United Technologies 2012 Annual Report Download - page 51

Management’s Discussion and Analysis 2012 ANNUAL REPORT 49
Purchase obligations include amounts committed under
legally enforceable contracts or purchase orders for goods and
services with defined terms as to price, quantity, delivery and termi-
nation liability. Approximately 21% of the purchase obligations dis-
closed above represent purchase orders for products to be
delivered under firm contracts with the U.S. Government for which
we have full recourse under customary contract termination clauses.
Other long-term liabilities primarily include those amounts
on our December 31, 2012 balance sheet representing obligations
under product service and warranty policies, performance and
operating cost guarantees, estimated environmental remediation
costs and expected contributions under employee benefit pro-
grams. The timing of expected cash flows associated with these
obligations is based upon management’s estimates over the terms
of these agreements and is largely based upon historical experience.
In connection with the acquisition of Goodrich, we
recorded customer contractual obligations of approximately $2.0
billion relating to certain Goodrich OEM development programs
where the expected costs exceed the expected revenues under
contract. These liabilities will be liquidated in accordance with the
underlying economic pattern of obligations, as reflected by the net
cash outflows incurred on the OEM contracts. We expect these
customer contractual obligations will be liquidated as follows: $283
million in 2013, $513 million in 2014 through 2015, $456 million in
2016 through 2017, and $634 million thereafter. These amounts
are not included in the table above.
The above table also does not reflect unrecognized tax
benefits of $1,073 million, the timing of which is uncertain, except
for approximately $129 million that may become payable during
2013. Refer to Note 11 to the Consolidated Financial Statements
for additional discussion on unrecognized tax benefits.
COMMERCIAL COMMITMENTS
Amount of Commitment Expiration per Period
(DOLLARS IN MILLIONS) Committed 2013 2014 – 2015 2016 – 2017 Thereafter
Commercial aerospace
financing commitments $ 3,237 $ 339 $ 1,150 $ 798 $ 950
Other commercial aerospace
commitments 7,628 736 1,196 1,314 4,382
Commercial aerospace
financing arrangements 346 42 118 14 172
Unconsolidated subsidiary
debt guarantees 240 108 35 – 97
Performance guarantees 33 33 – – –
Total commercial
commitments $ 11,484 $ 1,258 $ 2,499 $ 2,126 $ 5,601
The table above includes IAE’s gross obligation at December 31, 2012; our propor-
tionate share of IAE’s obligations was 61%. Refer to the Segment Review for addi-
tional discussion of our agreement with Rolls-Royce to restructure the IAE interests.
Other commercial aerospace commitments include amounts related to our agreement
with Embraer, which we announced on January 8, 2013, to power the next generation
Embraer E-Jet family.
In exchange for the increased ownership and collaboration
interests and intellectual property license, Pratt & Whitney paid
Rolls-Royce $1.5 billion at closing with additional payments due to
Rolls-Royce contingent upon each hour flown by the V2500-
powered aircraft in service as of June 29, 2012 during the fifteen
year period following closing of the purchase. These payments will
be capitalized as a collaboration intangible asset and amortized in
relation to the economic benefits received over the projected
remaining 30 year life of the V2500 program. The flight hour pay-
ments are included in other commercial aerospace commitments in
the table above. As previously reported, Pratt & Whitney entered
into a collaboration arrangement with MTU with respect to a portion
of the collaboration interest in IAE acquired from Rolls-Royce for
consideration of approximately $233 million with additional pay-
ments due to Pratt & Whitney in the future.
Refer to Notes 5, 16, and 18 to the Consolidated Financial
Statements for additional discussion on contractual and commer-
cial commitments.
MARKET RISK AND RISK MANAGEMENT
We are exposed to fluctuations in foreign currency exchange rates,
interest rates and commodity prices. To manage certain of those
exposures, we use derivative instruments, including swaps, forward
contracts and options. Derivative instruments utilized by us in our
hedging activities are viewed as risk management tools, involve little
complexity and are not used for trading or speculative purposes.
We diversify the counterparties used and monitor the concentration
of risk to limit our counterparty exposure.
We have evaluated our exposure to changes in foreign
currency exchange rates, interest rates and commodity prices in
our market risk sensitive instruments, which are primarily cash, debt
and derivative instruments, using a value at risk analysis. Based on
a 95% confidence level and a one-day holding period, at
December 31, 2012, the potential loss in fair value on our market
risk sensitive instruments was not material in relation to our financial
position, results of operations or cash flows. Our calculated value at
risk exposure represents an estimate of reasonably possible net
losses based on volatilities and correlations and is not necessarily
indicative of actual results. Refer to Notes 1, 9 and 14 to the Con-
solidated Financial Statements for additional discussion of foreign
currency exchange, interest rates and financial instruments.
Foreign Currency Exposures. We have a large volume of
foreign currency exposures that result from our international sales,
purchases, investments, borrowings and other international trans-
actions. International segment sales, including U.S. export sales,
averaged approximately $34 billion over the last three years. We
actively manage foreign currency exposures that are associated
with committed foreign currency purchases and sales and other
assets and liabilities created in the normal course of business at the