United Technologies 2011 Annual Report Download - page 52

MANAGEMENT’S DISCUSSION AND ANALYSIS
Foreign Currency Exposures. We have a large volume of
foreign currency exposures that result from our international
sales, purchases, investments, borrowings and other
international transactions. International segment sales,
including U.S. export sales, averaged approximately $33
billion over the last three years. We actively manage foreign
currency exposures that are associated with committed
foreign currency purchases and sales and other assets and
liabilities created in the normal course of business at the
operating unit level. More than insignificant exposures that
cannot be naturally offset within an operating unit are
hedged with foreign currency derivatives. We also have a
significant amount of foreign currency net asset exposures.
Currently, we do not hold any derivative contracts that hedge
our foreign currency net asset exposures but may consider
such strategies in the future.
Within aerospace, our sales are typically denominated in U.S.
Dollars under accepted industry convention. However, for our
non-U.S. based entities, such as P&WC, a substantial portion
of their costs are incurred in local currencies. Consequently,
there is a foreign currency exchange impact and risk to
operational results as U.S. Dollars must be converted to local
currencies such as the Canadian Dollar in order to meet local
currency cost obligations. In order to minimize the exposure
that exists from changes in the exchange rate of the
U.S. Dollar against these other currencies, we hedge a certain
portion of sales to secure the rates at which U.S. Dollars will
be converted. The majority of this hedging activity occurs at
P&WC. At P&WC, firm and forecasted sales for both engines
and spare parts are hedged at varying amounts up to 32
months on the U.S. Dollar sales exposure as represented by
the excess of U.S. Dollar sales over U.S. Dollar denominated
purchases. Hedging gains and losses resulting from
movements in foreign currency exchange rates are partially
offset by the foreign currency translation impacts that are
generated on the translation of local currency operating
results into U.S. Dollars for reporting purposes. While the
objective of the hedging program is to minimize the foreign
currency exchange impact on operating results, there are
typically variances between the hedging gains or losses and
the translational impact due to the length of hedging
contracts, changes in the sales profile, volatility in the
exchange rates and other such operational considerations.
Interest Rate Exposures. Our long-term debt portfolio
consists mostly of fixed-rate instruments. From time to time,
we may hedge to floating rates using interest rate swaps. The
hedges are designated as fair value hedges and the gains and
losses on the swaps are reported in interest expense,
reflecting that portion of interest expense at a variable rate.
We issue commercial paper, which exposes us to changes in
interest rates. Currently, we do not hold any derivative
contracts that hedge our interest exposures, but may
consider such strategies in the future.
Commodity Price Exposures. We are exposed to volatility in
the prices of raw materials used in some of our products and
from time to time we may use forward contracts in limited
circumstances to manage some of those exposures. In the
future, if hedges are used, gains and losses may affect
earnings. There were no significant outstanding commodity
hedges as of December 31, 2011.
ENVIRONMENTAL MATTERS
Our operations are subject to environmental regulation by
federal, state and local authorities in the United States and
regulatory authorities with jurisdiction over our foreign
operations. As a result, we have established, and continually
update, policies relating to environmental standards of
performance for our operations worldwide. We believe that
expenditures necessary to comply with the present
regulations governing environmental protection will not have
a material effect upon our competitive position, results of
operations, cash flows or financial condition.
We have identified 597 locations, mostly in the United States,
at which we may have some liability for remediating
contamination. We have resolved our liability at 250 of these
locations. We do not believe that any individual location’s
exposure will have a material effect on our results of
operations. Sites in the investigation, remediation or
operation and maintenance stage represent approximately
91% of our accrued environmental remediation reserve.
We have been identified as a potentially responsible party
under the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA or Superfund) at
106 sites. The number of Superfund sites, in and of itself, does
not represent a relevant measure of liability because the
nature and extent of environmental concerns vary from site
to site and our share of responsibility varies from sole
responsibility to very little responsibility. In estimating our
liability for remediation, we consider our likely proportionate
share of the anticipated remediation expense and the ability
of other potentially responsible parties to fulfill their
obligations.
At December 31, 2011 and 2010, we had $617 million and $605
million reserved for environmental remediation, respectively.
Cash outflows for environmental remediation were $54
million in 2011, $44 million in 2010 and $49 million in 2009.
We estimate that ongoing environmental remediation
expenditures in each of the next two years will not exceed
approximately $60 million.
50 UNITED TECHNOLOGIES CORPORATION