-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UTmqyGEGQofA21JY7amVb6vqA/3sX2KVAC9C3gmr8CXo8lbfluARiiqzANJ7Qyb2 Ue1QfrdziGoN1DdYr/1Qyg== 0000101829-98-000041.txt : 19980727 0000101829-98-000041.hdr.sgml : 19980727 ACCESSION NUMBER: 0000101829-98-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980724 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED TECHNOLOGIES CORP /DE/ CENTRAL INDEX KEY: 0000101829 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT ENGINES & ENGINE PARTS [3724] IRS NUMBER: 060570975 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00812 FILM NUMBER: 98670906 BUSINESS ADDRESS: STREET 1: UNITED TECHNOLOGIES BLDG STREET 2: ONE FINANCIAL PLZ CITY: HARTFORD STATE: CT ZIP: 06101 BUSINESS PHONE: 2037287000 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TECHNOLOGIES MICROELECTRONICS CENTER DATE OF NAME CHANGE: 19850825 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TECHNOLOGIES CORP DATE OF NAME CHANGE: 19841205 10-Q 1 COMPANY 1ST QUARTER 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________________________to__________________________ Commission file number 1-812 UNITED TECHNOLOGIES CORPORATION DELAWARE 06-0570975 One Financial Plaza, Hartford, Connecticut 06101 (860) 728-7000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . At June 30, 1998 there were 228,029,546 shares of Common Stock outstanding. UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONTENTS OF QUARTERLY REPORT ON FORM 10-Q Quarter Ended June 30, 1998 Page Part I - Financial Information Item 1. Financial Statements: Condensed Consolidated Statement of Operations for the quarters ended June 30, 1998 and 1997 1 Condensed Consolidated Statement of Operations for the six months ended June 30, 1998 and 1997 2 Condensed Consolidated Balance Sheet at June 30, 1998 and December 31, 1997 3 Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 1998 and 1997 4 Notes to Condensed Consolidated Financial Statements 5 Report of Independent Accountants 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Position 9 Part II - Other Information Item 1. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Exhibit Index 1 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Quarter Ended June 30, In Millions of Dollars (except per share amounts) 1998 1997 Revenues: Product sales $ 5,333 $ 5,146 Service sales 1,347 1,286 Financing revenues and other income, net (15) 51 6,665 6,483 Costs and expenses: Cost of products sold 4,131 4,081 Cost of services sold 847 807 Research and development 320 316 Selling, general and administrative 750 727 Interest 47 49 6,095 5,980 Income before income taxes and minority interests 570 503 Income taxes 182 162 Minority interests 28 37 Net Income $ 360 $ 304 Earnings per share of common stock: Basic $ 1.54 $ 1.26 Diluted $ 1.44 $ 1.19 Dividends per share of common stock $ .36 $ .31 Average number of shares outstanding (in thousands) Basic 229,132 235,831 Diluted 249,098 255,024
See accompanying Notes to Condensed Consolidated Financial Statements 2 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Six Months Ended June 30, In Millions of Dollars (except per share amounts) 1998 1997 Revenues: Product sales $ 10,058 $ 9,791 Service sales 2,646 2,527 Financing revenues and other income, net 72 99 12,776 12,417 Costs and expenses: Cost of products sold 7,918 7,841 Cost of services sold 1,672 1,583 Research and development 628 587 Selling, general and administrative 1,481 1,429 Interest 96 97 11,795 11,537 Income before income taxes and minority interests 981 880 Income taxes 313 286 Minority interests 48 66 Net Income $ 620 $ 528 Earnings per share of common stock: Basic $ 2.63 $ 2.17 Diluted $ 2.48 $ 2.05 Dividends per share of common stock $ .67 $ .62 Average number of shares outstanding (in thousands): Basic 229,240 236,574 Diluted 248,923 255,588
See accompanying Notes to Condensed Consolidated Financial Statements 3 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET
June 30, December 31, In Millions of Dollars 1998 1997 (Unaudited)
Assets
Cash and cash equivalents $ 718 $ 755 Accounts receivable, net 4,259 3,789 Inventories and contracts in progress, net 3,073 3,173 Future income tax benefits 1,279 1,111 Other current assets 284 420 Total Current Assets 9,613 9,248 Fixed assets 10,622 10,655 Less - accumulated depreciation (6,491) (6,393) 4,131 4,262 Other assets 3,714 3,209 Total Assets $ 17,458 $ 16,719
Liabilities and Shareowners' Equity
Short-term borrowings $ 221 $ 217 Accounts payable 2,043 1,978 Accrued liabilities 5,318 4,993 Long-term debt currently due 100 123 Total Current Liabilities 7,682 7,311 Long-term debt 1,221 1,275 Future pension and postretirement benefit obligations 1,279 1,267 Other long-term liabilities 2,533 2,343 Series A ESOP Convertible Preferred Stock 849 865 ESOP deferred compensation (397) (415) 452 450 Shareowners' Equity: Common Stock 2,604 2,488 Treasury Stock (2,746) (2,472) Retained earnings 4,981 4,558 Accumulated other non-shareowner changes in equity (548) (501) 4,291 4,073 Total Liabilities and Shareowners' Equity $ 17,458 $ 16,719
See accompanying Notes to Condensed Consolidated Financial Statements 4 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended June 30, In Millions of Dollars 1998 1997 Operating activities: Net income $ 620 $ 528 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 428 430 Deferred income tax benefit (165) (165) Change in: Accounts receivable (385) (179) Inventories and contracts in progress 172 41 Accounts payable and accrued liabilities 379 244 Other current assets 123 64 Other, net 130 129 Net cash flows provided by operating 1,302 1,092 activities Investing activities: Capital expenditures (329) (350) Acquisitions of business units (434) (101) Dispositions of business units - 35 (Increase) decrease in customer financing assets, net (125) 25 Other, net 33 91 Net cash flows used in investing activities (855) (300) Financing activities: Issuance of long-term debt 2 1 Repayments of long-term debt (81) (56) Increase (decrease) in short-term borrowings, net 5 (8) Dividends paid on Common Stock (154) (147) Common stock repurchase (277) (302) Other, net 36 29 Net cash flows used in financing activities (469) (483) Effect of foreign exchange rate changes on Cash and cash equivalents (15) (23) Net (decrease) increase in cash and cash (37) 286 equivalents Cash and cash equivalents, beginning of year 755 1,127 Cash and cash equivalents, end of period $ 718 $ 1,413
See accompanying Notes to Condensed Consolidated Financial Statements 5 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Condensed Consolidated Financial Statements at June 30, 1998 and for the quarters and six-month periods ended June 30, 1998 and 1997 are unaudited, but in the opinion of the Corporation include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. In the first quarter of 1998, the Corporation adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The Statement requires disclosure of total non-shareowner changes in equity in interim periods and additional disclosures of the components of non-shareowner changes in equity on an annual basis. Total non-shareowner changes in equity includes all changes in equity during a period except those resulting from investments by and distributions to shareowners. The specific components include: net income, deferred gains and losses resulting from foreign currency translation and minimum pension liability adjustments. Total non-shareowner changes in equity were $310 million and $573 million in the second quarter and six-month period of 1998, compared to $291 million and $416 million in the same periods of 1997. In June of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" which must be adopted by January 1, 2000. The Corporation is evaluating the impact of the new requirement. At this time, management does not expect implementation will result in a material impact on the Corporation's financial position, results of operations or cash flows. Contingent Liabilities While there has been no significant change in the Corporation's material contingencies during 1998, the matters previously described in Note 14 of the Notes to Consolidated Financial Statements in the Corporation's Annual Report, incorporated by reference in the Corporation's Annual Report on Form 10-K for calendar year 1997, are summarized below. Environmental The Corporation's operations are subject to environmental regulation by federal, state, and local authorities in the United States and regulatory authorities with jurisdiction over its foreign operations. Environmental investigatory, remediation, operating and maintenance costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. Where no amount within a range of estimates is more likely, the minimum is accrued. Otherwise, the most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site including existing technology, current laws and regulations and prior remediation experience. For sites with multiple responsible parties, the Corporation considers its likely proportionate share of the anticipated remediation costs and the ability of the other parties to fulfill their obligations in establishing a provision for those costs. Liabilities with fixed or reliably determinable future cash payments are discounted. The Corporation has had insurance in force over its history with a number of insurance companies and has commenced litigation seeking indemnity and defense 6 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES under these insurance policies in relation to its environmental liabilities. The litigation is expected to last several years. Environmental liabilities are not reduced by potential insurance reimbursements. As discussed above, the Corporation has accrued for the costs of environmental remediation activities and periodically reassesses these amounts. Management believes that losses materially in excess of amounts accrued are not reasonably possible. U.S. Government The Corporation is now and believes that, in light of the current government contracting environment, it will be the subject of one or more government investigations. If the Corporation or one of its business units were charged with wrongdoing as a result of any of these investigations, the Corporation or one of its business units could be suspended from bidding on or receiving awards of new government contracts pending the completion of legal proceedings. If convicted or found liable, the Corporation could be fined and debarred from new government contracting for a period generally not to exceed three years. Any contracts found to be tainted by fraud could be voided by the Government. The Corporation's contracts with the U.S. Government are also subject to audits. Like many defense contractors, the Corporation has received audit reports which recommend that certain contract prices should be reduced to comply with various government regulations. Some of these audit reports involve substantial amounts. The Corporation has made voluntary refunds in those cases it believes appropriate. Other The Corporation extends performance and operating cost guarantees, which are beyond its normal warranty and service policies, for extended periods on some of its products, particularly commercial aircraft engines. Liability under such guarantees is contingent upon future product performance and durability. The Corporation has accrued its estimated liability that may result under these guarantees. The Corporation also has other commitments and contingent liabilities related to legal proceedings and matters arising out of the normal course of business. The Corporation has accrued its liability for environmental investigatory, remediation, operating and maintenance costs, performance guarantees and other litigation and claims based on management's estimate of the probable outcome of these matters. While it is possible that the outcome of these matters may differ from the recorded liability, management believes that resolution of these matters will not have a material adverse effect upon either results of operations, cash flows, or financial position of the Corporation. 7 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES Earnings Per Share Quarter Ended Six Months Ended June 30, June 30, In Millions of Dollars (except per share 1998 1997 1998 1997 amounts) [S] [C] [C] Net Income $ 360 $ 304 $ 620 $ 528 ESOP Stock dividends (8) (8) (16) (16) Basic earnings 352 296 604 512 ESOP Stock adjustment 7 7 13 13 Diluted earnings $ 359 $ 303 $ 617 $ 525 Average shares (thousands): Basic 229,132 235,831 229,240 236,574 Stock awards 6,408 6,005 6,115 5,906 ESOP Stock 13,558 13,188 13,568 13,108 Diluted 249,098 255,024 248,923 255,588 Basic earnings per $ 1.54 $ 1.26 $ 2.63 $ 2.17 share Diluted earnings per $ 1.44 $ 1.19 $ 2.48 $ 2.05 share 8 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES With respect to the unaudited condensed consolidated financial information of United Technologies Corporation for the quarters and six-month periods ended June 30, 1998 and 1997, PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated July 22, 1998 appearing below, states that they did not audit and they do not express an opinion on that unaudited condensed consolidated financial information. PricewaterhouseCoopers has not carried out any significant or additional audit tests beyond those which would have been necessary if their report had not been included. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers is not subject to the liability provisions of section 11 of the Securities Act of 1933 ("the Act") for their report on the unaudited condensed consolidated financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers within the meaning of sections 7 and 11 of the Act. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareowners of United Technologies Corporation We have reviewed the accompanying condensed consolidated statement of operations of United Technologies Corporation and consolidated subsidiaries for the quarters and six months ended June 30, 1998 and 1997, the condensed consolidated statement of cash flows for the six months ended June 30, 1998 and 1997, and the condensed consolidated balance sheet as of June 30, 1998. This financial information is the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial information for it to be in conformity with generally accepted accounting principles. We previously audited in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1997, and the related consolidated statements of operations, of changes in shareowners' equity and of cash flows for the year then ended (not presented herein), and in our report dated January 22, 1998 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP Hartford, Connecticut July 22, 1998 9 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL POSITION BUSINESS ENVIRONMENT The Corporation's operations are classified into five principal business segments. Otis, Carrier and UT Automotive subsidiaries serve customers in the commercial property, residential housing and automotive industries. Pratt & Whitney and the Flight Systems segment, which includes Sikorsky Aircraft and Hamilton Standard, serve commercial and government customers in the aerospace industry. As worldwide businesses, these operations are affected by global and regional economic factors. However, the diversity of the Corporation's businesses and global market presence has helped limit the impact of any one industry or the economy of any single country on the consolidated results. Economic growth rates in the Asia Pacific region slowed during the latter part of 1997. Tightening of credit in Asia has restricted available financing for new construction and slowed the completion of projects currently underway, resulting in less activity compared to recent years. While recognizing that the Asian economic downturn may continue beyond 1998, management believes the long- term economic growth prospects of the region remain intact. Therefore, the Corporation's Asian investment strategy continues to focus on the long-term infrastructure requirements of the region. U.S. residential housing starts increased in the second quarter and six-month period of 1998 compared to the same periods of 1997. Commercial construction activity was essentially flat in the second quarter while increasing in the six-month period of 1998 compared to the same periods of 1997. U.S. commercial property vacancy rates continued to improve. North American car and light truck production was lower in the second quarter and six-month period of 1998 compared to the same periods of 1997, primarily as a result of the General Motors strike. European car sales increased in the second quarter and six-month period of 1998 compared to the same periods of 1997. Worldwide airline profits, traffic growth and load factors have been a reliable indicator for new aircraft and after-market orders. U.S. and European airlines are experiencing strong levels of profitability driven primarily by higher traffic growth, improved yields and major cost reduction programs. Airlines in the Asia Pacific region have suffered declines in operating results reflecting weaker local economies. This erosion in earnings has resulted in a decrease in new orders for aerospace products and cancellations or deferrals of existing orders throughout the industry. The defense portion of the Corporation's aerospace businesses continues to respond to a changing global political environment. The U.S. defense industry continues to downsize and consolidate in response to continued pressure on U.S. defense spending. 10 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS Consolidated revenues and margin percentages were as follows:
Quarter Ended Six Months Ended June 30, June 30, In Millions of Dollars 1998 1997 1998 1997 Sales $ 6,680 $ 6,432 $ 12,704 $ 12,318 Financing revenues and other income, net (15) 51 72 99 Revenues $ 6,665 $ 6,483 $ 12,776 $ 12,417 Gross margin % 25.5% 24.0% 24.5% 23.5%
Consolidated revenues for the second quarter and six-month period of 1998 increased 3% over the same periods of 1997. Excluding the unfavorable impact of foreign currency translation, revenues would have increased 5% in both the second quarter and six-month period of 1998 compared to the same periods of 1997, driven by growth at Carrier, Pratt & Whitney and Flight Systems. Financing revenues and other income, net, decreased $66 million and $27 million in the second quarter and six-month period of 1998 from the same periods of 1997. The second quarter results reflect costs of Pratt & Whitney's repurchase of a small interest from a participant in a commercial engine program and lower interest income. The year-to-date amounts also include the favorable settlement of a contract dispute with the U.S. Government which occurred in the first quarter of 1998. Gross margin as a percentage of sales increased 1.5 and 1.0 percentage points in the second quarter and six-month period of 1998 compared to the same periods of 1997, primarily due to improvements at Pratt & Whitney and UT Automotive. Research and development expenses increased $4 million (1%) and $41 million (7%) in the second quarter and six-month period of 1998 compared to 1997. The increase in the six-month period is due to higher expenses in all segments, but principally Pratt & Whitney and UT Automotive. As a percentage of sales, research and development was 4.8% and 4.9% in the second quarter and six-month period of 1998 compared to 4.9% and 4.8% in the second quarter and six-month period of 1997. Research and development expenses in 1998 are expected to increase from 1997, but are expected to be approximately 5% of sales. Selling, general and administrative expenses increased $23 million (3%) and $52 million (4%) in the second quarter and six-month period of 1998 over the same periods of 1997 primarily due to increases at Carrier, largely due to acquisitions and Pratt & Whitney. These expenses decreased as a percentage of sales to 11.2% in the second quarter of 1998 from 11.3% in the second quarter of 1997 while increasing as a percentage of sales to 11.7% in the six-month period of 1998 from 11.6% in the six-month period of 1997. The effective tax rate for the six-month period of 1998 was 31.9%, compared to an effective tax rate of 32.5% for the six-month period of 1997. The Corporation has continued to lower its effective income tax rate by implementing tax reduction strategies. 11 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES Revenues and operating profits of the Corporation's principal business segments for the quarters and six-month periods ended June 30, 1998 and 1997 are as follows (in millions of dollars):
Operating Revenues Operating Profits Profit Margin 1998 1997 1998 1997 1998 1997 Quarter Ended June 30, Otis $ 1,337 $ 1,397 $ 140 $ 133 10.5% 9.5% Carrier 1,878 1,691 195 167 10.4% 9.9% UT Automotive 756 782 45 33 6.0% 4.2% Pratt & Whitney 1,974 1,944 248 210 12.6% 10.8% Flight Systems 756 685 73 70 9.7% 10.2% Six Months Ended June 30, Otis $ 2,659 $ 2,765 $ 238 $ 264 9.0% 9.5% Carrier 3,376 3,078 213 237 6.3% 7.7% UT Automotive 1,485 1,523 94 64 6.3% 4.2% Pratt & Whitney 3,890 3,663 541 392 13.9% 10.7% Flight Systems 1,432 1,420 138 141 9.6% 9.9%
Otis revenues decreased 4% in the second quarter and six-month period of 1998 compared to 1997. Excluding the unfavorable impact of foreign currency translation, revenues would have been flat in the second quarter and increased 1% in the six-month period of 1998, with increases in Europe and the Americas, largely offset by declines in Asia. Otis operating profits increased $7 million (5%) in the second quarter and decreased $26 million (10%) in the six-month period of 1998 compared to 1997. The increase in the second quarter of 1998 reflects improvements in Europe and the Americas, partially offset by declines in Asia and the unfavorable impact of foreign currency translation. The 1998 year-to-date results include charges in the first quarter related to salaried workforce reductions and the consolidation of manufacturing and engineering facilities. Excluding these charges, 1998 year-to-date operating profits increased. Carrier revenues increased 11% and 10% in the second quarter and six-month period of 1998 compared to 1997. Excluding the unfavorable impact of foreign currency translation, revenues would have increased 15% and 14% in the second quarter and six-month period of 1998, due to the impact of 1997 acquisitions and increases in the Americas, Europe and transport refrigeration operations, partially offset by declines in Asia. Carrier operating profits increased $28 million (17%) in the second quarter and decreased $24 million (10%) in the six-month period of 1998 compared to 1997. The 1998 second quarter results reflect improvement in the transport refrigeration operations, the Americas, Europe and the impact of 1997 acquisitions, partially offset by declines in Asia and the unfavorable impact of foreign currency translation. The 1998 year-to-date results include charges in the first quarter related to workforce reductions, plant closures and implementation of a new manufacturing strategy in the rotary chiller business. Excluding these charges, 1998 year-to-date operating profits increased. 12 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES UT Automotive revenues decreased 3% and 2% in the second quarter and six- month period of 1998 compared to 1997 reflecting declines in the electrical and interiors businesses and the unfavorable impact of foreign currency translation, partially offset by improvement in Europe. UT Automotive operating profits increased $12 million (36%) and $30 million (47%) in the second quarter and six-month period of 1998 compared to 1997. The second quarter results reflect improvement in the interiors business and in Europe, partially offset by declines in the electrical business. In addition, the 1997 second quarter results included charges related to administrative workforce reductions and a provision for a plant closure. The six-month results reflect improvement in all businesses. The strike at General Motors did not have a significant impact on second quarter 1998 results. However, the loss of General Motors volume for an extended period could have a negative effect on UT Automotive's financial performance, although any impact on the Corporation as a whole would not be significant. Pratt & Whitney revenues increased 2% and 6% in the second quarter and six- month period of 1998 compared to 1997. The 1998 second quarter increase reflects higher U.S. Government development revenues, commercial engine shipments and volumes in the after-market business. The six-month results also reflect the favorable settlement of a contract dispute with the U.S. Government which occurred in the first quarter of 1998. Operating profits for Pratt & Whitney increased $38 million (18%) and $149 million (38%) in the second quarter and six-month period of 1998 compared to 1997, reflecting higher commercial engine margins and after-market volumes, partially offset by the cost to repurchase a small interest from a participant in a commercial engine program and higher selling, general and administrative expenses. The six-month results also reflect the favorable settlement of a contract dispute with the U.S. Government which occurred in the first quarter of 1998. Flight Systems revenues increased 10% and 1% in the second quarter and six- month period of 1998 compared to 1997, primarily due to increased revenues at Hamilton Standard which were also favorably impacted by the first quarter 1998 acquisition of a French aerospace components manufacturer. Lower helicopter shipments at Sikorsky in the first quarter impacted the six-month results. Operating profits for Flight Systems increased $3 million (4%) in the second quarter while decreasing $3 million (2%) in the six-month period of 1998 compared to 1997. The second quarter increase is due to improvements at Hamilton Standard, which was favorably impacted by the first quarter 1998 acquisition of a French aerospace components manufacturer offset by a charge for workforce and other cost reduction actions. In the six-month period of 1998, declines at Sikorsky were largely offset by improvement at Hamilton Standard. 13 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES FINANCIAL POSITION AND LIQUIDITY Management assesses the Corporation's liquidity in terms of its overall ability to generate cash to fund its operating and investing activities. Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, acquisitions, customer financing requirements, common stock repurchases, adequate bank lines of credit, and financial flexibility to attract long-term capital on satisfactory terms. Set forth below is selected key cash flow data:
Six Months Ended June 30, In Millions of Dollars 1998 1997 Operating Activities Net cash flows from operating activities $ 1,302 $ 1,092 Investing Activities Capital expenditures (329) (350) Acquisitions of business units (434) (101) Dispositions of business units - 35 (Increase) decrease in customer financing (125) 25 assets, net Financing Activities Common Stock repurchase (277) (302) Decrease in total debt (73) (52) Decrease in net debt (36) (338)
Cash flows provided by operating activities were $1,302 million during the first six months of 1998 compared to $1,092 million for the first six months of 1997. The improvement resulted from improved operating and working capital performance. Cash flows used in investing activities were a use of funds of $855 million during the first six months of 1998 compared to a use of $300 million in the first six months of 1997. Capital expenditures in the six-month period of 1998 were $329 million, a $21 million decrease from the corresponding period of 1997. The Corporation invested $434 million in the acquisition of businesses, including Pratt & Whitney's investment in an overhaul and repair joint venture in Singapore, Hamilton Standard's acquisition of a French aerospace components manufacturer and Carrier's investment in an air conditioning manufacturer in the Philippines. Customer financing activity was a net use of cash of $125 million in the six-month period of 1998, compared to a net source of cash of $25 million in 1997, primarily as a result of first quarter 1998 funding for an airline customer. While the Corporation expects 1998 customer financing activity will be a net use of funds, actual funding is subject to usage under existing customer financing commitments during the remainder of the year. The Corporation's total commitments to finance or arrange financing of commercial aircraft and related equipment at June 30, 1998 were approximately $1.1 billion. The Corporation repurchased $277 million of common stock, representing 3.1 million shares, in the first six months of 1998 under previously announced stock 14 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES repurchase programs. Share repurchase continues to be a significant use of the Corporation's strong cash flows and serves to offset the dilutive effect resulting from the issuance of stock under stock-based employee benefit programs. Other selected financial data is as follows:
June 30, December 31, June 30, In Millions of Dollars 1998 1997 1997 Cash and cash equivalents $ 718 $ 755 $ 1,413 Total debt 1,542 1,615 1,733 Net debt (total debt less cash) 824 860 320 Shareowners' equity 4,291 4,073 4,333 Debt-to-total capitalization 26% 28% 29% Net debt-to-total capitalization 16% 17% 7%
The Corporation manages its worldwide cash requirements considering available funds among the many subsidiaries through which it conducts its business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of the Corporation's subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations. The Corporation has and will continue to transfer cash from those subsidiaries to the parent and to other international subsidiaries when it is cost effective to do so. Management believes that its existing cash position and other available sources of liquidity are sufficient to meet current and anticipated requirements for the foreseeable future. Management anticipates the level of debt-to-capital will increase during the balance of the year in order to satisfy its various cash flow requirements, including acquisition spending and continued share repurchases. YEAR 2000 The Corporation continues to assess its exposure related to the impact of the Year 2000 date issue which is attributable to the fact that many computer programs use only two digits to identify a year in a date field. The Corporation's products and key financial and operational systems are being reviewed and, where required, detailed plans have been, or are being, developed and implemented on a schedule intended to permit the Corporation's computer systems and products to continue to function properly. The Year 2000 date conversion effort is expected to increase costs in 1998, 1999 and 2000. Based on the information obtained to date, management does not expect these conversion costs will have a material adverse impact on the Corporation's financial position, results of operations or cash flows. The schedule for completion and the estimated conversion costs are based on management's estimates, which include assumptions of future events, including items such as availability of qualified resources. The Corporation could be adversely impacted by the Year 2000 date issue if the conversion schedule and cost estimates for its internal systems are not met or if suppliers, customers and other businesses do not address this issue successfully. Management continues to assess these risks in order to reduce the impact on the Corporation. 15 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES SAFE HARBOR STATEMENT This report on Form 10-Q contains statements which, to the extent they are not historical fact, constitute "forward looking statements" under the securities laws. All forward looking statements involve risks, uncertainties and other factors that may cause the actual results, performance and achievements of the Corporation to differ materially from those contemplated or projected, forecasted, estimated, budgeted, expressed or implied by or in such forward looking statements. The forward looking statements in this document are intended to be subject to the safe harbor protection provided under the securities laws. For additional information identifying economic, political, climatic, currency, regulatory, technological, competitive and some other important factors which may affect the Corporation's operations, products and markets and could cause actual results to vary materially from those anticipated in the forward looking statements, see the Corporation's Securities and Exchange Commission filings, including, but not limited to, the discussion included in the Business section of the Corporation's 1997 Annual Report on Form 10-K under the headings "Description of Business by Industry Segment" and "Other Matters Relating to the Corporation's Business as a Whole". 16 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES Part II - Other Information Item 1 - Legal Proceedings There have been no material developments with respect to legal proceedings during the second quarter of 1998. For a description of previously reported legal proceedings, refer to Part 1, Item 3 - Legal Proceedings of the Corporation's Annual Report on Form 10-K for calendar year 1997 and Part II, Item 1 - Legal Proceedings of the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. Item 4 - Submission of Matters to a Vote of Security Holders (a) The Corporation held its Annual Meeting of Shareowners on April 30, 1998. (b) The following individuals were nominated and elected to serve as directors: Antonia H. Chayes, George David, Charles W. Duncan, Jr., Jean-Pierre Garnier, Pehr G. Gyllenhammar, Karl J. Krapek, Charles R. Lee, Robert H. Malott, William J. Perry, Frank P. Popoff, Andre Villeneuve, Harold A. Wagner, and Jacqueline G. Wexler. (c) The Shareowners voted as follows on the following matters: 1. Election of directors. The voting result for each nominee is as follows: NAME VOTES FOR VOTES WITHHELD Antonia Handler Chayes 227,986,969 936,048 George David 228,029,823 893,194 Charles W. Duncan, Jr. 228,019,982 903,035 Jean-Pierre Garnier 228,110,006 813,011 Pehr G. Gyllenhammar 226,180,428 2,742,589 Karl J. Krapek 227,994,595 928,422 Charles R. Lee 228,108,621 814,396 Robert H. Malott 228,025,627 897,390 William J. Perry 228,037,717 885,300 Frank P. Popoff 228,094,618 828,399 Andre Villeneuve 228,116,964 806,053 Harold A. Wagner 228,119,751 803,266 Jacqueline G. Wexler 227,941,801 981,216 17 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES 2. The reappointment of the Corporation's independent public accountants was approved by a count of 227,813,019 votes for, 737,384 votes against, and 372,614 votes abstaining. 3. A shareowner proposal recommending that the Corporation adopt term limits for future outside directors was rejected by a count of 6,512,118 votes for and 195,922,937 votes against, with 10,099,630 votes abstaining and 16,388,332 broker non-votes. 4. A shareowner proposal recommending that the Corporation adopt criteria for the bidding, acceptance and implementation of military contracts was rejected by a count of 27,981,294 votes for and 169,352,199 votes against, with 15,201,192 votes abstaining and 16,388,332 broker non-votes. 5. A shareowner proposal recommending that the Corporation establish guidelines and reporting provisions for corporate political contributions was rejected by a count of 20,361,451 votes for and 186,627,009 votes against, with 5,546,225 votes abstaining and 16,388,332 broker non-votes. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits: (12) Statement re computation of ratio of earnings to fixed charges. (15) Letter re unaudited interim financial information. (27) Financial data schedule (submitted electronically herewith). (b) No Reports on Form 8-K were filed during the quarter ended June 30, 1998. 18 UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED TECHNOLOGIES CORPORATION Dated: July 24, 1998 By: /s/ David J. FitzPatrick David J. FitzPatrick Senior Vice President and Chief Financial Officer Dated: July 24, 1998 By: /s/ Jay L. Haberland Jay L. Haberland Vice President and Controller Dated: July 24, 1998 By: /s/ William H. Trachsel William H. Trachsel Senior Vice President, General Counsel and Secretary UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES EXHIBIT INDEX Exhibit 12 - Statement re computation of ratio of earnings to fixed charges Exhibit 15 - Letter re unaudited interim financial information Exhibit 27 - Financial data schedule (submitted electronically herewith) PAGE EX-12 2 Exhibit 12
UNITED TECHNOLOGIES CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Six Months Ended June 30, In Millions of Dollars 1998 1997 Fixed Charges: Interest on indebtedness $ 96 $ 97 Interest capitalized 6 5 One-third of rents* 41 43 Total Fixed Charges $ 143 $ 145 Earnings: Income before income taxes and minority interests $ 981 $ 880 Fixed charges per above 143 145 Less: interest capitalized (6) (5) 137 140 Amortization of interest capitalized 16 19 Total Earnings $ 1,134 $ 1,039 Ratio of Earnings to Fixed Charges 7.93 7.17 * Reasonable approximation of the interest factor. /TABLE EX-15 3 Exhibit 15 July 24, 1998 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Ladies and Gentlemen: We are aware that United Technologies Corporation has included our report dated July 22, 1998 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) in the Prospectus constituting part of its Registration Statements on Form S-3 (Nos. 333-26331, 33-46916, 33-40163, 33-34320, 33-31514, 33-29687, and 33-6452) and in the Registration Statements on Form S-8 (Nos. 333- 21853, 333-18743, 333-21851, 33-57769, 33-45440, 33-11255, 33-26580, 33-26627, 33-28974, 33-51385, 33-58937 and 2-87322). We are also aware of our responsibilities under the Securities Act of 1933. Yours very truly, PricewaterhouseCoopers LLP EX-27 4
5 This schedule contains summary financial information extracted from the Condensed Consolidated Balance Sheet at June 30, 1998 (Unaudited) and the Condensed Consolidated Statement of Operations for the six months ended June 30, 1998 (Unaudited) and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 718 0 4,642 383 3,073 9,613 10,622 6,491 17,458 7,682 1,221 452 0 2,604 1,687 17,458 10,058 12,776 7,918 9,590 628 0 96 981 313 620 0 0 0 620 2.63 2.48 The [EPS-PRIMARY] amount represents BASIC earnings per share and the [EPS-DILUTED] amount represents DILUTED earnings per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share.
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