United Technologies 2012 Annual Report Download - page 49

Management’s Discussion and Analysis 2012 ANNUAL REPORT 47
increase to tax expense in the period in which that determination is
made or when tax law changes are enacted. Conversely, if we were
to determine that we would be able to realize our deferred tax
assets in the future in excess of the net carrying amounts, we would
decrease the recorded valuation allowance through a decrease to
tax expense in the period in which that determination is made.
In the ordinary course of business there is inherent
uncertainty in quantifying our income tax positions. We assess our
income tax positions and record tax benefits for all years subject to
examination based upon management’s evaluation of the facts,
circumstances and information available at the reporting date. For
those tax positions where it is more likely than not that a tax benefit
will be sustained, we have recorded the largest amount of tax bene-
fit with a greater than 50% likelihood of being realized upon ultimate
settlement with a taxing authority that has full knowledge of all rele-
vant information. For those income tax positions where it is not
more likely than not that a tax benefit will be sustained, no tax bene-
fit has been recognized in the financial statements. See Notes 1 and
11 to the Consolidated Financial Statements for further discussion.
Goodwill and Intangible Assets. Our investments in
businesses in 2012 totaled $18.6 billion, including approximately
$2.6 billion of debt assumed. The assets and liabilities of acquired
businesses are recorded under the acquisition method of account-
ing at their estimated fair values at the dates of acquisition. Good-
will represents costs in excess of fair values assigned to the
underlying identifiable net assets of acquired businesses. Intangible
assets consist of service portfolios, patents, trademarks/
tradenames, customer relationships and other intangible assets
including a collaboration asset established in connection with the
restructuring of IAE as discussed above and in Note 2 to the Con-
solidated Financial Statements. Also included within other intangible
assets are commercial aerospace payments made to secure certain
contractual rights to provide product on new aircraft platforms.
Payments made on these contractual commitments are to be
amortized as the related OEM and aftermarket units are delivered.
The gross value of these contractual commitments at
December 31, 2012 was approximately $2.6 billion, of which
approximately $700 million has been paid to date. We record these
payments as intangible assets when such payments are no longer
conditional. The recoverability of these intangibles is dependent
upon the future success and profitability of the underlying aircraft
platforms including the associated aftermarket revenue streams.
Goodwill and intangible assets deemed to have indefinite
lives are not amortized, but are subject to annual impairment testing
using the guidance and criteria described in the “Intangibles—
Goodwill and Other” Topic of the FASB ASC. This testing compares
carrying values to fair values and, when appropriate, the carrying
values of these assets is reduced to fair value. During 2012 we early
adopted the FASB Accounting Standards Update (ASU) No. 2012-
02, “Testing Indefinite-Lived Intangible Assets for Impairment” in
connection with the performance of our annual goodwill and
indefinite lived intangible assets impairment test. This ASU intends to
align impairment testing guidance among long-lived asset catego-
ries. This ASU allows the assessment based on qualitative factors to
determine whether it is more likely than not that an indefinite-lived
intangible asset is impaired prior to determining whether it is neces-
sary to perform the quantitative impairment test in accordance with
ASC Subtopic 350-30, “Intangibles—Goodwill and Other—General
Intangibles Other than Goodwill.” We completed our annual impair-
ment testing as of July 1, 2012 and determined that no significant
adjustments to the carrying value of goodwill or indefinite lived
intangible assets were necessary based on the results of the
impairment tests, other than those impairment charges associated
with certain businesses reclassified to discontinued operations.
During 2012, we recorded goodwill impairment charges of $980 mil-
lion in discontinued operations in connection with the disposition of
Rocketdyne, Clipper and UTC Power. The goodwill impairment
charges on both Rocketdyne and Clipper result from the decision to
dispose of the businesses within a relatively short period after they
were acquired. Consequently, there has not been sufficient oppor-
tunity for the long-term operations to recover the value implicit in
goodwill at the initial date of acquisition. The impairment charge at
UTC Power resulted from the disposition of the business before the
benefits of the technology investments were fully realized. Although
the remaining goodwill is not currently impaired, there can be no
assurances that future goodwill impairments will not occur. See Note
2 to the Consolidated Financial Statements for further discussion.
Product Performance. We extend performance and
operating cost guarantees beyond our normal service and warranty
policies for extended periods on some of our products, particularly
commercial aircraft engines. Liability under such guarantees is
based upon future product performance and durability. In addition,
we incur discretionary costs to service our products in connection
with product performance issues. We accrue for such costs that
are probable and can be reasonably estimated. The costs asso-
ciated with these product performance and operating cost guaran-
tees require estimates over the full terms of the agreements, and
require management to consider factors such as the extent of
future maintenance requirements and the future cost of material
and labor to perform the services. These cost estimates are largely
based upon historical experience. See Note 16 to the Consolidated
Financial Statements for further discussion.
Contracting with the U.S. Government. Our contracts
with the U.S. Government are subject to government oversight and
audit. Like many defense contractors, we have received audit
reports which recommend that certain contract prices should be
reduced to comply with various government regulations. Some of
these audit reports have involved substantial amounts. We have
made voluntary refunds in those cases we believe appropriate, have
settled some allegations and continue to litigate certain cases. In
addition, we accrue for liabilities associated with those government
contracting matters that are probable and can be reasonably