United Technologies 2012 Annual Report Download - page 45

Management’s Discussion and Analysis 2012 ANNUAL REPORT 43
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 from continuing oper-
ations, which, after netting out capital expenditures, we target to
equal or exceed net income attributable to common shareowners
from continuing operations. In addition to operating cash flows,
other significant factors that affect our overall management of liquid-
ity 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.
Improvement in the global economy remains uneven. While
there continues to be a level of fiscal uncertainty in Europe and the
U.S., we have seen signs of stabilization in Europe, gradual recov-
ery in the U.S., and continued but modest strength in emerging
markets. 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 2012.
Our domestic pension funds, excluding the acquired Good-
rich domestic pension funds, experienced a positive return on
assets of approximately 14% and 7% during 2012 and 2011,
respectively. Approximately 89% of these domestic pension plans
are invested in readily-liquid investments, including equity, fixed
income, asset-backed receivables and structured products. The
balance of these domestic pension plans (11%) is invested in less-
liquid but market-valued investments, including real estate and pri-
vate equity. Across our global pension plans, the continued
recognition of prior pension losses and the impact of a lower dis-
count rate, partially offset by additional funding and the positive
returns experienced during 2012, are expected to result in
increased pension expense in 2013 of approximately $250 million
as compared to 2012. As part of the Goodrich acquisition, we
assumed approximately $5.2 billion of pension projected benefit
obligation and $3.8 billion of plan assets.
As discussed further below, despite our increased debt
levels incurred to finance the Goodrich acquisition, our strong debt
ratings and financial position have historically enabled us to issue
long-term debt at favorable market rates, including our issuance of
$9.8 billion of long-term debt in June 2012. 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 of Goodrich of $127.50 per share in
cash equated to a total enterprise value of $18.3 billion, including
$1.9 billion in net debt assumed. To finance the cash consideration
for the Goodrich acquisition and pay related fees, expenses and
other amounts due and payable as a result of the acquisition, we
utilized the net proceeds of approximately $9.6 billion from the $9.8
billion of long-term notes issued on June 1, 2012, the net proceeds
of approximately $1.1 billion from the equity units issued on
June 18, 2012, $3.2 billion from the issuance of commercial paper
during July 2012 and $2.0 billion of proceeds borrowed on July 26,
2012 pursuant to our April 24, 2012 term loan credit agreement, all
of which are discussed below. The $2.0 billion borrowed pursuant
to our April 24, 2012 term loan credit agreement was prepaid in
November and December 2012. For the remainder of the cash
consideration, we utilized approximately $0.5 billion of cash and
cash equivalents generated from operating activities.
On December 6, 2012, we announced that we had com-
menced cash tender offers for six series of outstanding notes origi-
nally issued by Goodrich and assumed by us through the
acquisition. These offers expired on January 7, 2013. Holders val-
idly tendering their notes by December 19, 2012 received consid-
eration determined by reference to a fixed spread over the yield to
maturity (or in the case of one series, yield to call) of the applicable
U.S. Treasury security with the same maturity, plus an early tender
payment of $30 per $1,000 principal amount of notes accepted for
purchase. Holders validly tendering their notes after December 19,
2012 but prior to January 8, 2013 received consideration
determined by reference to a fixed spread over the yield to maturity
(or in the case of one series, yield to call) of the applicable U.S.
Treasury security with the same maturity. Approximately $637 mil-
lion in aggregate principal amount of the outstanding Goodrich
notes were tendered under these offers, with $635 million in
aggregate principal amount being eligible for the early tender pre-
mium. Total payments under these tender offers were approx-
imately $790 million including principal, premium and interest.
In 2012, we approved plans for the divestiture of a number
of non-core businesses. On December 13, 2012, we completed the
sale of the legacy Hamilton Sundstrand Industrial businesses to a
private limited liability company formed by affiliates of BC Partners
and affiliates of The Carlyle Group for $3.4 billion. The tax expense
associated with this transaction was approximately $1.2 billion. A
significant portion of the tax will be included in our net tax payments
for 2013. On July 23, 2012, we announced an agreement to sell our
Rocketdyne unit to GenCorp Inc. for $550 million. On December 12,
2012, we announced an agreement to sell our Pratt & Whitney Power
Systems unit to Mitsubishi Heavy Industries. Both transactions are
expected to close in the first half of 2013. On December 22, 2012 we
announced an agreement to sell our UTC Power unit to ClearEdge
Power with an expected closing in the first quarter of 2013. Cash
generated from these divestitures is intended to be used to repay
debt incurred to finance the Goodrich acquisition.
To manage the cash flow and liquidity impacts of these
actions, we suspended share repurchases in 2012 and the fourth
quarter of 2011, and will significantly reduce repurchases from
historical levels for 2013 and 2014. In addition, we will reduce
our budgeted acquisition spending for the next few years, which
for 2013 we expect to approximate $1 billion; however, actual