United Technologies 2012 Annual Report Download - page 33

Management’s Discussion and Analysis 2012 ANNUAL REPORT 31
venture in the United Arab Emirates, a $122 million increase in
income from joint ventures, and $79 million in other, net gains from
divestitures, all of which was partially offset by a $66 million other-
than-temporary impairment charge on an equity investment at UTC
Climate, Controls & Security, and $45 million of reserves estab-
lished for legal matters.
Interest Expense, Net
(DOLLARS IN MILLIONS) 2012 2011 2010
Interest expense $ 893 $ 673 $ 751
Interest income (120) (177) (101)
Interest expense, net $ 773 $ 496 $ 650
Average interest expense rate during the year on:
Short-term borrowings 0.9% 2.0% 1.8%
Total debt 4.1% 5.6% 5.6%
Interest expense increased in 2012, as compared with
2011, primarily as a result of higher average debt balances in 2012
associated with the financing of our acquisition of Goodrich. Financ-
ing for the Goodrich acquisition included a total of $9.8 billion of
long-term debt, $1.1 billion of equity units which bear contract
adjustment payments at a rate of 5.95% per year, and $3.2 billion
from the issuance of commercial paper. We also entered into a
term loan credit agreement for $2 billion and borrowed the full
amount available under this facility. In connection with the acquis-
ition of Goodrich, we assumed long term debt of approximately
$3.0 billion, which bears interest at rates ranging from 3.6% to
7.1%. Subsequent to the acquisition in 2012, we repaid approx-
imately $635 million of principal ($761 million fair value) of the
assumed Goodrich debt, the entire $2.0 billion term loan, and
nearly all of the commercial paper issued to finance the acquisition.
Interest expense on our long-term debt decreased in 2011
as a result of the repayment at maturity in May 2010 of our $600
million of 4.375% notes due 2010, the early redemption in June
2010 of the entire $500 million outstanding principal amount of our
7.125% notes that would have otherwise been due November
2010, the early redemption in September 2010 of the entire $500
million outstanding principal amount of our 6.350% notes that
would have otherwise been due March 2011, and as a result of the
early redemption in December 2011 of the entire $500 million out-
standing principal amount of our 6.100% notes that would other-
wise have been due May 15, 2012. This impact was partially offset
by the full year impact from the issuance of two series of fixed rate
long-term notes totaling $2.25 billion in February 2010. Lower
interest charges related to our deferred compensation plan and
lower interest accrued on unrecognized tax benefits also con-
tributed to the overall interest expense decline. Interest income
increased in 2011, as compared with 2010, as a result of favorable
pre-tax interest adjustments of approximately $89 million related to
the settlement of U.S. federal income tax refund claims for years
prior to 2004, partially offset by the absence of a favorable pre-tax
interest adjustment of approximately $24 million associated with the
resolution of an uncertain temporary tax item in the second quarter
of 2010.
The decline in the weighted-average interest rates for
short-term borrowings was due to the mix of our borrowings with a
greater percentage of short-term borrowings at lower interest rates
in 2012 than the percentage of short-term borrowings in 2011. At
December 31, 2012 and 2011, we had commercial paper borrow-
ings outstanding of $320 million and $455 million, respectively. The
three month LIBOR rate as of December 31, 2012, 2011 and 2010
was 0.3%, 0.6% and 0.3%, respectively. The decline in the average
interest rate on total debt is due to the redemptions of higher rate
debt as discussed above and the low interest rates obtained on the
debt issued to fund the Goodrich acquisition.
Income Taxes
2012 2011 2010
Effective income tax rate 24.8% 29.0% 27.6%
The effective income tax rates for 2012, 2011 and 2010
reflect tax benefits associated with lower tax rates on international
earnings, which we intend to permanently reinvest outside the
United States. The 2012 effective tax rate reflects a favorable non-
cash income tax adjustment of approximately $203 million related to
the conclusion of the IRS’s examination of the Company’s 2006 –
2008 tax years, as well as a reduction in tax expense of $34 million
related to the favorable resolution of disputed tax matters with the
Appeals division of the IRS for the tax years 2004 and 2005. Also
included in the 2012 effective tax rate is the favorable income tax
impact of $225 million related to the release of non-U.S. valuation
allowances resulting from internal legal entity reorganizations.
The 2011 effective tax rate reflects approximately $63 mil-
lion 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 Medi-
care Part D program and other increases to UTC’s effective income
tax rate.
We estimate our full year annual effective income tax rate in
2013 to be approximately 29%, absent one-time adjustments. We
anticipate some variability in the tax rate quarter to quarter in 2013.
In addition, the Company expects to record a one-time favorable
tax adjustment of $80 million in the first quarter of 2013 related to