United Technologies 2012 Annual Report Download - page 68

66 UNITED TECHNOLOGIES CORPORATION
Preliminary Allocation of Consideration Transferred to Net
Assets Acquired:
The following amounts represent the preliminary determi-
nation of the fair value of identifiable assets acquired and liabilities
assumed from the Goodrich acquisition. The final determination of
the fair value of certain assets and liabilities will be completed within
the one year measurement period from the date of acquisition as
required by the FASB ASC Topic 805, “Business Combinations”.
The size and breadth of the Goodrich acquisition will necessitate
the use of this measurement period to adequately analyze and
assess a number of the factors used in establishing the asset and
liability fair values as of the acquisition date including the significant
contractual and operational factors underlying the customer
relationship intangible asset; the final negotiated sales values for
businesses that are required to be sold as part of the regulatory
approval of the Goodrich acquisition; the assumptions underpinning
certain reserves such as those for environmental obligations, and
the related tax impacts of any changes made. Any potential
adjustments made could be material in relation to the preliminary
values presented below:
(DOLLARS IN MILLIONS)
Cash and cash equivalents $ 538
Accounts receivable, net 1,182
Inventories and contracts in progress, net 1,729
Future income tax benefits, current 280
Other assets, current 574
Fixed assets 2,342
Intangible assets:
Customer relationships and related program assets 8,550
Trademarks 1,550
Other assets 1,831
Short-term borrowings (83)
Accounts payable (443)
Accrued liabilities (2,242)
Long-term debt (2,961)
Future pension and postretirement benefit obligations (1,745)
Other long-term liabilities:
Customer contractual obligations (2,050)
Other long-term liabilities (3,758)
Non-controlling interests (41)
Total identifiable net assets 5,253
Goodwill 11,167
Total consideration transferred $ 16,420
In order to allocate the consideration transferred for Good-
rich, the fair values of all identifiable assets and liabilities needed to
be established. For accounting and financial reporting purposes,
fair value is defined under FASB ASC Topic 820, “Fair Value Meas-
urements and Disclosures” as the price that would be received
upon sale of an asset or the amount paid to transfer a liability in an
orderly transaction between market participants at the measure-
ment date. Market participants are assumed to be buyers and sell-
ers in the principal (most advantageous) market for the asset or
liability. Additionally, fair value measurements for an asset assume
the highest and best use of that asset by market participants. Use
of different estimates and judgments could yield different results.
In determining the fair value of identifiable assets acquired
and liabilities assumed, a review was conducted for any significant
contingent assets or liabilities existing as of the acquisition date.
The preliminary assessment did not note any significant con-
tingencies related to existing legal or government action. Based
upon our existing practices and phase II environmental assess-
ments done on a number of Goodrich sites, we determined that
environmental liability obligations of $232 million were assumed in
connection with the acquisition.
The fair values of the customer relationship and related
program intangible assets, which include the related aerospace
program OEM and aftermarket cash flows, were determined by
using an “income approach” which is the most common valuation
approach utilized. Under this approach, the net earnings attribut-
able to the asset or liability being measured are isolated using the
discounted projected net cash flows. These projected cash flows
are isolated from the projected cash flows of the combined asset
group over the remaining economic life of the intangible asset or
liability being measured. Both the amount and the duration of the
cash flows are considered from a market participant perspective.
Our estimates of market participant net cash flows considered his-
torical and projected pricing, remaining developmental effort,
operational performance including company specific synergies,
aftermarket retention, product life cycles, material and labor pricing,
and other relevant customer, contractual and market factors.
Where appropriate, the net cash flows are probability-adjusted to
reflect the uncertainties associated with the underlying assump-
tions, as well as the risk profile of the net cash flows utilized in the
valuation. The probability-adjusted future cash flows are then dis-
counted to present value using an appropriate discount rate. The
customer relationship and related program intangible assets are
being amortized on a straight-line basis (which approximates the
economic pattern of benefits) over the estimated economic life of
theunderlyingprogramsof10to25years.
We also identified customer contractual obligations on
certain original equipment manufacturing (OEM) development pro-
grams where the expected costs exceed the expected revenue
under contract. We measured these liabilities under the measure-
ment provisions of FASB ASC Topic 820, “Fair Value Measure-
ments and Disclosures”, which is based on the price to transfer the
obligation to a market participant at the measurement date, assum-
ing that the liability will remain outstanding in the marketplace.
Based on the estimated net cash outflows of the OEM devel-
opmental programs plus a reasonable contracting profit margin
required to transfer the contracts to market participants, we
recorded assumed liabilities of approximately $2 billion. These