United Technologies 2011 Annual Report Download - page 46

MANAGEMENT’S DISCUSSION AND ANALYSIS
LIQUIDITY AND FINANCIAL CONDITION
(Dollars in millions) 2011 2010
Cash and cash equivalents $ 5,960 $ 4,083
Total debt 10,260 10,289
Net debt (total debt less cash and cash equivalents) 4,300 6,206
Total equity 22,820 22,332
Total capitalization (total debt plus total equity) 33,080 32,621
Net capitalization (total debt plus total equity less
cash and cash equivalents) 27,120 28,538
Total debt to total capitalization 31% 32%
Net debt to net capitalization 16% 22%
We assess our liquidity in terms of our ability to generate
cash to fund our operating, investing and financing activities.
Our principal source of liquidity is operating cash flows,
which, after netting out capital expenditures, we target to
equal or exceed net income attributable to common
shareowners. In addition to operating cash flows, other
significant factors that affect our overall management of
liquidity include: capital expenditures, customer financing
requirements, investments in businesses, dividends, common
stock repurchases, pension funding, access to the commercial
paper markets, adequacy of available bank lines of credit, and
the ability to attract long-term capital at satisfactory terms.
Although the global economy improved in 2011, as compared
with 2010, and there have been some recent signs that
economic recovery may be gaining traction in the U.S., there
continues to be significant overall uncertainty with regard to
the future direction of the world economy. High
unemployment and a weak housing sector in the U.S.
continue to dampen consumer sentiment domestically, while
concerns over the European debt crisis and the deficit debate
in Washington, D.C. continue to adversely impact financial
markets and constrain government spending in certain
countries. In light of these circumstances, we continue to
assess our current business and closely monitor the impact
on our customers and suppliers, and have determined that
overall there has not been a significant impact on our
financial position, results of operations or liquidity during 2011.
Our domestic pension funds experienced a positive return on
assets of approximately 7% and 15% during 2011 and 2010,
respectively. Approximately 88% of our domestic pension
plans are invested in readily-liquid investments, including
equity, fixed income, asset-backed receivables and structured
products. The balance of our domestic pension plans (12%) is
invested in less-liquid but market-valued investments,
including real estate and private equity. The continued
recognition of prior pension losses and the impact of a lower
discount rate, partially offset by additional funding and the
positive returns experienced during 2011, are expected to
result in increased pension expense in 2012 of approximately
$250 million as compared to 2011.
Our strong debt ratings and financial position have
historically enabled us to issue long-term debt at favorable
market rates, including our issuance of $2.25 billion of long-
term debt in February 2010. Our ability to obtain debt
financing at comparable risk-based interest rates is partly a
function of our existing debt-to-total-capitalization level as
well as our current credit standing.
The purchase price for our pending acquisition of Goodrich
for $127.50 per share in cash equates to a total estimated
enterprise value of $18.4 billion, including $1.9 billion in net
debt to be assumed. We expect to finance the total $16.5
billion to be paid to Goodrich shareholders at the closing of
the acquisition through a combination of short- and long-
term debt, equity issuance and cash. We intend to maintain
our strong existing credit rating and minimize future share
count dilution on earnings per share by targeting the equity
component to comprise no more than 25% of the total
financing (excluding the amount of Goodrich net debt to be
assumed). We are also evaluating the potential disposition of
a number of our non-core businesses to generate cash and
minimize the level of future debt or equity issuances. To
manage the cash flow and liquidity impacts of these actions,
we are suspending future share repurchases until at least
September 30, 2012, and will significantly reduce repurchases
for two years thereafter. In addition, we will reduce our
budgeted acquisition spending for the next few years, which
for 2012 we expect to approximate $500 million excluding
spending for our pending acquisitions of Goodrich and Rolls-
Royce’s interests in IAE.
On November 8, 2011, we entered into a bridge credit
agreement with various financial institutions that provides for
a $15 billion unsecured bridge loan facility, available to pay a
portion of the cash consideration for the Goodrich
acquisition, and to finance certain related transactions and
pay related fees and expenses. Any funding under the bridge
credit agreement would substantially occur concurrently with
the consummation of the Goodrich acquisition, subject to
customary conditions for acquisition financings of this type.
Any loans made pursuant to the bridge credit agreement
would mature on the date that is 364 days after the funding
date.
At December 31, 2011, we had revolving credit agreements
with various banks permitting aggregate borrowings of up to
$4.0 billion pursuant to a $2.0 billion revolving credit
agreement and a $2.0 billion multicurrency revolving credit
agreement, both of which expire in November 2016. These
revolving credit agreements were signed on November 4,
2011 and replaced our previous revolving credit agreements
executed in 2010 which had permitted aggregate borrowings
of up to $3.0 billion. As of December 31, 2011 and 2010, there
were no borrowings under either of these revolving credit
agreements. The undrawn portions of our revolving credit
agreements are also available to serve as backup facilities for
the issuance of commercial paper. In November 2011, our
maximum commercial paper borrowing authority was
increased from $3 billion to $4 billion.
We continue to have access to the commercial paper markets
and our existing credit facilities, and expect to continue to
generate strong operating cash flows. While the impact of
market volatility cannot be predicted, we believe we have
44 UNITED TECHNOLOGIES CORPORATION