United Technologies 2011 Annual Report Download - page 35

MANAGEMENT’S DISCUSSION AND ANALYSIS
The weighted-average interest rate applicable to debt
outstanding at December 31, 2011 was 1.5% for short-term
borrowings and 5.6% for total debt as compared to 6.3% and
5.9%, respectively, at December 31, 2010. The decline in the
weighted-average interest rates for short-term borrowings
was due to the $455 million of commercial paper borrowings
outstanding at December 31, 2011, which carries favorable
interest rates. There were no commercial paper borrowings
outstanding at December 31, 2010. The three month LIBOR
rate as of December 31, 2011 was 0.6% and 0.3% as of both
December 31, 2010 and 2009.
Income Taxes
2011 2010 2009
Effective income tax rate 29.3% 27.9% 27.4%
The effective income tax rates for 2011, 2010 and 2009 reflect
tax benefits associated with lower tax rates on international
earnings, which we intend to permanently reinvest outside
the United States. The 2011 effective income tax rate
increased as compared to 2010, due to the absence of the
repatriation of highly taxed dividends which had a net
favorable impact in 2010. The 2011 effective tax rate reflects
approximately $63 million of favorable income tax
adjustments related to the settlement of two refund claims
for years prior to 2004, as well as a favorable tax impact of
$17 million related to a U.K. tax rate reduction enacted in 2011.
These favorable tax adjustments are partially offset by
non-deductible charges accrued in 2011.
The 2010 effective income tax rate reflects a non-recurring
tax expense reduction associated with management’s
decision to repatriate additional high tax dividends from 2010
earnings to the U.S. as a result of U.S. tax legislation enacted
in 2010. This was partially offset by the non-deductibility of
impairment charges, the adverse impact from the health care
legislation related to the Medicare Part D program and other
increases to UTC’s effective income tax rate.
The 2009 effective income tax rate reflects approximately
$38 million of tax expense reductions relating to re-evaluation
of our liabilities and contingencies based on global
examination activity during the year including the Internal
Revenue Service’s (IRS) completion of 2004 and 2005
examination fieldwork and our related protest filing. As a
result of the global examination activity, we recognized
approximately $18 million of associated pre-tax interest
income adjustments during 2009.
We estimate our full year annual effective income tax rate in
2012, excluding the impact of the acquisition of Goodrich, to
be approximately 29.5%, absent one-time adjustments and
contingent upon the release of valuation allowances resulting
from potential internal reorganizations. These internal
reorganizations are separate from the creation of the UTC
Climate, Controls & Security and the UTC Propulsion &
Aerospace Systems organizations as described above and
are a component of our ongoing efforts to improve business
efficiency. We anticipate variability in the tax rate quarter to
quarter with lower rates likely to occur in the second half of
2012, primarily due to the realization of tax benefits
associated with these potential internal reorganizations,
which, if completed, would be recognized in the second half
of 2012.
For additional discussion of income taxes, see “Critical
Accounting Estimates—Income Taxes” and Note 10 to the
Consolidated Financial Statements.
Net Income and Earnings Per Share
(Dollars in millions, except per share amounts) 2011 2010 2009
Net income $5,374 $ 4,711 $ 4,179
Less: Noncontrolling interest in subsidiaries’
earnings 395 338 350
Net income attributable to common
shareowners $4,979 $4,373 $3,829
Diluted earnings per share $ 5.49 $ 4.74 $ 4.12
Foreign currency translation, inclusive of the net hedging
impact at Pratt & Whitney Canada (P&WC) generated a net
positive impact of $.11 per diluted share on our operational
performance in 2011. At P&WC, the weakness of the
U.S. Dollar against the Canadian Dollar during 2011 generated
an adverse foreign currency translation impact as the
majority of P&WC’s sales are denominated in U.S. Dollars,
while a significant portion of its costs are incurred in local
currencies. To help mitigate the volatility of foreign currency
exchange rates on our operating results, we maintain foreign
currency hedging programs, the majority of which are
entered into by P&WC. As a result of hedging programs
currently in place, P&WC’s 2012 full year operating results are
expected to include a net adverse impact of foreign currency
translation and hedging of approximately $50 million. In 2010,
foreign currency generated a net positive impact on our
operational results of $.12 per diluted share while in 2009,
foreign currency had an adverse impact of $.22 per diluted
share. For additional discussion of foreign currency exposure,
see “Market Risk and Risk Management—Foreign Currency
Exposures.”
Diluted earnings per share for 2011 include a net charge of
$.04 per share from net restructuring and non-recurring
items. Besides the restructuring charges of $336 million,
non-recurring items included approximately $152 million of
favorable pre-tax interest and income tax adjustments related
to the settlement of U.S. federal income tax refund claims for
years prior to 2004, approximately $109 million of net gains
resulting from Carrier’s ongoing portfolio transformation,
approximately $73 million gain recognized from the
contribution of a business into a new venture in the United
Arab Emirates at Sikorsky, approximately $66 million of
other-than-temporary impairment charges on an equity
investment at UTC Fire & Security, approximately $45 million
of reserves established for legal matters, a gain of
approximately $41 million recognized from the sale of an
equity investment at Pratt & Whitney, and a favorable tax
benefit of approximately $17 million as a result of a U.K. tax
rate reduction enacted in July 2011.
2011 ANNUAL REPORT 33