United Technologies 2012 Annual Report Download - page 50

48 UNITED TECHNOLOGIES CORPORATION
estimated. The inherent uncertainty related to the outcome of these
matters can result in amounts materially different from any provi-
sions made with respect to their resolution. See Note 18 to the
Consolidated Financial Statements for further discussion. We
recorded sales to the U.S. Government of $10.1 billion in 2012,
$9.1 billion in 2011, and $9.1 billion in 2010.
Employee Benefit Plans. We sponsor domestic and for-
eign defined benefit pension and other postretirement plans. Major
assumptions used in the accounting for these employee benefit
plans include the discount rate, expected return on plan assets, rate
of increase in employee compensation levels, and health care cost
increase projections. Assumptions are determined based on com-
pany data and appropriate market indicators, and are evaluated
each year at December 31. A change in any of these assumptions
would have an effect on net periodic pension and postretirement
benefit costs reported in the Consolidated Financial Statements.
In the following table, we show the sensitivity of our pen-
sion and other postretirement benefit plan liabilities and net annual
periodic cost to a 25 basis point change in the discount rate as of
December 31, 2012:
(DOLLARS IN MILLIONS)
Increase in
Discount Rate
of 25 bps
Decrease in
Discount Rate
of 25 bps
Pension plans
Projected benefit obligation $ (1,073) $ 1,111
Net periodic pension cost (85) 88
Other postretirement benefit plans
Accumulated postretirement benefit obligation (20) 21
Net periodic postretirement benefit cost 1 (1)
Pension expense is also sensitive to changes in the
expected long-term rate of asset return. An increase or decrease of
25 basis points in the expected long-term rate of asset return would
have decreased or increased 2012 pension expense by approx-
imately $67 million.
The weighted-average discount rate used to measure pen-
sion liabilities and costs is set by reference to UTC specific analysis
using each plan’s specific cash flows and is then compared to
high-quality bond indices for reasonableness. Global market
interest rates have decreased in 2012 as compared with 2011 and,
as a result, the weighted-average discount rate used to measure
pension liabilities decreased from 4.7% in 2011 to 4.0% in 2012. In
December 2009, we amended the salaried retirement plans
(qualified and non-qualified) to change the retirement formula effec-
tive January 1, 2015. At that time, final average earnings (FAE) and
credited service will stop under the formula applicable for hires
before July 1, 2002. Employees hired after 2009 are not eligible for
any defined benefit pension plan and will instead receive an
enhanced benefit under the UTC Savings Plan. As of July 26, 2012
the same amendment was applied to legacy Goodrich salaried
employees. The continued recognition of prior pension losses and
the impact of a lower discount rate, partially offset by additional
funding and the positive returns experienced during 2012, are
expected to increase pension expense in 2013 by approximately
$250 million as compared to 2012. See Note 12 to the Con-
solidated Financial Statements for further discussion.
Inventory Valuation Reserves. Inventory valuation
reserves are established in order to report inventories at the lower of
cost or market value on our Consolidated Balance Sheet. The
determination of inventory valuation reserves requires management
to make estimates and judgments on the future salability of
inventories. Valuation reserves for excess, obsolete, and slow-
moving inventory are estimated by comparing the inventory levels of
individual parts to both future sales forecasts or production require-
ments and historical usage rates in order to identify inventory where
the resale value or replacement value is less than inventoriable cost.
Other factors that management considers in determining the
adequacy of these reserves include whether individual inventory
parts meet current specifications and cannot be substituted for a
part currently being sold or used as a service part, overall market
conditions, and other inventory management initiatives.
As of December 31, 2012 and 2011, we had $866 million
and $884 million, respectively, of inventory valuation reserves
recorded. Although management believes these reserves are
adequate, any abrupt changes in market conditions may require us
to record additional inventory valuation reserves.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL
OBLIGATIONS
We extend a variety of financial guarantees to third parties in sup-
port of unconsolidated affiliates and for potential financing require-
ments of commercial aerospace customers. We also have
obligations arising from sales of certain businesses and assets,
including indemnities for representations and warranties and envi-
ronmental, health and safety, tax and employment matters.
Circumstances that could cause the contingent obligations and
liabilities arising from these arrangements to come to fruition include
changes in an underlying transaction (e.g., hazardous waste
discoveries, etc.), nonperformance under a contract, customer
requests for financing, or deterioration in the financial condition of
the guaranteed party.
A summary of our consolidated contractual obligations and
commitments as of December 31, 2012 is as follows:
Payments Due by Period
(DOLLARS IN MILLIONS) Total 2013 2014 – 2015 2016 – 2017 Thereafter
Long-term debt—principal $ 22,365 $ 1,121 $ 2,773 $ 2,841 $ 15,630
Long-term debt—future
interest 14,628 1,023 1,982 1,708 9,915
Operating leases 2,486 646 888 413 539
Purchase obligations 16,076 8,389 5,376 982 1,329
Other long-term liabilities 4,586 862 1,369 1,272 1,083
Total contractual obligations $ 60,141 $ 12,041 $ 12,388 $ 7,216 $ 28,496