MD&A (cont.)

 

  As previously disclosed, the European Commission’s competition directorate conducted inspections in early 2004 at offices of UTC’s Otis subsidiary in Berlin, Brussels, Luxembourg and Paris. The inspections relate to the Commission’s ongoing investigation of possible unlawful collusive arrangements involving the elevator and escalator industry in Europe. UTC is cooperating fully with the Commission’s investigation. Based on the results of its own internal investigation, UTC believes that some Otis employees in limited European locations engaged in activities at a local level in violation of Otis and UTC policies, and may have violated applicable competition law. It is still too early in the Commission’s investigation for UTC to reasonably estimate the civil fines to which it would likely be subject. The aggregate amount of such fines, if ultimately imposed, could be material to UTC’s operating results for the period in which the liability would be recognized or cash flows for the period in which the fines would be paid. UTC does not believe that any such fines would have a material adverse effect on UTC’s financial condition, or that the resolution of this matter would have a material adverse effect on Otis’ competitive position.
   Additional discussion of UTC’s environmental, U.S. Government contract matters, product performance and other contingent liabilities is included in “Critical Accounting Estimates” and Notes 1, 14 and 15 to the Consolidated Financial Statements. For additional discussion of UTC’s legal proceedings, see Item 3 “Legal Proceedings” in UTC’s Form 10-K for 2004.

New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). The standard, which is effective for awards issued after June 15, 2005, requires that all equity-based compensation be recorded in the financial statements at the grant date fair value. UTC has elected to adopt the standard as of January 1, 2005 as permitted by the early adoption provisions in the standard. UTC will utilize the modified retrospective transition alternative and will restate its financial statements in 2005 for all periods presented.
   The impact of recording stock option expense on UTC and its seg­ments, and the impact on certain line items on the Statement of Operations is as follows:

(in millions of dollars, except per share amounts) 2004 2003
Otis $29 $31
Carrier 33 44
Chubb 6 1
Pratt & Whitney 38 41
Hamilton Sundstrand 20 21
Sikorsky 13 13
Total segment option expense 139 151
Eliminations & other 3 6
General corporate expenses 27 41
Impact on income before income taxes    
   and minority interest 169 198
Income taxes 54 73
Net income impact $115 $125
Diluted earnings per share $.23 $.25

   The increase to stock option expense described in the above table was determined using the Black-Scholes valuation model as disclosed, on a pro forma basis, in Note 1 to UTC’s Consolidated Financial Statements. UTC will utilize the binomial lattice fair value method, described in SFAS 123R, to value stock-based compensation beginning with awards granted in 2005. UTC expects its 2005 stock option expense to approximate 2004 levels. UTC does not expect the adoption of SFAS 123R to have a material impact on its cash flows or financial condition.

Cautionary Note Concerning Factors
That May Affect Future Results
This Annual Report contains statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements” under the securities laws. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These forward-looking statements are intended to provide management’s current expectations or plans for the future operating and financial performance of UTC, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as: “believe,” “expect,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate” and other words of similar meaning in connection with a discussion of future operating or financial performance. These include, among others, statements relating to:

  • Future earnings and other measurements of financial
    performance
  • Future cash flow and uses of cash
  • The effect of economic downturns or growth in particular regions
  • The effect of changes in the level of activity in particular industries or markets
  • The availability and cost of materials, components, services
    and supplies
  • The scope, nature or impact of acquisition activity and integration into UTC’s businesses
  • Product developments and new business opportunities
  • Restructuring costs and savings
  • The outcome of contingencies
  • Future repurchases of Common Stock
  • Future levels of indebtedness and capital spending
  • Pension plan assumptions and future contributions

   All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For additional information identifying factors that may cause actual results to vary materially from those stated in the forward-looking statements, see UTC’s reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission from time to time. UTC’s Annual Report on Form 10-K for 2004 includes important information as to risk factors in the “Business” section under the headings “Description of Business by Segment” and “Other Matters Relating to UTC’s Business as a Whole,” and in the “Legal Proceedings” section.


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