United Technologies 2012 Annual Report Download - page 48

46 UNITED TECHNOLOGIES CORPORATION
for future issuance, subject to our internal limitations on the amount of
securities to be issued under this shelf registration statement.
Cash Flow—Discontinued Operations
(DOLLARS IN MILLIONS) 2012 2011
Net cash flows provided by discontinued operations $ 3,015 $73
Cash flows provided by discontinued operations primarily
relate to the completed divestitures of two businesses. As discussed
above, on December 13, 2012 we completed the sale of the legacy
Hamilton Sundstrand Industrial businesses 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. Also, on August 7, 2012, we completed the
disposition of Clipper to a private equity acquirer. The disposition
resulted in payments totaling approximately $367 million, which
included capitalization of the business prior to sale, transaction fees,
and funding of operations as the acquirer took control of a business
with significant net liabilities.
CRITICAL ACCOUNTING ESTIMATES
Preparation of our financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. Note 1 to the Con-
solidated Financial Statements describes the significant accounting
policies used in preparation of the Consolidated Financial State-
ments. Management believes the most complex and sensitive
judgments, because of their significance to the Consolidated Finan-
cial Statements, result primarily from the need to make estimates
about the effects of matters that are inherently uncertain. The most
significant areas involving management judgments and estimates
are described below. Actual results in these areas could differ from
management’s estimates.
Long-Term Contract Accounting. We utilize percentage-
of-completion accounting on certain of our long-term contracts.
The percentage-of-completion method requires estimates of future
revenues and costs over the full term of product and/or service
delivery. We also utilize the completed-contract method of account-
ing on certain lesser value commercial contracts. Under the
completed-contract method, sales and cost of sales are recognized
when a contract is completed.
Losses, if any, on long-term contracts are provided for when
anticipated. We recognize loss provisions on original equipment
contracts to the extent that estimated inventoriable manufacturing,
engineering, product warranty and product performance guarantee
costs, as appropriate, exceed the projected revenue from the prod-
ucts contemplated under the contractual arrangement. For new
commitments, we generally record loss provisions at the earlier of
contract announcement or contract signing except for certain
requirements contracts under which losses are recorded based upon
receipt of the purchase order. For existing commitments, anticipated
losses on contracts are recognized in the period in which losses
become evident. Products contemplated under the contractual
arrangement include products purchased under the contract and, in
the large commercial engine and wheels and brakes businesses,
future highly probable sales of replacement parts required by regu-
lation that are expected to be purchased subsequently for
incorporation into the original equipment. Revenue projections used
in determining contract loss provisions are based upon estimates of
the quantity, pricing and timing of future product deliveries. We gen-
erally recognize losses on shipment to the extent that inventoriable
manufacturing costs, estimated warranty costs and product
performance guarantee costs, as appropriate, exceed revenue real-
ized. We measure the extent of progress toward completion on our
long-term commercial aerospace equipment and helicopter con-
tracts using units-of-delivery. In addition, we use the cost-to-cost
method for elevator and escalator sales, installation and moderniza-
tion contracts in the commercial businesses. For long-term after-
market contracts, we recognize revenue over the contract period in
proportion to the costs expected to be incurred in performing serv-
ices under the contract. Contract accounting also requires estimates
of future costs over the performance period of the contract as well as
an estimate of award fees and other sources of revenue.
Contract costs are incurred over a period of time, which can
be several years, and the estimation of these costs requires
management’s judgment. The long-term nature of these contracts,
the complexity of the products, and the strict safety and performance
standards under which they are regulated can affect our ability to
estimate costs precisely. As a result, we review and update our cost
estimates on significant contracts on a quarterly basis, and no less
frequently than annually for all others, or when circumstances change
and warrant a modification to a previous estimate. We record
changes in contract estimates using the cumulative catch-up method
in accordance with the Revenue Recognition Topic of the FASB ASC.
Income Taxes. The future tax benefit arising from net
deductible temporary differences and tax carryforwards was $3.2 bil-
lion at December 31, 2012 and $4.0 billion at December 31, 2011.
Management believes that our earnings during the periods when the
temporary differences become deductible will be sufficient to realize
the related future income tax benefits. For those jurisdictions where
the expiration date of tax carryforwards or the projected operating
results indicate that realization is not likely, a valuation allowance is
provided.
In assessing the need for a valuation allowance, we esti-
mate future taxable income, considering the feasibility of ongoing
tax planning strategies and the realizability of tax loss carryforwards.
Valuation allowances related to deferred tax assets can be affected
by changes to tax laws, changes to statutory tax rates and future
taxable income levels. In the event we were to determine that we
would not be able to realize all or a portion of our deferred tax
assets in the future, we would reduce such amounts through an