United Technologies 2008 Annual Report Download - page 48

Restructuring and Other Costs
We recorded net pre-tax restructuring and related charges/(credits) totaling $357 million in
2008 and $166 million in 2007 for new and ongoing restructuring actions. We recorded these
charges in the segments as follows:
(in millions of dollars) 2008 2007
Otis $21 $21
Carrier 140 33
UTC Fire & Security 63 39
Pratt & Whitney 116 53
Hamilton Sundstrand 16 23
Sikorsky —(3)
Eliminations & Other 1—
The 2008 charges include $148 million in cost of sales, $205 million in selling, general and
administrative expenses and $4 million in other income. The 2007 charges include $110
million in cost of sales, $55 million in selling, general and administrative expenses and
$1 million in other income. These charges relate principally to actions initiated during 2008
and, to a lesser extent, residual trailing costs related to certain 2007 and 2006 actions.
Restructuring actions are an essential component of our operating margin improvement
efforts and relate to both existing operations and those recently acquired. We have acquired
certain businesses at beneficial values, such as Linde, Chubb, Kidde and IESG, with the
expectation of restructuring the underlying cost structure in order to bring operating margins
up to expected levels. Restructuring actions focus on streamlining costs through workforce
reductions, the consolidation of manufacturing, sales and service facilities, and the transfer of
work to more cost-effective locations. For acquisitions prior to January 1, 2009, the costs of
restructuring actions at the acquired company contemplated at the date of acquisition are
recorded under purchase accounting and actions initiated subsequently are recorded through
operating results. However, upon the January 1, 2009 adoption of SFAS No. 141 (revised
2007), “Business Combinations” (SFAS 141(R)), restructuring costs associated with a business
combination will be expensed as incurred. We expect to initiate restructuring actions during
2009 across the businesses due to our continuing cost reduction efforts. Excluding the impact
of SFAS 141(R), we expect to incur approximately $150 million of restructuring costs in the
first quarter of 2009. Although no specific plans for other significant actions have been
finalized at this time, we continue to closely monitor the economic environment and may
undertake further restructuring actions to keep our cost structure aligned with the demands of
the prevailing market conditions.
2008 Actions. During 2008, we initiated restructuring actions relating to ongoing cost
reduction efforts, including selling, general and administrative reductions and the
consolidation of manufacturing facilities. We recorded net pre-tax restructuring and related
charges in the business segments totaling $327 million as follows: Otis $21 million, Carrier
$141 million, UTC Fire & Security $58 million, Pratt & Whitney $93 million, Hamilton
Sundstrand $13 million and Eliminations & Other $1 million. The charges included $119
million in cost of sales, $204 million in selling, general and administrative expenses and $4
million in other income. Those costs included $277 million for severance and related employee
termination costs, $24 million for asset write-downs and $26 million for facility exit and lease
termination costs.
We expect the 2008 actions to result in net workforce reductions of approximately 6,300
hourly and salaried employees, the exiting of approximately 1.2 million net square feet of
facilities and the disposal of assets associated with the exited facilities. As of December 31,
2008, we have completed net workforce reductions of approximately 3,900 employees. We are
targeting the majority of the remaining workforce and all facility related cost reduction actions
for completion during 2009 and 2010. Approximately 80% of the total pre-tax charge will
require cash payments, which we will fund with cash generated from operations. During 2008,
we had cash outflows of approximately $130 million related to the 2008 actions. We expect to
incur additional restructuring and related charges of $60 million to complete these actions. We
expect recurring pre-tax savings to increase over the two-year period subsequent to initiating
the actions to approximately $370 million annually, of which $108 million was realized in 2008.
2007 Actions. During 2008, we recorded net pre-tax restructuring and related charges in the
business segments totaling $10 million for restructuring actions initiated in 2007. The 2007
actions relate to ongoing cost reduction efforts, including workforce reductions and the
consolidation of manufacturing facilities. We recorded the charges in 2008 in our segments as
follows: UTC Fire & Security $5 million, Pratt & Whitney $2 million and Hamilton Sundstrand
$3 million. The charges included $9 million in cost of sales and $1 million in selling, general
and administrative expenses. Those costs included $7 million for facility exit and lease
termination costs, $2 million for asset write-downs and $1 million for severance.
We expect the 2007 actions to result in net workforce reductions of approximately 1,800
hourly and salaried employees, the exiting of approximately 500,000 net square feet of facilities
and the disposal of assets associated with the exited facilities. As of December 31, 2008, we have
completed net workforce reductions of approximately 1,700 employees and exited 200,000 net
square feet of facilities. We are targeting the majority of the remaining workforce and facility
related cost reduction actions for completion during 2009. Approximately 70% of the total
pre-tax charge will require cash payments, which we will fund with cash generated from
46 United Technologies Corporation