275 billion pre-tax ($1.21 billion
after-tax, or $10.06 per share) charge to 1991 operations. The restructuring
actions included eliminating jobs, closing or consolidating facilities, and
improving design, engineering and manufacturing processes.
As a result of the continued worsening of the commercial airline industry,
the Corporation recorded additional restructuring provisions of $85 million in
the fourth quarter of 1992 to reflect the need for further workforce reductions
in the Pratt & Whitney and Flight Systems segments.
Note 4
International Operations
A substantial portion of the Corporation's revenues and assets is
attributable to international operations. The Corporation has significant
manufacturing facilities in Canada, Italy, France, Japan, South Korea, Spain,
Australia, Mexico, the United Kingdom, Brazil, China, Ireland, Singapore, and
Germany and operations of lesser size in a number of other countries. At
December 31, 1993, the investment (identifiable assets) in any single country
outside the United States did not exceed 5% of the Corporation's total
identifiable assets, other than investments in Canada which amounted to slightly
more than 5% of total identifiable assets.
Amounts included in the accompanying consolidated financial statements
associated with operations outside the United States consist of the following:
[Download Table]
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Sales $7,854 $8,396 $7,720
Net income 264 254 179
Assets 4,722 4,999 5,096
Liabilities 2,076 2,395 2,758
Minority interests 364 340 328
-------------------------------------------------------------------------------
The financial position and results of operations of substantially all of
the Corporation's significant foreign subsidiaries are measured using local
currency as the functional currency. The aggregate effects of translating the
financial statements of these subsidiaries are deferred as a separate component
of shareowners' equity.
At December 31, 1993, the Corporation had $667 million notional principal
amount of outstanding currency swaps and forward exchange contracts to hedge its
foreign net investment exposures. In addition, at December 31, 1993 and 1992,
the
43
Corporation had $1.6 billion and $1.7 billion, respectively, of forward foreign
exchange contracts hedging other foreign currency exposures.
Earnings were credited or charged with foreign exchange gains (losses),
including gains and losses of operations in highly inflationary economies, of
$3 million, $6 million and $(22) million in 1993, 1992 and 1991, respectively.
Note 5
Airline Industry and Customer Financing Assets
The Corporation has significant receivables and other financing assets
which result from its business activities with commercial airline industry
customers totaling $2,235 million and $2,219 million at December 31, 1993 and
1992, respectively. The commercial airline industry and customer financing
asset amounts primarily include assets of Pratt & Whitney, Hamilton Standard and
UT Finance Corporation.
Customer financing assets consist of the following:
[Download Table]
In Millions of Dollars 1993 1992
-------------------------------------------------------------------------------
Notes receivable $570 $365
Leases receivable, less unearned income
of $311 and $13 367 73
Products under lease 19 255
---- ----
956 693
Less: receivables due within one year 42 46
---- ----
$914 $647
==== ====
-------------------------------------------------------------------------------
Scheduled maturities of amounts included in notes and leases receivable due
after one year for the next five years are $40 million in 1995, $49 million in
1996, $105 million in 1997, $58 million in 1998 and $643 million in 1999 and
thereafter.
Customer aircraft financing activities are conducted principally through UT
Finance Corporation, its consolidated subsidiaries and certain other customer
financing operations.
The competitive commercial aircraft engine market often requires customer
financing commitments. These commitments may be in the form of guarantees,
secured debt or lease financing. At December 31, 1993, the Corporation had
commitments to finance or arrange financing for approximately $1.3 billion of
commercial aircraft. The Corporation cannot currently predict the extent to
which these commitments will be utilized, since certain customers may be able
to obtain more favorable terms using traditional financing sources. From time
to time, the Corporation also arranges for third party investors to assume a
portion of its commitments. However, should all current commitments be
exercised as scheduled, the maximum amounts that will be disbursed are as
follows: $174 million in 1994, $280 million in 1995, $204 million in 1996,
$440 million in 1997, $112 million in 1998 and $67 million in 1999 and beyond.
If exercised, the financing arrangements will be secured by assets with fair
values exceeding the financed amounts.
The Corporation's customer financing activities include leasing aircraft
and subleasing the aircraft to customers. In some instances, customers have
cancellation provisions which may result in sublease periods shorter than the
Corporation's lease obligation. At December 31, 1993, the Corporation's rental
commitments under long-term noncancelable operating leases aggregated $290
million ($25 million in each of the years 1994 through 1998). At December 31,
1993, the Corporation also had approximately $421 million of residual value and
other guarantees related to various commercial aircraft engine customer
financing arrangements. These guarantees may extend for up to twenty-two years
and may be used by the customers to obtain more favorable financing terms than
would otherwise be available. Where applicable, the estimated fair market values
of the assets securing these guarantees and operating lease obligations equaled
or exceeded the related guarantees and obligations, after considering existing
reserves. As with financing commitments, the Corporation may arrange for third
party investors to assume a portion of its guarantees or operating lease
obligations.
Allowances for possible losses relating to financing activities with
commercial airline customers total $374 million and $409 million at December 31,
1993 and 1992, respectively.
Note 6
Inventories and Contracts in Progress
Inventories and contracts in progress at December 31, 1993 consist of
inventories of $3,629 million ($4,018 million at December 31, 1992) and elevator
and escalator contracts in progress of $1,006 million ($1,077 million at
December 31, 1992).
The methods of accounting followed by the Corporation do not permit
classification of inventories by categories of finished goods, work in process
and raw materials. The Corporation's sales contracts in many cases are long-term
contracts expected to be performed over periods exceeding twelve months.
Approximately 58% (60% at December 31, 1992) of the total inventories and
contracts in progress has been acquired or manufactured under such long-term
contracts. It is impracticable for the Corporation to determine the amounts of
inventory scheduled for delivery under long-term contracts within the next
twelve months.
The principal elements of cost included in inventories are materials,
purchased components, direct labor and manufacturing overhead (engineering
overhead in the case of engineering contracts). Tooling and other costs are an
insignificant portion of inventories.
A substantial portion of the Corporation's inventories in its Carrier and
Automotive businesses is valued under the LIFO method. If these inventories had
been valued at the lower of replacement value or cost under the first-in, first-
out method, they
44
would have been higher by $137 million at December 31, 1993 ($148 million at
December 31, 1992).
The book basis of LIFO inventories exceeded the tax basis of such inventories
by approximately $57 million at December 31, 1993 and 1992 resulting from the
assignment of fair value to inventories acquired in a business acquisition
accounted for under the purchase method of accounting.
At December 31, 1993, progress payments, secured by lien, on United States
Government contracts and billings on contracts in progress amounted to $347
million ($333 million at December 31, 1992) and $1,135 million ($1,254 million
at December 31, 1992), respectively.
Note 7
Investments and Receivables Due After One Year
Investments and receivables due after one year consist of the following:
[Download Table]
In Millions of Dollars 1993 1992
-------------------------------------------------------------------------------
Receivables due after one year $239 $216
Investments 218 200
---- ----
$457 $416
==== ====
-------------------------------------------------------------------------------
Current and long-term accounts receivable at December 31, 1993 and 1992
include approximately $105 million and $144 million, respectively, representing
retainage under contract provisions and amounts which are not presently billable
because of lack of funding or final prices or contractual documents under
government contracts or for other reasons. These items are expected to be
collected in the normal course of business.
Note 8
Fixed Assets
[Download Table]
In Millions of Dollars 1993 1992
-------------------------------------------------------------------------------
Fixed assets, at cost:
Land $ 158 $ 161
Buildings and improvements 2,754 2,620
Machinery, tools and equipment 6,427 6,206
Under construction 457 543
------- -------
9,796 9,530
Accumulated depreciation (5,231) (4,928)
------- -------
$ 4,565 $ 4,602
======= =======
-------------------------------------------------------------------------------
Depreciation expense was $777 million in 1993 and 1992, and $735 million in
1991.
Note 9
Borrowings and Lines of Credit
The following summarizes the short-term borrowings, lines of credit and
long-term debt of the Corporation and its subsidiaries. Short-term borrowings:
[Download Table]
In Millions of Dollars 1993 1992
-------------------------------------------------------------------------------
Foreign bank borrowings $204 $253
Commercial paper and notes 576 124
---- ----
$780 $377
==== ====
-------------------------------------------------------------------------------
At December 31, 1993, the Corporation had credit commitments from banks
totaling $1.0 billion under two Revolving Credit Agreements. Each agreement
provides for borrowings of $500 million at interest rates up to the prime rate.
The termination date for one agreement is January 1, 1996 with a facility fee
not to exceed 1/4% per year on the aggregate commitment. The other is effective
through October 14, 1994 and has a facility fee not to exceed 3/16% per annum on
the aggregate commitment. There were no borrowings under either Revolving Credit
Agreement during the two years ended December 31, 1993.
[Download Table]
Long-term debt:
In Millions
1993 Debt of Dollars
----------------------------- ----------------
Weighted Average
Type of Issue Interest Rate Maturity 1993 1992
-------------------------------------------------------------------------------
Denominated in U.S. Dollars:
Notes and other debt 6.3% 1995-2021 $1,003 $1,316
Denominated in foreign currency:
Notes and other debt 8.0% 1995-2030 40 95
Capital lease obligations 9.5% 1995-2013 379 394
ESOP debt guarantee 7.5% 1995-2009 517 553
------ ------
$1,939 $2,358
====== ======
45
Principal payments required on long-term debt for the next five years are
$240 million in 1994, $148 million in 1995, $119 million in 1996, $185 million
in 1997 and $80 million in 1998.
The terms of the indentures relating to certain issues of long-term debt
include provisions intended to restrict, under certain conditions, the
availability of retained earnings for payment of dividends on the Common Stock.
At December 31, 1993, all of the Corporation's retained earnings were free of
such restrictions.
At December 31, 1993, the Corporation had entered into various interest
rate swap contracts (including options thereon) related to approximately $805
million of its outstanding borrowings. The expiration dates of the various
contracts are tied to scheduled debt and capital lease obligation payment dates
and extend to 2002.
Capitalized Interest: During 1993, the Corporation and its consolidated
subsidiaries capitalized $29 million ($52 million in 1992 and $70 million in
1991) of interest, to be depreciated over the lives of the related fixed assets.
Note 10
Taxes on Income
The provision for income taxes for the years ended December 31 comprises
the following:
[Download Table]
In Millions of Dollars 1993 1992 1991*
-------------------------------------------------------------------------------
Current:
United States:
Federal $ 6 $(145) $138
State 22 9 48
Foreign 226 263 246
----- ----- ----
254 127 432
Future: ----- ----- ----
United States:
Federal 4 (19) (275)
State 22 (44) (31)
Foreign 27 (24) (51)
----- ----- ----
53 (87) (357)
----- ----- ----
307 40 75
Benefits attributable to items
credited to equity 29 37 -
----- ----- ----
$ 336 $ 77 $ 75
===== ===== ====
<FN>
* 1991 amounts have not been restated for FAS109.
As discussed in Note 2, the Corporation adopted FAS 109 as of January 1,
1992, and the cumulative effect of this change is reported in the 1992
Consolidated Statement of Operations.
Future income taxes represent the tax effects of transactions which are
reported in different periods for financial and tax reporting purposes. These
temporary differences are determined in accordance with FAS 109 and are more
inclusive in nature than "timing differences" as determined under previously
applicable accounting principles. Temporary differences and carryforwards which
gave rise to future income tax benefits and payables at December 31, 1993 and
1992 are as follows:
[Download Table]
In Millions of Dollars 1993 1992
-------------------------------------------------------------------------------
Future income tax benefits:
Tax depreciation and foreign capital
allowances $ (129) $ (147)
Capitalization of interest cost, less
related depreciation (99) (105)
Adjustment of inventories and
contract losses to tax basis 393 304
Provisions for warranty 286 306
Insurance and employee benefits 554 468
Restructuring provisions 182 351
Alternative minimum tax credits 84 51
Environmental remediation provisions 195 199
Federal, foreign and state tax loss
carryforwards 173 123
Foreign and state tax credit
carryforwards 69 31
Other items, net 81 221
Valuation allowance (297) (217)
------ ------
1,492 1,585
Future income taxes payable: ------ ------
Use of completed-contract method
for reporting taxable income 11 17
Tax depreciation and foreign capital
allowances 104 109
Capitalization of interest cost, less
related depreciation 21 23
Insurance and employee benefits 42 34
Lease transactions, finance subsidiaries 23 21
Other items, net 9 69
------ ------
210 273
------ ------
Net future income tax benefits $1,282 $1,312
====== ======
Current and non-current future income tax benefits and payables within the
same tax jurisdiction are offset for presentation in the Consolidated Balance
Sheet. Valuation allowances have been established for state and foreign tax
credit and tax loss carryforwards to reduce the future income tax benefits to
amounts expected to be realized. Federal loss carryforwards arise from business
acquisitions with significant restrictions as to their future realization and
consequently are fully reserved.
46
Deferred U.S. federal, state and foreign income taxes shown in the income
tax provision for 1991 are comprised principally of the income tax effects of
insurance and employee benefit items $(107) million, restructuring provisions
$(59) million, and environmental remediation provisions $(102) million.
The sources of income (loss) before income taxes and minority interests
were:
[Download Table]
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
United States $291 $(374) $(1,311)
Foreign 618 574 420
---- ----- -------
$909 $ 200 $ (891)
==== ===== =======
Future income taxes payable generally have not been provided on
undistributed earnings of international subsidiaries, of $1,288 million, which
are included in consolidated retained earnings at December 31, 1993. A
substantial portion of the undistributed earnings of the international
subsidiaries has been reinvested, and the Corporation believes that income taxes
otherwise payable upon repatriation of earnings not reinvested would not be
significant.
Differences between effective income tax rates and the statutory U.S.
federal income tax rates are as follows:
[Download Table]
1993 1992 1991*
-------------------------------------------------------------------------------
Statutory U.S. federal income
tax rate 35.0% 34.0% (34.0)%
State and local income taxes,
net of federal tax benefit 3.4 (9.6) 1.3
Varying tax rates of consolidated
subsidiaries (including Foreign
Sales Corporation) (1.0) (5.7) 7.1
Amortization of excess purchase
accounting and goodwill
adjustments, without tax effect 0.5 3.4 0.4
Foreign tax credits (0.4) 15.6 33.5
Other (0.5) 0.7 0.1
---- ---- ----
Effective income tax rates 37.0% 38.4% 8.4%
==== ==== ====
<FN>
* 1991 amounts have not been restated for FAS109.
Foreign and state tax credit carryforwards total $69 million at December
31, 1993, $27 million of which expire in 1998. Federal, state and foreign tax
loss carryforwards total $1,418 million at December 31, 1993 and expire as
follows:
[Download Table]
In Millions of Dollars Federal State Foreign
-------------------------------------------------------------------------------
1994-1998 $ - $640 $120
1999-2003 51 107 2
2004-2008 1 455 -
Indefinite - - 42
Note 11
Employee Benefit Plans
Employee Pension Benefits: The Corporation and its domestic subsidiaries
have a number of defined benefit pension plans covering substantially all U.S.
employees. Plan benefits are generally based on years of service and the
employee's compensation during the last several years of employment. The
Corporation's funding policy is based on an actuarially determined cost method
allowable under Internal Revenue Service regulations. The funds are invested
either in various securities by trustees or in insurance annuity contracts.
Certain foreign subsidiaries have defined benefit pension plans or severance
indemnity plans covering their employees. The Corporation accounts for the cost
of its defined benefit plans in accordance with Statement of Financial
Accounting Standards No. 87 (FAS 87), "Employers' Accounting for Pensions."
In addition to the defined benefit plans covering U.S. and foreign
employees discussed above, the Corporation makes contributions to multiemployer
plans (predominantly defined benefit plans) covering certain employees in some
of its U.S. operations. Certain additional employees, primarily located in
foreign countries, are covered by retirement arrangements which do not meet the
reporting requirements of FAS 87.
Summarized below are the components of net periodic pension cost for
defined benefit plans, net pension cost for multiemployer plans and other costs
for pension and severance indemnity plans:
[Download Table]
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Defined benefit plans:
Service cost-benefits earned
during the period $ 204 $ 195 $ 210
Interest cost on projected
benefit obligation 573 551 524
Actual return on assets (1,024) (286) (1,198)
Net amortization and deferral
of actuarial gains (losses) 305 (433) 508
------- ----- -------
Net periodic pension cost $ 58 $ 27 $ 44
======= ===== =======
Net pension cost:
Multiemployer plans $ 19 $ 17 $ 21
Other costs 20 11 22
Summarized below is the funded status of the defined benefit pension plans
and the related amounts that are recognized in the Consolidated Balance Sheet at
December 31:
47
[Enlarge/Download Table]
December 31, 1993 December 31, 1992
------------------------ ------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Millions of Dollars Benefits Exceed Assets Benefits Exceed Assets
--------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $4,894 $1,702 $4,176 $1,566
Nonvested 615 128 223 147
------ ------ ------ ------
Accumulated benefit obligation 5,509 1,830 4,399 1,713
Effect of projected future salary increases 834 106 1,081 130
------ ------ ------ ------
Projected benefit obligation for services rendered to date 6,343 1,936 5,480 1,843
Plan assets available for benefits 5,937 1,532 5,283 1,475
------ ------ ------ ------
Plan assets less than projected benefit obligation (406) (404) (197) (368)
Unrecognized net loss (gain) 609 195 363 166
Prior service cost not yet recognized in net periodic pension cost 58 128 88 146
Unrecognized net (asset) obligation at transition (112) (25) (148) (11)
Additional minimum liability recognized - (207) - (207)
Prepaid pension cost (pension liability) included in deferred ------ ------ ------ ------
charges (future pension and postretirement benefit obligations) $ 149 $ (313) $ 106 $ (274)
====== ====== ====== ======
The pension funds are valued at September 30 of the respective years in the
table above. Major assumptions used in the accounting for the defined benefit
pension plans are shown in the following table. Net periodic pension cost is
determined using these factors as of the end of the prior year, whereas the
funded status of the plans uses only the first two factors as of the end of the
current year.
[Download Table]
December 31,
-------------------------------------
1993 1992 1991 1990
-------------------------------------------------------------------------------
Weighted-average
discount rate 7.3% 8.1% 8.6% 9.0%
Rate of increase in future
compensation 5.1% 5.2% 6.1% 7.0%
Expected long-term rate
of return on assets 9.7% 10.5% 10.5% 10.5%
In accordance with the provisions of FAS 87, the Corporation was required
to record an additional minimum pension liability at December 31, 1993 and 1992.
This amount represents the excess of the accumulated benefit obligations over
the fair value of plan assets and accrued pension liabilities. The liabilities
have been offset by intangible assets to the extent possible. Because the asset
recognized may not exceed the amount of unrecognized prior service cost, the
balance of the liability at the end of each period is reported as a separate
reduction to shareowners' equity, net of tax benefits.
Amounts are summarized as follows:
[Download Table]
December 31,
---------------
In Millions of Dollars 1993 1992
-------------------------------------------------------------------------------
Additional minimum liability $207 $207
==== ====
Intangible assets $142 $158
Reduction of shareowners' equity 39 30
Tax benefits 26 19
Certain of the Corporation's international subsidiaries generally do not
determine the actuarial value of accumulated benefits and the value of net
assets on the basis shown above. For these plans, unfunded vested benefits as of
December 31, 1993 and 1992 were insignificant. Unfunded liabilities for pension
plans of certain international subsidiaries and for employee severance benefits,
including those accruing to employees under foreign government regulations, are
included in future pension and postretirement benefit obligations in the
accompanying balance sheet.
Employee Health Care and Insurance Benefits: As discussed in Note 2, the
Corporation adopted FAS 106 as of January 1, 1992.
The Corporation expects to continue funding postretirement health care and
insurance benefit costs principally on a pay-as-you-go basis. Substantially all
domestic full-time employees who retire from the Corporation between age 55 and
age 65, and certain foreign employees, are eligible to receive postretirement
health care and life insurance benefits. Beginning in the first quarter of 1993
and continuing through the year, the Corporation revised its substantive
postretirement medical plan for certain of its employee population. The revised
plan calls for defined dollar benefits for all domestic salaried employees and
certain domestic hourly employees. Most other employees who retire from the
Corporation between ages 55 and 65, are eligible to receive, at a cost to the
retiree equal to the Corporation's cost for an active employee, certain health
care benefits identical to those available to active employees. After attaining
age 65, an eligible retiree's health care benefit coverage
48
becomes coordinated with Medicare, with the retiree paying substantially all of
the cost of the coverage. Certain retired employees of businesses acquired by
the company are covered under other health care plans that differ from current
plans in coverage, deductibles, and retiree contributions. In addition, certain
retirees may elect, at retirement, to continue life insurance coverage of up to
twice their annual base pay as of that date.
Summary information on the Corporation's plans is as follows:
[Download Table]
December 31,
---------------
In Millions of Dollars 1993 1992
-------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 505 $ 433
Fully eligible, active plan participants 32 32
Other active participants 341 565
----- ------
878 1,030
Less: plan assets at fair value 107 118
----- ------
Postretirement benefit obligation in
excess of plan assets 771 912
Unrecognized net loss (73) (4)
Unrecognized net reduction in prior
service costs 222 -
----- ------
Accrued postretirement benefit cost $ 920 $ 908
===== ======
The components of net periodic postretirement benefit cost are as follows:
[Download Table]
December 31,
---------------
In Millions of Dollars 1993 1992
-------------------------------------------------------------------------------
Service cost of benefits earned $ 17 $ 35
Interest cost on accumulated postretirement
benefit obligation 65 80
Actual return on plan assets (7) (10)
Net amortization and deferral of actuarial
(gains) losses (17) -
---- ----
Net periodic postretirement benefit cost $ 58 $105
==== ====
The discount rate used in determining the APBO was 7.4% and 8.1% for 1993
and 1992, respectively. The expected long-term rate of return on plan assets
used in determining the net periodic postretirement benefit cost was 8.5% and
8.35% in 1993 and 1992, respectively. The assumed health care cost trend rate
used in measuring the accumulated postretirement benefit obligation was 14.25%
and 15% in 1993 and 1992, respectively, declining by .75% per year to an
ultimate rate of 8%.
If the health care cost trend rate assumptions were increased by 1%, the
APBO as of December 31, 1993 would be increased by 5%. The December 31, 1992
APBO would have been increased by 10% for the change. The effect of this change
on the sum of the service cost and interest cost components of the net periodic
postretirement benefit cost for 1993 and 1992 would be an increase of 5% and
13%, respectively. The impact of changes in expected health care trend rates was
substantially reduced during 1993 as a result of postretirement medical plan
revisions calling for defined dollar benefits for many domestic employees.
Curtailment: During 1993 and 1991, the Corporation recognized net
curtailment losses of $56 million and $54 million, respectively, in accordance
with FAS 88 and FAS 106. These losses resulted from the net increase in the
Corporation's benefit obligation for pension and postretirement benefits for
certain employees affected by workforce reductions at several operating units
and from enhanced early retirement benefits.
Employee Savings Plans: In 1989, the Corporation established an Employee
Stock Ownership Plan (ESOP) to serve as the vehicle for the Corporation's match
of employee contributions within one of its existing savings plans. The
Corporation's Board of Directors authorized 20,000,000 shares of Series A ESOP
Convertible Preferred Stock, par value $1.00 per share, having a 7.38% dividend
rate per annum. Each share of ESOP Preferred Stock is convertible into one share
of Common Stock. In 1990 and 1989, the ESOP Trust acquired 2,900,000 and
10,153,847 shares of this new series of ESOP Preferred Stock, respectively, in
exchange for individual promissory notes aggregating $202 million and $660
million, respectively. In 1990, the ESOP Trust arranged $660 million of
permanent financing guaranteed by the Corporation and repaid the note issued in
1989. The Corporation has no intention at this time of arranging permanent
financing for the remaining balance of the 10.5% $202 million promissory note.
The guarantee of the ESOP's debt resulted in the Corporation recording such
debt in its Consolidated Balance Sheet with a corresponding offset to the ESOP
Preferred Stock. The Corporation is required to contribute sufficient funds,
when combined with dividends paid on the ESOP Preferred Stock, to meet the ESOP
Trust's debt service requirements on the permanent financing and promissory
note. In 1993 and 1992, the ESOP incurred interest expense aggregating $54
million and $58 million, respectively, on its outstanding indebtedness. In 1993,
the ESOP made principal payments of $34 million and $5 million on its permanent
financing and promissory note, respectively.
Shares of ESOP Preferred Stock are held by the ESOP Trustee with the number
of shares allocated to each employee determined annually in accordance with a
method approved by the Internal Revenue Service. To the extent that allocated
shares are not sufficient to meet the matching requirement of the savings plan,
the Corporation will contribute additional ESOP Preferred Stock, Common Stock or
cash.
49
Shares allocated to employees generally may not be withdrawn until the
employee's termination, disability, retirement or death. Upon withdrawal, shares
of ESOP Preferred Stock must be converted into one share of the Corporation's
Common Stock or, if the value of the Common Stock is less than the original cost
of the ESOP Preferred Stock, the ESOP Trustee may require the Corporation to
repurchase the ESOP Preferred Stock at its original cost. Because of the
guaranteed value, the ESOP Preferred Stock is classified outside of permanent
equity. In conjunction with the establishment of the ESOP, the Corporation
purchased approximately 1.7 million shares and 10.4 million shares of its Common
Stock in 1990 and 1989, respectively, at a combined average cost of $53.48 per
share to substantially provide for the conversion feature of the ESOP Preferred
Stock.
Dividends on ESOP Preferred Stock are deductible for U.S. income tax
purposes. Tax benefits available to the Corporation resulting from such
dividends are applied as a reduction of the ESOP Preferred Stock dividends in
the financial statements.
The ESOP Preferred Stock is redeemable, in whole or in part, generally at
the option of the Corporation at redemption prices ranging from $67.88-$69.77
per share plus accrued and unpaid dividends. At December 31, 1993, the aggregate
redemption value of the ESOP Preferred Stock was $851 million.
Contributions to the ESOP together with the value of additional ESOP
Preferred Stock, Common Stock or cash necessary to satisfy the savings plan
matching requirement are charged to expense. The Corporation and a number of its
subsidiaries have additional savings plans in which a portion of employee
contributions is matched in cash by the employer. The amount expensed related to
all savings plans totaled $77 million in 1993 ($77 million in 1992 and $88
million in 1991).
Employee Incentive Plans: On April 24, 1989, the Corporation's shareowners
approved the Long-Term Incentive Plan (1989 Plan) under which shares of Common
Stock may be sold or awarded to officers and key employees. The 1989 Plan in
effect replaced the 1979 Long-Term Incentive Plan (1979 Plan). The 1989 Plan
also had the effect of amending the terms of all grants and awards under the
1979 Plan that remain outstanding inasmuch as they shall be administered in
accordance with the terms and provisions of the 1989 Plan.
The 1989 Plan authorized various types of market-based incentive and
performance-based awards. The exercise price of an option, which will be set at
the time of the grant, will not be less than the fair market value of the shares
subject thereto on the date of grant. The maximum number of shares which may be
utilized for awards granted during a given calendar year may not exceed 2% of
the aggregate shares of Common Stock, common stock equivalents and treasury
shares as reported outstanding in the Annual Report on Form 10-K for the
preceding fiscal year.
At December 31, 1993, stock options for 5,338,917 shares of Common Stock
were exercisable at an average price of $46.41 per share.
At December 31, 1993, 7,983,128 shares of Common Stock were reserved for
issuance under various employee incentive plans.
For 1993, $67 million ($58 million in 1992 and $54 million in 1991) was
charged to income with respect to employee incentive plans of the Corporation
and certain of its subsidiaries, of which $32 million ($35 million in 1992 and
$24 million in 1991) relates to the Corporation's principal incentive
compensation plan, and the remainder to the 1989 Plan and other plans.
A summary of the transactions under all Plans for the three years ended
December 31 follows:
[Download Table]
Stock Options
Average Other Incentive
Shares Price Awards
-------------------------------------------------------------------------------
Outstanding - December 31, 1990 8,164,005 $42.32 247,099
Granted 1,438,054 $48.92 654,816
Exercised/earned (705,691) $33.21 (68,157)
Cancelled (192,996) $47.88 (149,197)
---------- --------
Outstanding - December 31, 1991 8,703,372 $44.03 684,561
Granted 1,618,726 $50.28 640,595
Exercised/earned (1,698,513) $38.26 (468,209)
Cancelled (179,832) $48.49 (266,622)
---------- --------
Outstanding - December 31, 1992 8,443,753 $46.30 590,325
Granted 1,395,273 $47.36 438,865
Exercised/earned (2,103,123) $44.62 (338,681)
Cancelled (180,846) $48.21 (74,017)
---------- --------
Outstanding - December 31, 1993 7,555,057 $46.92 616,492
========== ========
50
Note 12
Fair Value of Financial Instruments
FAS 107, "Disclosures about Fair Value of Financial Instruments," requires
the determination of fair value for certain of the Corporation's assets,
liabilities and contingent liabilities. When practicable, the following methods
and assumptions were used to estimate the fair value of those financial
instruments included in the following categories:
Cash and short-term cash investments: The carrying amount approximates fair
value because of the short maturity of those instruments.
Investments and receivables due after one year: The fair values of some
investments and receivables are estimated based on quoted market prices for
those or similar instruments. For other investments and receivables for which
there are no quoted market prices, an approximation of fair value is based upon
projected cash flows discounted at an estimated current market rate of interest.
Customer financing assets: The fair values of customer financing assets are
estimated based upon projected cash flows discounted at an estimated current
market rate of interest.
Long-term debt: The fair value of the Corporation's long-term debt is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Corporation for debt of the same remaining
maturities.
Interest rate swap agreements: The fair value of interest rate swaps (used
for hedging purposes) is the estimated amount that the Corporation would receive
or pay to terminate the swap agreements at the reporting date, taking into
account current interest rates and the current credit worthiness of the swap
counterparties.
Foreign currency contracts: The fair value of foreign currency contracts
(used for hedging purposes) is estimated by obtaining quotes from brokers.
Financing commitments: It was not practicable, without incurring excessive
cost, to estimate the fair value of the Corporation's financing commitments
totaling $1.3 billion at December 31, 1993. The fair value of such commitments
would be based upon the amount a third party would charge for assuming the
Corporation's obligation under the commitments. Additional information
pertaining to these commitments is included in Note 5.
Except for the financing commitments described above and long-term debt,
it is estimated that the carrying value of all of the Corporation's financial
instruments approximate fair value at December 31, 1993. Based upon market
conditions at December 31, 1993, the fair value of the Corporation's long-term
debt exceeded the carrying value by approximately $180 million.
Note 13
Commitments and Contingent Liabilities
The Corporation and its consolidated subsidiaries occupy space and use
certain equipment under lease arrangements. Rent expense in 1993, 1992 and 1991
under such arrangements totaled $344 million, $405 million and $389 million,
respectively. Rental commitments at December 31, 1993 under long-term
noncancelable operating leases are as follows (See Note 5 for lease commitments
associated with customer financing arrangements):
[Download Table]
Land, Machinery,
Buildings and Tools and
In Millions of Dollars Office Space Equipment
-------------------------------------------------------------------------------
1994 $127 $ 58
1995 99 37
1996 76 20
1997 60 9
1998 49 7
After 1998 122 2
---- ----
$533 $133
==== ====
The Corporation extends performance and operating cost guarantees, which
are beyond its normal warranty and service policies, for extended periods on
some of its products, particularly commercial aircraft engines. Liability under
such guarantees is contingent upon future product performance and durability.
The Corporation has accrued its estimated liability that may result under these
guarantees.
The Corporation has been identified as a potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or Superfund) for environmental remediation at 84 federal Superfund
sites, many of which relate to formerly-owned businesses. Additionally, the
Corporation is potentially responsible for remediation under federal, state
and/or local regulations at other sites. The Corporation has adequately provided
for its share of future remediation and related expenditures at Superfund and
other known sites for which it may have some remediation responsibility.
The Corporation has instituted legal proceedings against its insurers
seeking insurance coverage for remediation and related expenditures. These
proceedings are expected to last several years. As no prediction can be made as
to the outcome of these proceedings, potential insurance reimbursements are not
recorded. The above uncertainties notwithstanding, the Corporation believes that
expenditures necessary to comply with the present regulations governing
environmental protection will not have a material effect upon its capital
expenditures, competitive position, financial position or results of operations.
51
In June 1989, Sikorsky Aircraft submitted a voluntary disclosure report to
the Department of Defense describing the conditions that gave rise to a $75
million downward adjustment of progress payments in April 1988 and related
matters. An employee filed a "qui tam" action under the Civil False Claims Act
based on matters that he learned while working on the Corporation's
investigation of the matter. The Civil Division of the Department of Justice has
stated that it would accept $150 million in full settlement of the matter, which
compensates the Government for damages it has suffered, but the terms and
conditions of such a settlement are the subject of continuing negotiations. The
Corporation has accrued its estimated liability for this matter based on
available information. If the Corporation is unable to negotiate a satisfactory
settlement, it intends to litigate.
The Corporation is now and believes that, in light of the current
government contracting environment, it will be the subject of one or more
government investigations. If the Corporation or one of its business units were
charged with wrongdoing as a result of any of these investigations, the
Corporation or one of its business units could be suspended from bidding on or
receiving awards of new government contracts pending the completion of legal
proceedings. If convicted or found liable, the Corporation could be fined and
debarred from new government contracting for a period generally not to exceed
three years. Any contracts found to be tainted by fraud could be voided by the
Government.
The Corporation also has other commitments and contingent liabilities
related to legal proceedings and matters arising out of the normal course of
business.
Management believes that resolution of these matters will not have a
material adverse effect upon either results of operations, cash flows, or
financial position of the Corporation.
Note 14
Subsequent Event
On January 19, 1994, the Corporation filed a registration statement with
the Securities and Exchange Commission pursuant to its plan to sell to the
public a 40 to 44 percent equity interest in UT Automotive, the Corporation's
Automotive segment. The Corporation has not made decisions regarding the use of
proceeds, which for purposes of the filing were estimated at $470 million.
Note 15
Business Segment Financial Data
The Corporation and its subsidiaries design, develop, manufacture and sell
high-technology products, classified in five principal industry segments or
lines of business.
Pratt & Whitney products are principally aircraft engines and substantial
spare parts sold to a diversified customer base including international and
domestic commercial airlines and aircraft leasing companies, aircraft
manufacturers, regional and commuter airlines, and U.S. and non-U.S.
governments. Modified aircraft engines used for electrical power generation and
other applications are also included.
Flight Systems products include helicopters and spare parts, propellers,
rocket motors, and fuel control, environmental, radar, cockpit and integrated
display and other airborne and space systems sold primarily to U.S. and non-U.S.
governments, aerospace and defense prime contractors, and airframe and jet
engine manufacturers. Products also include fuel cells and the design and manu-
facture of microelectronic circuits.
Carrier products include air conditioning equipment, substantial service,
maintenance and spare parts sold to a diversified international customer base
in commercial and residential real estate development.
Otis products include elevators and escalators, substantial service,
maintenance and spare parts sold to a diversified international customer base in
commercial real estate development.
Automotive products include electrical wiring systems, electromechanical
and hydraulic devices, electric motors, car and truck interior trim components,
steering wheels, instrument panels and other products for the automotive
industry principally in the United States and Canada.
Activities classified as "Other" consist of a variety of business and
developmental activities.
Business segment information for the three years ended December 31, 1993
appears in the Consolidated Summary of Business Segment Financial Data on pages
52 through 54.
52
[Download Table]
Consolidated Summary of Business Segment United Technologies Corporation
Financial Data
Industry Segments Years Ended December 31,
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Revenues
Pratt & Whitney $ 5,942 $ 6,894 $ 7,133
Flight Systems 3,930 4,045 4,024
Carrier 4,480 4,328 3,843
Otis 4,418 4,512 4,304
Automotive 2,382 2,378 2,084
Other 43 40 33
Corporate items and eliminations (114) (165) (159)
------- ------- -------
Consolidated revenues $21,081 $22,032 $21,262
======= ======= =======
Operating Profits (Losses)
Pratt & Whitney $ 156 $ (288) $ (282)
Flight Systems 385 275 (224)
Carrier 226 152 (159)
Otis 377 313 163
Automotive 148 111 2
Other 22 25 (3)
Eliminations - 1 6
------- ------- -------
Operating profits (losses) 1,314 589 (497)
Financing revenues and other income,
less other deductions 15 4 50
Interest expense (251) (282) (339)
General corporate expenses (169) (111) (105)
------- ------- -------
Consolidated income (loss) before income taxes $ 909 $ 200 $ (891)
======= ======= =======
Identifiable Assets
Pratt & Whitney $ 4,270 $ 4,483 $ 5,122
Flight Systems 2,011 2,170 2,323
Carrier 2,639 2,616 2,619
Otis 1,689 1,821 1,827
Automotive 1,557 1,537 1,625
General corporate assets and other 3,452 3,301 2,469
------- ------- -------
Consolidated assets $15,618 $15,928 $15,985
======= ======= =======
Capital Expenditures
Pratt & Whitney $ 252 $ 274 $ 351
Flight Systems 139 159 196
Carrier 176 175 203
Otis 124 139 128
Automotive 141 136 113
General corporate assets and other 14 37 57
------- ------- -------
Consolidated additions to fixed assets $ 846 $ 920 $ 1,048
======= ======= =======
<FN>
See accompanying Notes to Consolidated Summary of Business Segment Financial
Data
53
[Download Table]
Consolidated Summary of Business Segment United Technologies Corporation
Financial Data (Continued)
Geographic Areas Years Ended December 31,
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Revenues
United States operations $13,818 $14,403 $14,201
International operations:
Europe 4,018 4,572 4,121
Other 4,130 4,131 3,908
Corporate items and eliminations (885) (1,074) (968)
------- ------- -------
Consolidated revenues $21,081 $22,032 $21,262
======= ======= =======
Operating Profits (Losses)
United States operations $ 663 $ (83) $(1,034)
International operations:
Europe 375 469 370
Other 333 272 184
Eliminations (57) (69) (17)
------- ------- --------
Operating profits (losses) 1,314 589 (497)
Financing revenues and other income,
less other deductions 15 4 50
Interest expense (251) (282) (339)
General corporate expenses (169) (111) (105)
------- ------- -------
Consolidated income (loss) before income taxes $ 909 $ 200 $ (891)
======= ======= =======
Identifiable Assets
United States operations $ 7,934 $ 8,200 $ 8,959
International operations:
Europe 1,883 2,247 2,392
Other 2,520 2,311 2,255
General corporate assets and other 3,281 3,170 2,379
------- ------- -------
Consolidated assets $15,618 $15,928 $15,985
======= ======= =======
<FN>
See accompanying Notes to Consolidated Summary of Business Segment Financial
Data
54
Notes to Consolidated Summary Of Business Segment
Financial Data
Revenues: Revenues by industry segment and geographic area include inter-
segment sales and transfers between geographic areas. Generally, such sales and
transfers are made at prices approximating those which the selling or
transferring entity is able to obtain on sales of similar products to
unaffiliated customers.
Revenues include sales under prime contracts and subcontracts to the U.S.
Government, for the most part Pratt & Whitney and Flight Systems products, as
follows:
[Download Table]
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Pratt & Whitney $1,556 $1,905 $1,922
Flight Systems 2,416 2,616 2,511
Revenues from United States operations include export sales of $3,503
million in 1993, $3,451 million in 1992 and $3,587 million in 1991. Export sales
to Europe were $932 million, $1,114 million and $1,375 million of the 1993, 1992
and 1991 amounts, respectively. Export sales include direct sales to commercial
customers outside the United States and sales to the U.S. Government, commercial
and affiliated customers which are known to be for resale to customers outside
the United States.
Operating Profits: The Corporation changed its presentation of general
corporate expenses in 1993 to reflect in each segment's results only those
expenses which directly benefit the segment. As required by generally accepted
accounting principles, 1992 and 1991 operating profits have not been restated
for the 1993 change in presentation. Operating profits for 1993 on the old basis
of presentation of general corporate expenses would be as follows: Pratt &
Whitney - $121 million; Flight Systems - $362 million; Carrier - $199 million;
Otis - $350 million; and Automotive - $134 million.
Identifiable Assets: Identifiable assets are those which are specifically
identified with the industry segments and geographic areas in which operations
are conducted. General corporate assets consist principally of short-term cash
investments, customer financing subsidiaries, future income tax benefits, and
investments in other companies.
Depreciation and amortization charges are as follows:
[Download Table]
In Millions of Dollars 1993 1992 1991
-------------------------------------------------------------------------------
Pratt & Whitney $304 $322 $306
Flight Systems 157 168 138
Carrier 132 132 121
Otis 97 92 76
Automotive 96 95 91
Eliminations: Eliminations made in reconciling industry and geographic area
data with the related consolidated amounts include intersegment sales and
transfers between geographic areas, unrealized profits in inventory and similar
items.
Restructuring: The Corporation recorded charges of $85 million and $1,275
million to operations for restructuring actions in 1992 and 1991, respectively.
Restructuring provisions, by business segment and in total, were as follows:
[Download Table]
In Millions of Dollars 1992 1991
-------------------------------------------------------------------------------
Pratt & Whitney $ 70 $ 688
Flight Systems 15 142
Carrier - 190
Otis - 133
Automotive - 59
Other - 16
---- ------
85 1,228
Financing revenues and other income,
less other deductions - 6
General corporate expenses - 41
---- ------
$ 85 $1,275
==== ======
The Summary of Business Segment Financial Data should be read in
conjunction with the consolidated financial statements of the Corporation and
notes thereto appearing elsewhere in this Annual Report.
55
[Enlarge/Download Table]
Selected Quarterly Financial Data United Technologies Corporation
In Millions of Dollars (except per share amounts)
Quarter Ended
------------------------------------------------------
1993 March 31 June 30 September 30 December 31
------------------------------------------------------------------------------------------------------------------
Sales $4,725 $5,508 $5,056 $5,447
Financing revenues and other income, less other deductions 139 62 72 72
Gross profit 976 1,188 1,142 1,193
Net income 64 130 157 136
Earnings per share-primary .43 .95 1.16 .98
-fully diluted .42 .89 1.08 .92
1992
------------------------------------------------------------------------------------------------------------------
Sales $5,058 $5,635 $5,287 $5,661
Financing revenues and other income, less other deductions 108 101 88 94
Gross profit 1,107 1,202 1,199 900
Income (loss) before cumulative effect of accounting
principle changes 94 148 126 (333)
Net income (loss) (228) 148 126 (333)
Primary earnings (loss) per share before cumulative
effect of accounting principle changes .68 1.11 .94 (2.77)
Primary earnings (loss) per share (1.95) 1.11 .94 (2.77)
Fully diluted earnings (loss) per share before cumulative
effect of accounting principle changes .68 1.03 .87 (2.77)
Fully diluted earnings (loss) per share (1.95) 1.03 .87 (2.77)
The cumulative effect of the accounting principle changes appears in the
Corporation's Consolidated Statement of Operations on page 37 of this Annual
Report.
In the fourth quarter of 1992, the Corporation recorded charges of $447 million
for credit and other exposures related to the commercial airline industry, $169
million for various contract matters, and $85 million for additional
restructuring.
Dates Referenced Herein and Documents Incorporated by Reference
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