United Technologies 2008 Annual Report Download - page 47

The issuance of $1.0 billion of long-term debt in December 2007 did not have a significant
impact to interest expense in 2007.
The average interest rate for commercial paper decreased in 2008 as compared to 2007
generating the decrease in the average short-term borrowing rate. The overall average interest
rate declined as the long-term debt issuances noted above were at interest rates lower than
existing outstanding obligations. The weighted-average interest rate applicable to debt
outstanding at December 31, 2008 was 5.3% for short-term borrowings and 5.9% for total debt
as compared to 7.2% and 6.2%, respectively, at December 31, 2007. The decrease in the average
interest rate on total debt in 2007, as compared to 2006, corresponded to the full year impact
of the May 2006 long-term debt issuances which bear interest at 6.05% and LIBOR + .07%.
The three month LIBOR rate as of December 31, 2008, 2007 and 2006 was 1.4%, 4.7% and
5.4%, respectively.
Income Taxes
2008 2007 2006
Effective income tax rate 27.1% 28.8% 27.2%
The effective tax rates for 2008, 2007 and 2006 reflect tax benefits associated with lower tax
rates on international earnings, which we intend to permanently reinvest outside the United
States. The 2008 effective tax rate decreased as compared to 2007 due to the absence of certain
discrete items which had a net adverse impact in 2007. The 2008 effective tax rate reflects
approximately $62 million of tax expense reductions, principally relating to re-evaluation of
our liabilities and contingencies based upon resolution of disputed tax matters with the
Appeals Division of the IRS for tax years 2000 through 2003.
The 2007 effective tax rate reflects approximately $80 million of tax expense reductions,
principally relating to re-evaluation of our liabilities and contingencies based upon global
examination activity, including the IRS’s completion of 2000 through 2003 examination
fieldwork and our related protest filing, and development of claims for research and
development tax credits. Principal adverse tax impacts to the 2007 effective tax rate related to
the previously disclosed EU Fine and enacted tax law changes outside the United States.
In 2006, a residual disputed issue related to the 1999 disposition of a business segment was
settled with the Appeals Division of the IRS and was reviewed by the U.S. Congress Joint
Committee on Taxation. The settlement resulted in an approximately $35 million reduction in
tax expense in 2006.
We expect our effective income tax rate in 2009 to be approximately 28%, before the impacts
of any discrete events.
For additional discussion of income taxes, see “Critical Accounting Estimates—Income Taxes”
and Note 9 to the Consolidated Financial Statements.
Net Income and Earnings Per Share
(in millions of dollars, except per share amounts) 2008 2007 2006
Net income $4,689 $4,224 $3,732
Diluted earnings per share $ 4.90 $ 4.27 $ 3.71
The general weakness of the U.S. dollar against certain currencies, such as the Euro, for the
majority of the year, generated a beneficial year-over-year foreign currency impact of $.06 per
share in 2008. This year-over-year impact is net of the adverse impacts of both foreign
currency translation and hedging at Pratt & Whitney Canada (P&WC) of a combined $.05 per
share. At P&WC, the strength of the U.S. dollar in the fourth quarter of 2008 partially offset
the adverse foreign currency translation impact experienced earlier in the year from a weaker
U.S. dollar as the majority of P&WC’s revenues are denominated in U.S. dollars, while a
significant portion of its costs are incurred in local currencies. To help mitigate the volatility of
foreign currency exchange rates on our operating results, we maintain foreign currency
hedging programs, the majority of which are entered into by P&WC. Due to the significant
revenue growth at P&WC, as well as the dramatic increase in the strength of the Canadian
dollar to the U.S. dollar in 2007 and early 2008, the hedges previously entered into generated
an adverse foreign exchange impact as the U.S. dollar strengthened. As a result of hedging
programs currently in place, P&WC’s 2009 operating results will include the adverse impact of
foreign currency translation, net of hedging, of approximately $100 million. In 2007 and 2006,
foreign currency translation had a favorable impact of $.09 and $.01 per share, respectively. For
additional discussion of foreign currency exposure, see “Market Risk and Risk Management—
Foreign Currency Exposures.” Diluted earnings per share for 2008 were also favorably
impacted by approximately $.11 per share as a result of the shares repurchased since January 1,
2008 under our share repurchase program.
2008 Annual Report 45