United Technologies 2012 Annual Report Download - page 29

Management’s Discussion and Analysis 2012 ANNUAL REPORT 27
Management’s Discussion and Analysis
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We are a global provider of high technology products and services
to the building systems and aerospace industries. Our operations
for the periods presented herein are classified into five principal
business segments: Otis, UTC Climate, Controls & Security, Pratt &
Whitney, UTC Aerospace Systems and Sikorsky. Otis and UTC
Climate, Controls & Security are referred to as the “commercial
businesses,” while Pratt & Whitney, UTC Aerospace Systems and
Sikorsky are collectively referred to as the “aerospace businesses.”
Certain reclassifications have been made to the prior year amounts
to conform to the current year presentation.
In 2012, we implemented a new organizational structure
that allows us to better serve customers, drive growth and achieve
further efficiencies through greater integration across certain prod-
uct lines. As part of this new structure, effective January 1, 2012,
we formed the UTC Climate, Controls & Security segment, which
combines the former Carrier and UTC Fire & Security segments.
On July 26, 2012, we acquired Goodrich Corporation
(Goodrich) pursuant to a merger agreement dated September 21,
2011 for approximately $18.3 billion including $1.9 billion of net
debt assumed. As a result of the acquisition, Goodrich became a
wholly-owned subsidiary of UTC in the largest acquisition in UTC’s
history. The acquired Goodrich business and the legacy Hamilton
Sundstrand business have been combined to form a new segment
named UTC Aerospace Systems. This segment and our Pratt &
Whitney segment are separately reportable segments although they
are both included within the newly formed UTC Propulsion & Aero-
space Systems organizational structure. The increased scale,
financial strength and complementary products of the new com-
bined business are expected to continue to strengthen our position
in the aerospace and defense industry. Further, we expect that this
acquisition will enhance our ability to support our customers with
more integrated systems. The results of the acquired Goodrich
business have been included in UTC’s financial statements only for
periods subsequent to the completion of the acquisition. As a
result, the consolidated financial results for the year ended
December 31, 2012 do not reflect a full year of legacy Goodrich
operations. The acquisition resulted in the inclusion of Goodrich’s
assets and liabilities as of the acquisition date at their respective fair
values. Accordingly, the Goodrich acquisition materially affected
UTC’s results of operations and financial position.
On June 29, 2012, Pratt & Whitney, Rolls-Royce plc
(Rolls-Royce), MTU Aero Engines AG (MTU) and Japanese Aero
Engines Corporation (JAEC), participants in the IAE International
Aero Engines AG (IAE) collaboration, completed a restructuring
of their interests in IAE. Under the terms of the agreement,
Rolls-Royce sold its ownership and collaboration interests in IAE to
Pratt & Whitney, while also entering into a license for its V2500
intellectual property with Pratt & Whitney. In exchange for the
increased ownership and collaboration interests and intellectual
property license, Pratt & Whitney paid Rolls-Royce $1.5 billion at
closing with additional payments due to Rolls-Royce during the fif-
teen year period following closing of the purchase, conditional upon
each hour flown by V2500-powered aircraft in service at the closing.
Pratt & Whitney entered into a collaboration arrangement with MTU
with respect to a portion of the collaboration interest in IAE acquired
from Rolls-Royce for consideration of approximately $233 million
with additional payments due to Pratt & Whitney in the future. As a
result of these transactions, Pratt & Whitney has a 61% net interest
in the collaboration and a 49.5% ownership interest in IAE, which
has been consolidated by Pratt & Whitney post-transaction.
On March 14, 2012, the Board of Directors of the Com-
pany approved a plan for the divestiture of a number of non-core
businesses. Cash generated from these divestitures has been and
will be used to repay the debt issued to finance the acquisition of
Goodrich. These divestitures are expected to generate approx-
imately $3 billion in net cash, on an after-tax basis, when complete.
In the first quarter of 2012, the legacy Hamilton Sundstrand
Industrial businesses, Pratt & Whitney Rocketdyne (Rocketdyne)
and Clipper Windpower (Clipper) all met the “held-for-sale” criteria.
On June 29, 2012, management of the Company approved a plan
for the divestiture of UTC Power. The results of operations, includ-
ing the net gains/losses expected on disposition, and the related
cash flows which result from these non-core businesses have been
reclassified to Discontinued Operations in our Consolidated State-
ments of Operations and Cash Flows for all periods presented. The
sale of the legacy Hamilton Sundstrand Industrial businesses was
completed in the fourth quarter of 2012, while the sale of Clipper
was completed in the third quarter of 2012. On July 23, 2012, we
announced an agreement to sell our Rocketdyne unit to GenCorp
Inc. for $550 million. On December 22, 2012, we announced an
agreement to sell our UTC Power unit to ClearEdge Power.
Although the Pratt & Whitney Power Systems business was also
approved for sale by the Board of Directors of the Company, it was
not reclassified to Discontinued Operations due to the level of
expected continuing involvement in the business post-sale. The
sales of the remaining non-core businesses identified for disposition
are expected to be completed in the first half of 2013.
In accordance with conditions imposed for regulatory appro-
val of UTC’s acquisition of Goodrich, UTC must dispose of the electric
power systems and the pumps and engine controls businesses of
Goodrich. These businesses have been held separate from UTC’s and
Goodrich’s ongoing businesses pursuant to regulatory obligations
since the acquisition of Goodrich by UTC. On October 16, 2012, we
announced an agreement to sell the electric power systems business
for $400 million to Safran, and on January 18, 2013, we announced
an agreement to sell the pumps and engine controls business to Tri-
umph Group Inc. Closings of both sales are expected by the end of
the first quarter of 2013 and are subject to regulatory approvals and
other customary closing conditions.