<PAGE>
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C.
20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from____________________________to__________________________
Commission file number 1-812
UNITED TECHNOLOGIES CORPORATION
DELAWARE 06-0570975
One Financial Plaza, Hartford, Connecticut 06103
(860) 728-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
At September 30, 2000 there were 468,359,388 shares of Common Stock outstanding.
<PAGE>
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
Quarter Ended September 30, 2000
Page
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statement of 1
Operations for the quarters ended
September 30, 2000 and 1999
Condensed Consolidated Statement of 2
Operations for the nine months ended
September 30, 2000 and 1999
Condensed Consolidated Balance Sheet at 3
September 30, 2000 and December 31, 1999
Condensed Consolidated Statement of Cash 4
Flows for the nine months ended September
30, 2000 and 1999
Notes to Condensed Consolidated Financial 5
Statements
Report of Independent Accountants 10
Item 2. Management's Discussion and Analysis of 11
Results of Operations and Financial Position
Item 3. Quantitative and Qualitative 18
Disclosures About Market Risk
Part II - Other Information
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
<PAGE>
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE> (Unaudited)
<CAPTION>
Quarter Ended
September 30,
In Millions (except per share amounts) 2000 1999
<S> <C> <C>
Revenues:
Product sales $ 4,835 $ 4,581
Service sales 1,504 1,487
Financing revenues and other income, net 126 59
6,465 6,127
Costs and expenses:
Cost of products sold 3,609 3,872
Cost of services sold 916 985
Research and development 329 306
Selling, general and administrative 761 786
Interest 97 63
5,712 6,012
Income from continuing operations before income taxes
and minority interests 753 115
Income taxes 230 2
Minority interests 27 23
Income from continuing operations 496 90
Discontinued operation:
Income from operations of discontinued UT Automotive
unit - -
Gain on sale of UT Automotive subsidiary - -
Net income $ 496 $ 90
Earnings per share of Common Stock:
Basic:
Continuing operations $ 1.04 $ .17
Discontinued operation - -
Gain on sale of discontinued operation - -
Net earnings $ 1.04 $ .17
Diluted:
Continuing operations $ .98 $ .16
Discontinued operation - -
Gain on sale of discontinued operation - -
Net earnings $ .98 $ .16
Dividends per share of Common Stock $ .20 $ .20
Average number of shares outstanding:
Basic 468 480
Diluted 506 494
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
1
<PAGE> 2
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
In Millions (except per share amounts) 2000 1999
<S> <C> <C>
Revenues:
Product sales $ 15,029 $ 13,158
Service sales 4,488 4,276
Financing revenues and other income, net 299 176
19,816 17,610
Costs and expenses:
Cost of products sold 11,383 10,447
Cost of services sold 2,757 2,734
Research and development 952 886
Selling, general and administrative 2,329 2,180
Interest 276 175
17,697 16,422
Income from continuing operations before income taxes
and minority interests 2,119 1,188
Income taxes 659 334
Minority interests 78 69
Income from continuing operations 1,382 785
Discontinued operation:
Income from operations of discontinued UT Automotive
unit (net of applicable income tax provision of
$28) - 40
Gain on sale of UT Automotive subsidiary (net of
applicable income tax provision of $112) - 650
Net income $ 1,382 $ 1,475
Earnings per share of Common Stock:
Basic:
Continuing operations $ 2.89 $ 1.64
Discontinued operation - .09
Gain on sale of discontinued operation - 1.40
Net earnings $ 2.89 $ 3.13
Diluted:
Continuing operations $ 2.71 $ 1.55
Discontinued operation - .08
Gain on sale of discontinued operation - 1.29
Net earnings $ 2.71 $ 2.92
Dividends per share of Common Stock $ .60 $ .56
Average number of shares outstanding:
Basic 470 463
Diluted 508 504
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
2
<PAGE> 3
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, December 31,
In Millions 2000 1999
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 818 $ 957
Accounts receivable, net 4,130 4,337
Inventories and contracts in progress, net 3,704 3,504
Future income tax benefits 1,302 1,563
Other current assets 259 266
Total Current Assets 10,213 10,627
Fixed assets 10,179 10,455
Less: Accumulated depreciation 5,886 5,995
4,293 4,460
Goodwill 6,071 5,641
Other assets 3,580 3,638
Total Assets $ 24,157 $ 24,366
Liabilities and Shareowners' Equity
Short-term borrowings $ 869 $ 902
Accounts payable 2,078 1,957
Accrued liabilities 5,432 6,023
Long-term debt currently due 141 333
Total Current Liabilities 8,520 9,215
Long-term debt 3,232 3,086
Future pension and postretirement benefit obligations 1,626 1,601
Other long-term liabilities 2,919 2,898
Series A ESOP Convertible Preferred Stock 777 808
ESOP deferred compensation (340) (359)
437 449
Shareowners' Equity:
Common Stock 4,481 4,227
Treasury Stock (3,836) (3,182)
Retained earnings 7,468 6,463
Accumulated other non-shareowners' changes in equity (690) (391)
7,423 7,117
Total Liabilities and Shareowners' Equity $ 24,157 $ 24,366
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
In Millions 2000 1999
<S> <C> <C>
Operating Activities:
Income from continuing operations $ 1,382 $ 785
Adjustments to reconcile income from continuing
operations to net cash flows provided by
operating activities:
Depreciation and amortization 639 589
Deferred income tax provision (benefit) 182 (199)
Change in:
Accounts receivable 38 (259)
Inventories and contracts in progress (202) 211
Accounts payable and accrued liabilities (336) 270
Other current assets 16 (42)
Other, net 103 239
Net cash flows provided by operating
activities 1,822 1,594
Investing Activities:
Capital expenditures (600) (485)
Investments in businesses (507) (2,612)
Dispositions of businesses - 43
Increase in customer financing assets, net (9) (132)
Other, net 71 67
Net cash flows used in investing activities (1,045) (3,119)
Financing Activities:
Issuance of long-term debt 214 1,399
Repayment of long-term debt (239) (527)
Decrease in short-term borrowings, net (36) (275)
Dividends paid on Common Stock (282) (258)
Repurchase of Common Stock (673) (549)
Other, net 123 165
Net cash flows used in financing activities (893) (45)
Net cash flows provided by discontinued
operation - 2,159
Effect of foreign exchange rate changes on Cash and
cash equivalents (23) (24)
Net (decrease) increase in Cash and cash
equivalents (139) 565
Cash and cash equivalents, beginning of year 957 550
Cash and cash equivalents, end of period $ 818 $ 1,115
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at September 30, 2000 and for
the quarters and nine-month periods ended September 30, 2000 and 1999 are
unaudited, but in the opinion of management include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results for the interim periods. The results reported in these condensed
consolidated financial statements should not necessarily be taken as indicative
of results that may be expected for the entire year. The financial information
included herein should be read in conjunction with the financial statements and
notes in the Corporation's Annual Report incorporated by reference in Form 10-K
for calendar year 1999.
Recent Developments
On October 16, 2000, the Corporation announced the signing of an agreement to
purchase the Aurora, IL-based Specialty Equipment Companies, Inc. ("Specialty")
for $30.50 per share in cash. Upon completion of the purchase, Specialty will
be integrated into Carrier Corporation. Specialty, which had sales of $502
million and earnings from operations of $72 million during the fiscal year ended
January 31, 2000, designs, manufactures, and markets a broad array of
refrigeration and food service products. The Corporation has commenced a tender
offer for all outstanding shares of common stock of Specialty and will pay a
total purchase price of approximately $600 million in cash for all of the
outstanding shares and assume debt of approximately $100 million. The
transaction is subject to regulatory approvals and the valid tender of a
majority of Specialty shares, as well as other customary conditions.
Non-Shareowners' Changes in Equity
Non-shareowners' changes in equity include all changes in equity during a
period except changes resulting from investments by and distributions to
shareowners. A summary of the non-shareowners' changes in equity is provided
below.
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C>
Net Income $ 496 $ 90 $ 1,382 $ 1,475
Foreign currency translation, net (77) 11 (139) (60)
Unrealized holding gain (loss) on
marketable equity securities, net 15 - (159) -
$ 434 $ 101 $ 1,084 $ 1,415
</TABLE>
Investments in Businesses
During the first nine months of 2000, the Corporation invested $507 million,
including debt assumed, in the acquisitions of businesses. Those investments
include Pratt & Whitney's second quarter purchase of the engine maintenance
center of Braathens ASA, Carrier's first quarter purchase of the commercial
refrigeration business of Electrolux AB, and other smaller industry
consolidating transactions during the year. The assets and liabilities of the
acquired businesses accounted for under the purchase method were recorded at
their fair values at the dates of acquisition. The excess of the purchase price
over the estimated fair values of the net assets acquired has been recorded as
5
<PAGE> 6
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
goodwill and is being amortized over its estimated useful life. The increase in
goodwill in the nine-month period of 2000 is associated with goodwill recorded
on 2000 acquisitions as well as certain adjustments made in the finalization of
purchase price allocations for 1999 acquisitions. The results of operations of
all acquired businesses have been included in the Condensed Consolidated
Statement of Operations beginning on the effective date of each acquisition.
The pro forma results, assuming these acquisitions had been made at the
beginning of the year, would not be materially different from reported results.
Inventories and Contracts in Progress
<TABLE>
September 30, December 31,
In Millions 2000 1999
<S> <C> <C>
Inventories consist of the following:
Raw material $ 621 $ 702
Work-in-process 1,180 1,158
Finished goods 2,129 1,871
Contracts in progress 1,712 1,561
5,642 5,292
Less:
Progress payments, secured by lien, on U.S.
Government contracts (154) (87)
Billings on contracts in progress (1,784) (1,701)
$ 3,704 $ 3,504
</TABLE>
Restructuring
During 1999, the Corporation's operating segments initiated a variety of
actions aimed at further strengthening their future profitability and
competitive position. Those actions focused principally on rationalizing
manufacturing processes and improving the overall level of organizational
efficiency, including the removal of management layers. Restructuring charges
accrued in 1999 were $842 million before income taxes and minority interests and
are expected to result in net reductions of approximately 15,000 salaried and
hourly employees and approximately 8 million square feet of facilities.
The 1999 accrued costs were recorded at each of the Corporation's operating
segments as follows:
In Millions
Otis $ 178
Carrier 182
Pratt & Whitney 345
Flight Systems 131
Other 6
$ 842
6
<PAGE> 7
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
The following table summarizes the accrued costs associated with the 1999
restructuring actions by type and related activity through September 30, 2000:
<TABLE>
<CAPTION>
Accrued Accrued Exit &
Severance Lease Accrued Site
and Related Asset Write- Termination Restoration &
In Millions Costs downs Costs Other Costs Total
<S> <C> <C> <C> <C> <C>
1999 Charges:
Staff reductions $ 433 $ - $ - $ - $ 433
Facility closures 149 160 44 56 409
Total accrued charges 582 160 44 56 842
Adjustments (12) - (6) - (18)
1999 Adjusted 570 160 38 56 824
Utilized to date:
Cash (307) - (14) (16) (337)
Non-cash (70) (160) - (230)
Balance at
September 30, 2000 $ 193 $ - $ 24 $ 40 $ 257
</TABLE>
The 1999 accrued costs were recorded in cost of sales (87%) and selling,
general and administrative expenses (13%) and related to:
. Workforce reductions of approximately 15,000 employees, primarily at Pratt &
Whitney (5,200 employees), Otis (4,000 employees) and Carrier (3,200
employees).
. Plant closings that will result in the reduction of approximately 8 million
square feet of facilities, primarily at Pratt & Whitney (3 million square
feet) and Carrier (2.9 million square feet), and charges associated with the
write-down of property, plant and equipment to fair value, where fair value
is based on appraised value, primarily at Pratt & Whitney ($70 million) and
Carrier ($41 million).
As of September 30, 2000, workforce reductions of approximately 11,200
employees were completed and approximately 3.3 million square feet were
eliminated. The remaining workforce reductions and plant closings are planned
to be substantially completed by December of this year.
In the first nine months of 2000, the Corporation incurred and recognized
costs of $194 million associated with the restructuring actions that were not
accruable when the actions were initiated.
Contingent Liabilities
There has been no significant change in the Corporation's material
contingencies during 2000. Summarized below, however, are the matters previously
described in Notes 1 and 14 of the Notes to Consolidated Financial Statements in
the Corporation's Annual Report, incorporated by reference in Form 10-K for
calendar year 1999.
7
<PAGE> 8
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
Environmental
The Corporation's operations are subject to environmental regulation by
federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations.
Environmental investigatory, remediation, operating and maintenance costs are
accrued when it is probable that a liability has been incurred and the amount
can be reasonably estimated. The most likely cost to be incurred is accrued
based on an evaluation of currently available facts with respect to each
individual site, including existing technology, current laws and regulations and
prior remediation experience. Where no amount within a range of estimates is
more likely, the minimum is accrued. For sites with multiple responsible
parties, the Corporation considers its likely proportionate share of the
anticipated remediation costs and the ability of the other parties to fulfill
their obligations in establishing a provision for those costs. Liabilities with
fixed or reliably determinable future cash payments are discounted.
The Corporation maintains property insurance with a number of insurance
companies. Litigation is continuing against one of the Corporation's historical
property insurers seeking coverage for environmental costs incurred at certain
facilities. The litigation is expected to last several years. Environmental
liabilities are not reduced by potential insurance reimbursements.
As discussed above, the Corporation has accrued for the costs of
environmental remediation activities and periodically reassesses these amounts.
Management believes that the likelihood of incurring losses materially in excess
of amounts accrued is remote.
U.S. Government
The Corporation is now and believes that, in light of the current government
contracting environment, it will be the subject of one or more government
investigations. If the Corporation or one of its business units was 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's contracts with the U.S. Government are also subject to
audits. Like many defense contractors, the Corporation has received audit
reports which recommend that certain contract prices should be reduced to comply
with various government regulations. Some of these audit reports involve
substantial amounts. The Corporation has made voluntary refunds in those cases
it believes appropriate.
Other
The Corporation extends performance and operating cost guarantees beyond its
normal warranty and service policies for extended periods on some of its
products, particularly commercial aircraft engines. Liability under such
guarantees is contingent upon future product performance and durability. The
Corporation has accrued its estimated liability that may result under these
guarantees.
The Corporation also has other commitments and contingent liabilities related
to legal proceedings and matters arising out of the normal course of business.
The Corporation has accrued for environmental investigatory, remediation,
operating and maintenance costs, performance guarantees and other litigation and
claims based on management's estimate of the probable outcome of these matters.
While it is possible that the outcome of these matters may differ from the
recorded liability, management believes that resolution of these matters will
not have a material impact on the Corporation's financial position, results of
operations or cash flows.
8
<PAGE> 9
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Earnings Per Share
Quarter Ended Nine Months Ended
September 30, September 30,
In Millions (except per share amounts) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Income from continuing operations $ 496 $ 90 $ 1,382 $ 785
Less: ESOP Stock dividends (8) (9) (24) (25)
Basic earnings from continuing operations 488 81 1,358 760
ESOP Stock adjustment 7 -* 21 21
Diluted earnings from continuing operations $ 495 $ 81 $ 1,379 $ 781
Income from discontinued operation, net of tax $ - $ - $ - $ 40
Gain on sale of discontinued
operation, net of tax - - - 650
$ - $ - $ - $ 690
Net income $ 496 $ 90 $ 1,382 $ 1,475
Less: ESOP Stock dividends (8) (9) (24) (25)
Basic earnings 488 81 1,358 $ 1,450
ESOP Stock adjustment 7 -* 21 21
Diluted earnings $ 495 $ 81 $ 1,379 $ 1,471
Average shares:
Basic 468 480 470 463
Stock awards 11 14 11 14
ESOP Stock 27 -* 27 27
Diluted 506 494 508 504
Earnings per share of Common Stock:
Basic:
Continuing operations $ 1.04 $ .17 $ 2.89 $ 1.64
Discontinued operation - - - .09
Gain on sale of discontinued
operation - - - 1.40
Net earnings $ 1.04 $ .17 $ 2.89 $ 3.13
Diluted:
Continuing operations $ .98 $ .16 $ 2.71 $ 1.55
Discontinued operation - - - .08
Gain on sale of discontinued operation - - - 1.29
Net earnings $ .98 $ .16 $ 2.71 $ 2.92
</TABLE>
* ESOP Stock adjustment is antidulitive and is not considered in the Earnings
Per Share calculation for the quarter ended September 30, 1999.
9
<PAGE> 10
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
With respect to the unaudited condensed consolidated financial information of
United Technologies Corporation for the quarters and nine-month periods ended
September 30, 2000 and 1999, PricewaterhouseCoopers LLP
("PricewaterhouseCoopers") reported that they have applied limited procedures in
accordance with professional standards for a review of such information.
However, their separate report dated October 18, 2000, appearing below, states
that they did not audit and they do not express an opinion on that unaudited
condensed consolidated financial information. PricewaterhouseCoopers has not
carried out any significant or additional audit tests beyond those which would
have been necessary if their report had not been included. Accordingly, the
degree of reliance on their report on such information should be restricted in
light of the limited nature of the review procedures applied.
PricewaterhouseCoopers is not subject to the liability provisions of section 11
of the Securities Act of 1933 ("the Act") for their report on the unaudited
condensed consolidated financial information because that report is not a
"report" or a "part" of a registration statement prepared or certified by
PricewaterhouseCoopers within the meaning of sections 7 and 11 of the Act.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowners of
United Technologies Corporation
We have reviewed the accompanying condensed consolidated statement of
operations of United Technologies Corporation and consolidated subsidiaries for
the quarters and nine months ended September 30, 2000, and 1999, the condensed
consolidated statement of cash flows for the nine months ended September 30,
2000 and 1999, and the condensed consolidated balance sheet as of September 30,
2000. This financial information is the responsibility of the company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial information for it to be in
conformity with accounting principles generally accepted in the United States of
America.
We previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 1999, and the related consolidated statements of operations, of
changes in shareowners' equity and of cash flows for the year then ended (not
presented herein), and in our report dated January 19, 2000, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
October 18, 2000
10
<PAGE> 11
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Position
BUSINESS ENVIRONMENT
The Corporation's operations are classified into four principal operating
segments. Carrier and Otis serve customers in the commercial property and
residential housing industries. Carrier also serves customers in the commercial
refrigeration and transport industries. Pratt & Whitney and the Flight Systems
segment, which includes Sikorsky Aircraft and Hamilton Sundstrand, primarily
serve commercial and government customers in the aerospace industry.
For discussion of the Corporation's business environment, refer to the
discussions of "Business Environment," "Commercial Aerospace," and "Government
Business" in the Management's Discussion and Analysis of Results of Operations
and Financial Position in the Corporation's Annual Report incorporated by
reference in Form 10-K for calendar year 1999. Significant changes in the
Corporation's business environment during the first nine months of 2000 are
discussed below.
As worldwide businesses, the Corporation's operations are affected by global
and regional economic factors. During the first nine months of 2000, the decline
in the Euro had a negative impact on the Corporation's consolidated results.
In addition, U.S. residential housing and commercial construction starts
decreased in the first nine months of 2000 compared to 1999 and airline industry
fuel costs rose during that period. However, in general, the diversity of the
Corporation's businesses and global market presence have helped, and should
continue to help, limit the impact of any one industry or the economy of any
single country on the consolidated results.
The Sikorsky-Boeing joint venture that is under contract with the U.S. Army
to develop prototypes, flight test and field test Comanche helicopters obtained
approval to begin the Engineering and Manufacturing Development (EMD) phase.
The EMD phase is expected to lead to the manufacture of 13 additional aircraft
during 2004 and 2005 which will be used for continued development testing.
There have been no other significant changes in the Corporation's business
environment during the first nine months of 2000.
RESULTS OF CONTINUING OPERATIONS
Consolidated revenues increased $338 million (6%) to $6.47 billion and $2.21
billion (13%) to $19.82 billion in the third quarter and nine-month period of
2000 compared to the same periods in 1999. Excluding the unfavorable impact of
foreign currency translation, consolidated revenues increased 8% and 15% in the
third quarter and nine-month period of 2000. The third quarter increase
reflects the impact of the acquisition of International Comfort Products during
the third quarter of 1999, LG Industrial Systems' Building Facilities Group ("LG
Elevator") in the fourth quarter of 1999 and the commercial refrigeration
business of Electrolux AB during the first quarter of 2000. The nine-month
increase also reflects the impact of the acquisition of Sundstrand Corporation
("Sundstrand") late in the second quarter of 1999, partially offset by a
decrease in revenues at Pratt & Whitney.
Financing revenues and other income, net, increased $67 million and $123
million in the third quarter and nine-month period of 2000 compared to 1999.
The third quarter increase was due primarily to the modification of a product
support agreement and resolution of a contract dispute. The nine-month increase
also reflects interest income on prior period income tax credits resulting from
a second quarter 2000 industry related court decision from which the Corporation
expects to benefit.
11
<PAGE> 12
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
Gross margin as a percentage of sales increased 8.6 and 3.2 percentage points
in the third quarter and nine-month period of 2000 compared to the same periods
of 1999, due primarily to restructuring charges recorded in the third quarter of
1999.
Research and development spending increased $23 million (8%) and $66 million
(7%) in the third quarter and nine-month period of 2000 compared to 1999. The
third quarter reflects increases at all segments with the largest increase at
Pratt & Whitney. The nine-month increase was principally due to the inclusion of
Sundstrand's operations in the Flight Systems segment in 2000. As a percentage
of sales, research and development was 5.2% and 4.9% in the third quarter and
nine-month period of 2000 as compared to 5.0% and 5.1% in the same periods of
1999. Research and development is expected to remain at approximately 5% of
sales in 2000.
Selling, general and administrative expenses decreased $25 million (3%) and
increased $149 million (7%) in the third quarter and nine-month period of 2000
compared to 1999. The third quarter decrease was due primarily to third quarter
1999 restructuring charges. Excluding those restructuring charges, selling,
general and administrative expenses increased 2% and 9% in the third quarter and
nine-month period of 2000 compared to 1999. The third quarter increase was
primarily due to the impact of acquisitions at Carrier and the nine-month
increase primarily reflects the impact of acquisitions at Carrier and Hamilton
Sundstrand. The increases in both periods were partially offset by cost
reductions associated with the 1999 restructuring actions. As a percentage of
sales, these expenses were 12.0% and 11.9% in the third quarter and nine-month
period of 2000, as compared to 13.0% and 12.5% in the same periods of 1999.
Interest expense increased $34 million and $101 million in the third quarter
and nine-month period of 2000 compared to 1999. The increases are associated
with $1.7 billion of debt issued in 1999 to finance acquisitions and repurchase
the Corporation's Common Stock.
The effective income tax rate for the third quarter of 2000 was 30.5%, a
decrease of .4 percentage point over the same period of 1999, excluding the
impact of the third quarter 1999 restructuring actions. Those restructuring
actions carried a combined effective rate of 37.1%.
Excluding third quarter 1999 restructuring actions and second quarter 2000
discrete tax items discussed below, the effective tax rate for the nine-month
period of 2000 decreased to 30.5% from 30.9% for the same period of 1999. The
Corporation has continued to lower its effective income tax rate by implementing
tax reduction strategies.
The effective income tax rate for the nine-month period of 2000 including all
tax items was 31.1%, as compared to 28.1% for the same period of 1999. The
increase in effective tax rate relates to the absence, in 2000, of the impact of
the third quarter 1999 restructuring actions and the impact of the second
quarter 2000 enactment of Connecticut tax law changes and the related
revaluation of the Corporation's state deferred tax asset. In addition, the
Corporation expects to benefit from a second quarter 2000 industry related court
decision and, as a result, has recognized income tax credits for prior periods
and related interest income.
12
<PAGE> 13
UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
Restructuring and Other Costs
As described in the Notes to the Condensed Consolidated Financial Statements,
the Corporation's operating segments initiated a variety of actions in 1999
aimed at further strengthening their future profitability and competitive
position. The 1999 actions totaled $1,120 million, before income taxes and
minority interests, and included accrued restructuring charges of $842 million,
related charges of $141 million that were not accruable when initiated, and
charges associated with product development and aircraft systems integration and
non-product purchasing.
In February 2000, a Federal District Court issued an injunction relative to
certain restructuring actions planned by Pratt & Whitney that would move work
from Connecticut to Arkansas, Texas and Oklahoma. Pratt & Whitney appealed this
injunction and expects a decision later in 2000. The accruable portion of the
cost of these actions was recorded during 1999. The Corporation does not
believe that resolution of the litigation will materially impact the
Corporation's restructuring program.
In the current year, the Corporation expects to have pre-tax cash outflows
related to the 1999 programs of less than $750 million, using cash generated
from operations, including up to $300 million of additional costs that were not
accruable when the actions were initiated. Through September 30, 2000,
approximately $194 million of additional costs have been incurred and
recognized. The 1999 restructuring and other actions taken by the Corporation
are expected to result in savings that should offset the additional costs
expected to be incurred, resulting in a modest benefit in 2000. Recurring
savings, associated primarily with net reduction in workforce and facility
closures, are expected to increase over a three-year period to approximately
$750 million pre-tax annually.
Segment Review
Revenues, operating profits and operating profit margins of the Corporation's
principal operating segments include the results of all majority-owned
subsidiaries, consistent with the management reporting of these businesses.
Adjustments to reconcile segment reporting to consolidated results are included
in "Eliminations and other," which also includes certain small subsidiaries
and in the third quarter of 2000 included a favorable settlement of a customer
warranty issue. Results for the quarters and nine-month periods ended September
30, 2000 and 1999 are as follows:
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
<TABLE>
<CAPTION>
In Millions of Dollars Operating
Revenues Operating Profits Profit Margin
Quarter Ended September 30, 2000 1999 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
Otis $ 1,504 $ 1,404 $ 201 $ 104 13.4% 7.4%
Carrier 2,111 1,939 242 100 11.5% 5.2%
Pratt & Whitney 1,782 1,749 300 (4) 16.8% (0.2%)
Flight Systems 1,163 1,129 165 40 14.2% 3.5%
Total segment 6,560 6,221 908 240 13.8% 3.9%
Eliminations and other (95) (94) (2) (10)
General corporate expenses - - (56) (52)
Consolidated $ 6,465 $ 6,127 850 178
Interest expense (97) (63)
Income from continuing operations
before income taxes and minority
interests $ 753 $ 115
</TABLE>
<TABLE>
<CAPTION>
Operating
Revenues Operating Profits Profit Margin
Nine Months Ended September 30, 2000 1999 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
Otis $ 4,581 $ 4,146 $ 587 $ 420 12.8% 10.1%
Carrier 6,479 5,478 678 425 10.5% 7.8%
Pratt & Whitney 5,396 5,753 867 560 16.1% 9.7%
Flight Systems 3,621 2,499 443 161 12.2% 6.4%
Total segment 20,077 17,876 2,575 1,566 12.8% 8.8%
Eliminations and other (261) (266) (10) (26)
General corporate expenses - - (170) (177)
Consolidated $ 19,816 $ 17,610 2,395 1,363
Interest expense (276) (175)
Income from continuing operations
before income taxes and minority
interests $ 2,119 $ 1,188
</TABLE>
Otis revenues increased $100 million (7%) and $435 million (10%) in the third
quarter and nine-month period of 2000 compared to 1999. Excluding the impact of
foreign currency translation, the third quarter increase was due primarily to
the impact of the fourth quarter 1999 acquisition of LG Elevator and increased
sales in all regions except Asia, with the majority of the increase in North
America. The nine-month increase reflects the acquisition of LG Elevator and
increased sales in all regions. Foreign currency translation reduced revenues by
5% and 4% in the third quarter and nine-month period of 2000 compared to 1999,
primarily due to a weaker Euro.
Otis operating profits increased $97 million and $167 million in the third
quarter and nine-month period of 2000 compared to 1999, in part due to
restructuring charges recorded in the third quarter of 1999. Excluding third
quarter 1999 restructuring, operating profits increased $24 million (14%) and
$94 million (19%) for the third quarter and nine-month period of 2000 compared
to 1999, reflecting the impact of the acquisition of LG Elevator and increases
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
in all regions, partially offset by the negative impact of foreign currency
translation associated with a weaker Euro. Foreign currency translation
reduced operating profits by 8% and 7% in the third quarter and nine-month
period of 2000 compared to 1999.
Carrier revenues increased $172 million (9%) and $1,001 million (18%) in the
third quarter and nine-month period of 2000 compared to 1999. The increases
reflect the acquisition of the commercial refrigeration business of Electrolux
AB earlier this year, the acquisition of International Comfort Products during
the third quarter of 1999, and growth in the North American commercial business.
The third quarter increase was partially offset by a decline in the North
American residential operation related to a cooler summer selling season in many
regions of the U.S. and a decline in the North American truck/trailer operation
associated with higher fuel prices and interest rates. Foreign currency
translation reduced revenues by 2% in both the third quarter and nine-month
period of 2000 compared to 1999.
Carrier operating profits increased $142 million and $253 million in the
third quarter and nine-month period of 2000 compared to 1999. Excluding
restructuring charges recorded in the third quarter of 1999, operating profits
increased $19 million (9%) and $130 million (24%) in those periods. The third
quarter and nine-month increases were primarily due to the impact of the
acquisition of International Comfort Products during the third quarter of 1999,
growth in the North American commercial business and incremental export
incentives in Latin America, partially offset by declines in the North American
truck/trailer operation associated with higher fuel prices and interest rates.
In addition, the North American residential operation decreased in the third
quarter and increased in the nine-month period. Foreign currency translation
reduced operating profits by 1% in both the third quarter and nine-month period
of 2000 compared to 1999.
Carrier has announced an agreement to purchase Specialty Equipment Companies
to strengthen and broaden its growing commercial refrigeration business.
Pratt & Whitney revenues increased $33 million (2%) in the third quarter and
decreased $357 million (6%) in the nine-month period of 2000 compared to 1999.
The third quarter increase reflects higher sales in the small engine business at
Pratt & Whitney Canada, the impact of fourth quarter 1999 acquisitions, and
modification of a product support agreement, mostly offset by lower revenues on
large military engines. The nine-month decrease is due primarily to fewer
commercial and military engine shipments partially offset by increases at Pratt
& Whitney Canada and the impact of fourth quarter 1999 acquisitions.
Pratt & Whitney operating profits increased $304 million and $307 million in
the third quarter and nine-month period of 2000 compared to 1999, largely due to
third quarter 1999 restructuring charges. Excluding third quarter 1999
restructuring, operating profits increased $39 million (15%) and $42 million
(5%) for the third quarter and nine-month period of 2000 compared to 1999,
reflecting favorability in the commercial engine business and in the small
engine business at Pratt & Whitney Canada. Those increases were partially
offset in both periods by an anticipated decline in government funded research
and development.
Flight Systems revenues increased $34 million (3%) and $1,122 million (45%)
in the third quarter and nine-month period of 2000 compared to 1999. The third
quarter increase reflects slight growth at both Sikorsky and Hamilton Sundstrand
operations and the resolution of a contract dispute. The nine-month increase
also reflects the impact of the second quarter 1999 acquisition of Sundstrand.
Flight Systems operating profits increased $125 million and $282 million in
the third quarter and nine-month period of 2000 compared to 1999, partially due
to third quarter 1999 restructuring charges. Excluding third quarter 1999
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
restructuring, operating profits increased $33 million (25%) and $190 million
(75%) for the quarter and nine-month period of 2000 compared to 1999. The third
quarter increase reflects improvements at both Hamilton Sundstrand and Sikorsky,
including a resolution of a contract dispute. The nine-month increase primarily
relates to the inclusion of Sundstrand's results for the entire nine-month
period of 2000.
FINANCIAL POSITION
Management assesses the Corporation's liquidity in terms of its overall
ability to generate cash to fund its operating and investing activities.
Significant factors affecting the management of liquidity are cash flows
generated from operating activities, capital expenditures, investments in
businesses, customer financing requirements, Common Stock repurchases, adequate
bank lines of credit and financial flexibility to attract long-term capital with
satisfactory terms.
Set forth below are selected key cash flow data:
<TABLE><CAPTION>
Nine Months Ended
September 30,
In Millions 2000 1999
<S> <C> <C>
Operating Activities
Net cash flows provided by operating activities $ 1,822 $ 1,594
Investing Activities
Capital expenditures (600) (485)
Investments in businesses (507) (2,612)
Increase in customer financing assets, net (9) (132)
Financing Activities
Repurchase of Common Stock (673) (549)
(Decrease) increase in total debt (79) 1,349
Increase in net debt 60 784
Net cash flows provided by discontinued operation - 2,159
</TABLE>
Cash flows provided by operating activities increased $228 million in the
first nine months of 2000 compared to the corresponding period in 1999. The
increase reflects improved operating performance, in part due to lower
restructuring charges in 2000, partially offset by an increase in working
capital levels in 2000.
Cash flows used in investing activities decreased $2.1 billion in the first
nine months of 2000 compared to the first nine months of 1999 primarily due to
the second quarter 1999 purchase of Sundstrand. Cash spending for investments in
businesses for the first nine months of 2000 includes the first quarter Carrier
acquisition of the commercial refrigeration business of Electrolux AB and the
second quarter Pratt & Whitney acquisition of the engine maintenance center of
Braathens. Total cash spending for investments in businesses in 2000 is
expected to be in the range of $1.25 billion, including the recently announced
agreement to purchase Specialty Equipment Companies.
Customer financing activity decreased to a net use of cash of $9 million in
the first nine months of 2000 from the $132 million net use of cash in the first
nine months of 1999, primarily due to decreased customer demand for financing.
While the Corporation expects that 2000 customer financing activity will be a
net use of funds, actual funding is subject to usage under existing customer
financing commitments during the remainder of the year. The Corporation's total
commitments to finance or arrange financing of commercial aircraft and related
equipment at September 30, 2000 were approximately $1.1 billion compared to $1.3
billion for the same period of 1999.
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
The Corporation repurchased $673 million of Common Stock, representing 11.8
million shares, in the first nine months of 2000 under previously announced
share repurchase programs. The share repurchase programs continue to be a use of
the Corporation's cash flows and have more than offset the dilutive effect
resulting from the issuance of stock under stock-based employee benefit
programs. At September 30, 2000, the Corporation was authorized to repurchase
an additional 13 million shares.
As described in the Corporation's 1999 Annual Report incorporated by
reference in Form 10-K, the Corporation sold its UT Automotive Unit to Lear
Corporation on May 4, 1999. The discontinued UT Automotive operation and its
subsequent sale provided $2,159 million of cash in 1999.
Other selected financial data are as follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
In Millions of Dollars 2000 1999 1999
<S> <C> <C> <C>
Cash and cash equivalents $ 818 $ 957 $ 1,115
Total debt 4,242 4,321 3,522
Net debt (total debt less cash) 3,424 3,364 2,407
Shareowners' equity 7,423 7,117 7,102
Debt-to-total capitalization 36% 38% 33%
Net debt-to-total capitalization 32% 32% 25%
</TABLE>
The Corporation manages its worldwide cash requirements considering available
funds among the many subsidiaries through which it conducts its business and the
cost effectiveness with which those funds can be accessed. The repatriation of
cash balances from certain of the Corporation's subsidiaries could have adverse
tax consequences; however, those balances are generally available without legal
restrictions to fund ordinary business operations. The Corporation has and will
continue to transfer cash from those subsidiaries to the parent and to other
international subsidiaries when it is cost effective to do so.
Management believes that its existing cash position and other available
sources of liquidity are sufficient to meet current and anticipated requirements
for the foreseeable future. Although uncertainties in acquisition spending
could cause modest variations at times, management anticipates that the level of
debt-to-capital will remain generally consistent with recent levels.
New Accounting Guidance
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," (FAS 133) which, as amended, is currently effective
January 1, 2001 for the Corporation. FAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction, and if it is, the type of hedge transaction.
Management believes adoption of this standard and related transition adjustments
will not have a material impact on the Corporation's consolidated financial
position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements," (SAB
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
101) which, as amended, is effective for the fourth quarter of 2000 for the
Corporation. SAB 101 provides the SEC Staff's views on applying generally
accepted accounting principles to certain revenue recognition issues.
Management does not believe SAB 101 will have a material impact on the
Corporation's consolidated financial position, results of operations or cash
flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no significant change in the Corporation's exposure to market
risk during the first nine months of 2000. For discussion of the Corporation's
exposure to market risk, refer to Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, contained in the Corporation's Annual Report
incorporated by reference in Form 10-K for the calendar year 1999.
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
This report on Form 10-Q contains statements which, to the extent they are
not statements of historical or present fact, constitute "forward-looking
statements" under the securities laws. From time to time, oral or written
forward-looking statements may also be included in other materials released to
the public. These forward-looking statements are intended to provide
Management's current expectations or plans for the future operating and
financial performance of the Corporation, based on assumptions currently
believed to be valid. Forward-looking statements can be identified by the use
of words such as "believe," "expect," "plans," "strategy," "prospects,"
"estimate," "project," "anticipate" and other words of similar meaning in
connection with a discussion of future operating or financial performance.
These include, among others, statements relating to:
. Future earnings and other measurements of financial performance
. Future cash flow and uses of cash
. The effect of economic downturns or growth in particular regions
. The effect of changes in the level of activity in particular industries or
markets
. The scope, nature or impact of acquisition activity
. Product developments and new business opportunities
. Restructuring costs and cost reduction efforts
. The outcome of contingencies.
All forward-looking statements involve risks and uncertainties that may cause
actual results to differ materially from those expressed or implied in the
forward-looking statements. This Report on Form 10-Q includes important
information as to risk factors in the "Notes to Condensed Consolidated Financial
Statements" under the heading "Contingent Liabilities" and in the section titled
"Management's Discussion and Analysis of Results of Operations and Financial
Position" under the headings "Business Environment" and "Restructuring and Other
Costs." The Corporation's Annual Report on Form 10-K for 1999 also includes
important information as to risk factors in the "Business" section under the
headings "Description of Business by Operating Segment," "Other Matters Relating
to the Corporation's Business as a Whole" and "Legal Proceedings." Additional
important information as to risk factors is included in the Corporation's 1999
Annual Report to Shareowners in the section titled "Management's Discussion and
Analysis of Results of Operations and Financial Position" under the headings
"Business Environment" and "Restructuring and Other Costs." For additional
information identifying factors that may cause actual results to vary materially
from those stated in the forward-looking statements, see the Corporation's
reports on Forms 10-Q and 8-K filed with the Securities and Exchange Commission
from time to time.
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
Part II - Other Information
Item 1. Legal Proceedings
As previously reported, the Corporation has been served with two qui tam
complaints under the civil False Claims Act in the United States District Court
for the District of Connecticut: U.S. ex rel. Drake v. Norden Systems, Inc. and
UTC, No. 394CV00963 (filed July 1997, and involving allegations of improper
accounting for fixed assets), and U.S. ex rel. Capella v. UTC and Norden Systems
Inc., No. 394CV02063 (filed December 1994, and involving allegations of improper
accounting for insurance costs). The civil False Claims Act provides for
penalties in a civil case of up to $10,000 per false claim submitted. The number
of false claims implicated by the foregoing qui tam complaints cannot currently
be ascertained; however, if determined adversely to the Corporation the number
could result in significant penalties. The qui tam relator in each case has
claimed unspecified damages (trebled) and penalties, and the Department of
Justice in each case has declined to take over the litigation. On August 24,
2000, the court dismissed portions of the complaints as they relate to the
Corporation and has dismissed alleged false claims that occurred prior to June
15, 1988 (Drake) and December 6, 1988 (Capella). Norden Systems, Inc., an
inactive subsidiary of the Corporation (later renamed NSI, Inc.), remains a
defendant in both cases. Damages and penalties, if any, imposed on NSI, Inc.
could be borne by or also imposed on the Corporation due to its ownership of
NSI, Inc. at the time the claims arose. The court also has given the relator
additional time to submit an amended complaint, which may result in additional
or reinstituted claims against the Corporation.
Except as noted above, there have been no material developments in legal
proceedings during the quarter ended September 30, 2000. For a description of
previously reported legal proceedings, refer to Part II - Other Information,
Item 1. Legal Proceedings of the Corporation's Report on Form 10-Q for the
quarters ended March 31, 2000 and June 30, 2000 and to Part I, Item 3. Legal
Proceedings of the Corporation's Annual Report on Form 10-K for 1999.
The Corporation does not believe that resolution of the foregoing legal
matters will have a material adverse effect upon the Corporation's competitive
position, results of operations, cash flow or financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(12) Statement re: computation of ratio of earnings to fixed charges.*
(15) Letter re: unaudited interim financial information. *
(27) Financial data schedule.*
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September
30, 2000.
*Submitted electronically herewith.
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED TECHNOLOGIES CORPORATION
Dated: October 26, 2000 By: /s/ David J. FitzPatrick
David J. FitzPatrick
Senior Vice President,
Chief Financial Officer and Treasurer
Dated: October 26, 2000 By: /s/ David G. Nord
David G. Nord
Vice President, Controller
Dated: October 26, 2000 By: /s/ William H. Trachsel
William H. Trachsel
Senior Vice President, General Counsel and
Secretary
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UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
(12) Statement re: computation of ratio of earnings to fixed charges. *
(15) Letter re: unaudited interim financial information. *
(27) Financial data schedule. *
*Submitted electronically herewith.
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