United Technologies 2011 Annual Report Download - page 51

MANAGEMENT’S DISCUSSION AND ANALYSIS
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL
OBLIGATIONS
We extend a variety of financial guarantees to third parties in
support of unconsolidated affiliates and for potential
financing requirements of commercial aerospace customers.
We also have obligations arising from sales of certain
businesses and assets, including indemnities for
representations and warranties and environmental, health and
safety, tax and employment matters. Circumstances that
could cause the contingent obligations and liabilities arising
from these arrangements to come to fruition include changes
in an underlying transaction (e.g., hazardous waste
discoveries, etc.), nonperformance under a contract,
customer requests for financing, or deterioration in the
financial condition of the guaranteed party.
A summary of our consolidated contractual obligations and
commitments as of December 31, 2011 is as follows:
PAYMENTS DUE BY PERIOD
(Dollars in millions) Total 2012 2013 – 2014 2015 – 2016 Thereafter
Long-term debt—principal $ 9,630 $ 129 $ 46 $ 1,231 $ 8,224
Long-term debt—future
interest 8,172 554 1,109 1,047 5,462
Operating leases 1,883 515 696 299 373
Purchase obligations 12,486 7,305 2,807 853 1,521
Other long-term liabilities 5,786 1,322 1,192 1,815 1,457
Total contractual
obligations $37,957 $9,825 $5,850 $5,245 $17,037
Purchase obligations include amounts committed under
legally enforceable contracts or purchase orders for goods
and services with defined terms as to price, quantity, delivery
and termination liability. Approximately 20% of the purchase
obligations disclosed above represent purchase orders for
products to be delivered under firm contracts with the U.S.
government for which we have full recourse under customary
contract termination clauses.
Other long-term liabilities primarily include those amounts on
our December 31, 2011 balance sheet representing obligations
under product service and warranty policies, performance
and operating cost guarantees, estimated environmental
remediation costs and expected contributions under
employee benefit programs. The timing of expected cash
flows associated with these obligations is based upon
management’s estimates over the terms of these agreements
and is largely based upon historical experience.
The above table does not reflect unrecognized tax benefits of
$946 million, the timing of which is uncertain, except for
approximately $131 million that may become payable during
2012. Refer to Note 10 to the Consolidated Financial
Statements for additional discussion on unrecognized tax
benefits.
COMMERCIAL COMMITMENTS
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
(Dollars in millions) Committed 2012 2013 – 2014 2015 – 2016 Thereafter
Commercial aerospace
financing and other
contractual commitments $2,270 $ 131 $ 679 $574 $ 886
IAE financing arrangements* 989 284 448 183 74
Commercial aerospace
financing arrangements 323 49 7 107 160
Unconsolidated subsidiary
debt guarantees 239 147 — — 92
Performance guarantees 33 33 — — —
Total commercial
commitments $3,854 $644 $1,134 $864 $1,212
* Represents IAE’s gross obligation; at December 31, 2011 and 2010 our
proportionate share of IAE’s obligations was 33%. Refer to the Segment Review
for additional discussion of our agreement with Rolls-Royce to restructure the
IAE interests.
Refer to Notes 4, 15, and 17 to the Consolidated Financial
Statements for additional discussion on contractual and
commercial commitments.
MARKET RISK AND RISK MANAGEMENT
We are exposed to fluctuations in foreign currency exchange
rates, interest rates and commodity prices. To manage
certain of those exposures, we use derivative instruments,
including swaps, forward contracts and options. Derivative
instruments utilized by us in our hedging activities are viewed
as risk management tools, involve little complexity and are
not used for trading or speculative purposes. We diversify the
counterparties used and monitor the concentration of risk to
limit our counterparty exposure.
We have evaluated our exposure to changes in foreign
currency exchange rates, interest rates and commodity prices
in our market risk sensitive instruments, which are primarily
cash, debt and derivative instruments, using a value at risk
analysis. Based on a 95% confidence level and a one-day
holding period, at December 31, 2011, the potential loss in fair
value on our market risk sensitive instruments was not
material in relation to our financial position, results of
operations or cash flows. Our calculated value at risk
exposure represents an estimate of reasonably possible net
losses based on volatilities and correlations and is not
necessarily indicative of actual results. Refer to Notes 1, 8 and
13 to the Consolidated Financial Statements for additional
discussion of foreign currency exchange, interest rates and
financial instruments.
2011 ANNUAL REPORT 49