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Acquisitions, Dispositions, Goodwill and Other Intangible Assets | 9 Months Ended
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Sep. 30, 2019
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract] |
Acquisitions, Dispositions, Goodwill and Other Intangible Assets [Text Block] | Acquisitions, Dispositions, Goodwill and Other Intangible Assets Business Acquisitions. During the nine months ended September 30, 2019, our investment in business acquisitions was $39 million, which consisted of small acquisitions at Otis. On June 9, 2019, UTC entered into a merger agreement with Raytheon Company (“Raytheon”) providing for an all-stock merger of equals transaction. The Raytheon merger agreement provides, among other things, that each share of Raytheon common stock issued and outstanding immediately prior to the closing of the Raytheon merger (except for shares held by Raytheon as treasury stock) will be converted into the right to receive 2.3348 shares of UTC common stock. Upon the closing of the Raytheon merger, Raytheon will become a wholly-owned subsidiary of UTC, and UTC will change its name to Raytheon Technologies Corporation. On October 11, 2019, the shareowners of UTC and Raytheon approved the proposals necessary to complete the Raytheon merger. The Raytheon merger is expected to close in the first half of 2020 and is subject to customary closing conditions, including receipt of required regulatory approvals, as well as the completion of UTC's previously announced separation of its Otis and Carrier businesses. On November 26, 2018, we completed the acquisition of Rockwell Collins (the "Rockwell Acquisition"), a leader in aviation and high-integrity solutions for commercial and military customers as well as leading-edge avionics, flight controls, aircraft interior and data connectivity solutions. Under the terms of the Rockwell acquisition agreement, each share of common stock, par value $0.01 per share, of Rockwell Collins issued and outstanding immediately prior to the effective time of the Rockwell Acquisition (other than shares held by Rockwell Collins, the Company, Riveter Merger Sub Corp or any of their respective wholly owned subsidiaries) was converted into the right to receive (1) $93.33 in cash, without interest, and (2) 0.37525 shares of Company common stock (together, the “Acquisition Consideration”), less any applicable withholding taxes, with cash paid in lieu of fractional shares. The total aggregate consideration payable in the Rockwell Acquisition was $15.5 billion in cash ($14.9 billion net of cash acquired) and 62.2 million shares of Company common stock. In addition, $7.8 billion of Rockwell Collins debt was outstanding at the time of the Rockwell Acquisition. This equated to a total enterprise value of $30.6 billion, including the $7.8 billion of Rockwell Collins' outstanding debt.
(dollars in millions) |  | Amount
Cash consideration paid for Rockwell Collins outstanding common stock & equity awards |  | $ | 15,533 |
Fair value of UTC common stock issued for Rockwell Collins outstanding common stock & equity awards |  | 7,960 |
Total consideration transferred |  | $ | 23,493 |
The cash consideration utilized for the Rockwell Acquisition was partially financed through the previously disclosed issuance of $11.0 billion aggregate principal notes on August 16, 2018 for net proceeds of $10.9 billion. For the remainder of the cash consideration, we utilized repatriated cash and cash equivalents and cash flow generated from operating activities. Preliminary Allocation of Consideration Transferred to Net Assets Acquired: The following amounts represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Rockwell Collins acquisition. The final determination of the fair value of certain assets and liabilities will be completed up to a one year measurement period from the date of acquisition as required by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, “Business Combinations”. As of September 30, 2019, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed have not yet been finalized, including the validation of the underlying cash flows used to determine the fair value of the identified intangible assets. The size and breadth of the Rockwell Collins acquisition necessitates use of the one year measurement period to adequately analyze all the factors used in establishing the asset and liability fair values as of the acquisition date, including, but not limited to, intangible assets, inventory, real property, leases, deferred tax liabilities related to the unremitted earnings of foreign subsidiaries, certain reserves and the related tax impacts of any adjustments. The table below reflects adjustments recorded as of September 30, 2019. Any additional potential adjustments could be material in relation to the preliminary values presented below:
(dollars in millions) |
Cash and cash equivalents | $ | 640 |
Accounts receivable, net | 1,665 |
Inventory, net | 1,512 |
Contract assets, current | 291 |
Other assets, current | 252 |
Future income tax benefits | 38 |
Fixed assets, net | 1,558 |
Intangible assets: |
Customer relationships | 8,220 |
Tradenames/trademarks | 1,870 |
Developed technology | 600 |
Other assets | 217 |
Total identifiable assets acquired | 16,863 |
Short-term borrowings | 2,254 |
Accounts payable | 520 |
Accrued liabilities | 1,657 |
Contract liabilities, current | 299 |
Long-term debt | 5,530 |
Future pension and postretirement benefit obligation | 502 |
Other long-term liabilities | 3,464 |
Noncontrolling interest | 6 |
Total liabilities acquired | 14,232 |
Total identifiable net assets | 2,631 |
Goodwill | 20,862 |
Total consideration transferred | $ | 23,493 |
In order to allocate the consideration transferred for Rockwell Collins, the fair values of all identifiable assets and liabilities were established. For accounting and financial reporting purposes, fair value is defined under FASB ASC Topic 820, “Fair Value Measurements 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 measurement date. Market participants are assumed to be buyers and sellers 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. Fair value adjustments to Rockwell Collins' identified assets and liabilities resulted in an increase in inventory and fixed assets of $282 million and $256 million, respectively. 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 contingencies related to existing legal or government action. The fair values of the customer relationship and related program intangible assets, which include the related aerospace program original equipment ("OEM") and aftermarket cash flows, were determined by using an “income approach." Under this approach, the net earnings attributable 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 historical 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 assumptions as well as the risk profile of the net cash flows utilized in the valuation. The probability-adjusted future cash flows are then discounted 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 the underlying programs of 10 to 20 years. The developed technology intangible asset is being amortized over the economic pattern of benefit. The fair value of the tradename intangible assets were determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the valuation of the tradename and discounted to present value using an appropriate discount rate. The tradename intangible assets have been determined to have an indefinite life. The intangible assets included above consist of the following:
(dollars in millions) | Estimated Fair Value |  | Estimated Life
Acquired customer relationships | $ | 8,220 |  |  | 10-20 years
Acquired tradenames/trademarks | 1,870 |  |  | Indefinite
Acquired developed technology | 600 |  |  | 15 years
| $ | 10,690 |  |  |
We also identified customer contractual obligations on certain contracts with economic returns that are lower than could be realized in market transactions as of the acquisition date. We measured these liabilities under the measurement provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” which is based on the price to transfer the obligation to a market participant at the measurement date, assuming that the liability will remain outstanding in the marketplace. Based on the estimated net cash outflows of the programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, we recorded assumed liabilities of approximately $1,020 million. These liabilities will be liquidated in accordance with the underlying pattern of obligations, as reflected by the expenses incurred on the contracts. Total consumption of the contractual obligation for the next five years is expected to be as follows: $36 million remaining in 2019, $114 million in 2020, $101 million in 2021, $106 million in 2022, and $91 million in 2023. Acquisition-Related Costs: Acquisition-related costs have been expensed as incurred. In the nine months ended September 30, 2019 and 2018, approximately $30 million and $71 million, respectively, of transaction and integration costs have been incurred. These costs were recorded in Selling, general and administrative expenses within the Condensed Consolidated Statement of Operations. Supplemental Pro-Forma Data: Rockwell Collins' results of operations have been included in UTC’s financial statements for the period subsequent to the completion of the acquisition on November 26, 2018. Rockwell Collins contributed sales of approximately $6.9 billion and operating profit of approximately $1.1 billion for the nine months ended September 30, 2019. The following unaudited supplemental pro-forma data presents consolidated information as if the acquisition had been completed on January 1, 2017. The pro-forma results were calculated by combining the results of UTC with the stand-alone results of Rockwell Collins for the pre-acquisition periods, which were adjusted to account for certain costs that would have been incurred during this pre-acquisition period:
| Quarter Ended September 30, |  | Nine Months Ended September 30,
(dollars in millions, except per share amounts) | 2019 |  | 2018 |  | 2019 |  | 2018
Net sales | $ | 19,496 |  |  | $ | 18,664 |  |  | $ | 57,490 |  |  | $ | 54,795 |
Net income attributable to common shareowners | $ | 1,149 |  |  | $ | 1,455 |  |  | $ | 4,534 |  |  | $ | 5,196 |
Basic earnings per share of common stock | $ | 1.34 |  |  | $ | 1.70 |  |  | $ | 5.31 |  |  | $ | 6.09 |
Diluted earnings per share of common stock | $ | 1.33 |  |  | $ | 1.68 |  |  | $ | 5.25 |  |  | $ | 6.02 |
The unaudited supplemental pro-forma data above includes the following significant adjustments made to account for certain costs which would have been incurred if the acquisition had been completed on January 1, 2017, as adjusted for the applicable tax impact.
| Quarter Ended September 30, |  | Nine Months Ended September 30,
(dollars in millions) | 2019 |  | 2018 |  | 2019 |  | 2018
Amortization of inventory and fixed asset fair value adjustment 1 | $ | — |  |  | $ | (5 | ) |  | $ | 141 |  |  | $ | (15 | )
Amortization of acquired Rockwell Collins intangible assets, net 2 | — |  |  | (51 | ) |  | — |  |  | (156 | )
Utilization of contractual customer obligation 3 | — |  |  | 1 |  |  | — |  |  | 11 |
UTC/Rockwell Collins fees for advisory, legal, accounting services 4 | 1 |  |  | 17 |  |  | 4 |  |  | 60 |
Interest expense incurred on acquisition financing, net 5 | — |  |  | (40 | ) |  | — |  |  | (192 | )
Elimination of capitalized pre-production engineering amortization 6 | — |  |  | 20 |  |  | — |  |  | 51 |
Adjustment to net periodic pension cost 7 | — |  |  | 11 |  |  | — |  |  | 33 |
Adjustment to reflect the adoption of ASC 606 8 | — |  |  | 29 |  |  | — |  |  | 87 |
Elimination of entities held for sale 9 | — |  |  | (5 | ) |  | (5 | ) |  | (18 | )
| $ | 1 |  |  | $ | (23 | ) |  | $ | 140 |  |  | $ | (139 | )
1 | Reflects the elimination of the inventory step-up amortization recorded by UTC in 2019 as this would have been completed within the first two quarters of 2017. Additionally, this adjustment reflects the amortization of the fixed asset fair value adjustment as of the acquisition date.
2 | Reflects the additional amortization of the acquired Rockwell Collins' intangible assets recognized at fair value in purchase accounting and eliminates the historical Rockwell Collins intangible asset amortization expense.
3 | Reflects the additional amortization of liabilities recognized for acquired contracts with terms less favorable than could be realized in market transactions as of the acquisition date and eliminates Rockwell Collins historical amortization of these liabilities.
4 | Reflects the elimination of transaction-related fees incurred by UTC and Rockwell Collins in connection with the acquisition and assumes all of the fees were incurred during the first quarter of 2017.
5 | Reflects the additional interest expense incurred on debt to finance our acquisition of Rockwell Collins and reduces interest expense for the debt fair value adjustment which would have been amortized.
6 | Reflects the elimination of Rockwell Collins capitalized pre-production engineering amortization to conform to UTC policy.
7 | Reflects adjustments for the elimination of amortization of prior service cost and actuarial loss amortization, which was recorded by Rockwell Collins, as a result of fair value purchase accounting, net of the impact of the revised pension and post-retirement benefit (expense) as determined under UTC’s plan assumptions.
8 | Reflects adjustments to Rockwell Collins revenue recognition as if they adopted the New Revenue Standard as of January 1, 2018 and primarily relates to capitalization of contract costs and changes in timing of sales recognition for contracts requiring an over time method of revenue recognition, partially offset by deferral of revenue recognized on OEM product engineering and development.
9 | Reflects the elimination of entities required to be sold for regulatory approvals.
The unaudited supplemental pro-forma financial information does not reflect the potential realization of cost savings related to the integration of the two companies. Further, the pro-forma data should not be considered indicative of the results that would have occurred if the acquisition and related financing had been consummated on January 1, 2017, nor are they indicative of future results. Dispositions. Cash inflows related to dispositions during the nine months ended September 30, 2019 were $134 million and primarily consisted of the dispositions of businesses held for sale associated with the Rockwell Collins acquisition. In accordance with conditions imposed for regulatory approval of the acquisition, Rockwell Collins was required to dispose of certain businesses. These businesses were held separate from UTC’s and Rockwell Collins' ongoing businesses pursuant to regulatory requirements. Definitive agreements to sell each of the businesses were entered into prior to the completion of UTC's acquisition of Rockwell Collins. The related assets and liabilities of these businesses had been accounted for as held for sale at fair value less cost to sell. As of December 31, 2018, assets held for sale of $175 million were included within Other assets, current and liabilities held for sale of $40 million were included within Accrued liabilities on the Consolidated Balance Sheet. The major classes of assets and liabilities primarily include net Inventory of $51 million and net Fixed assets of $37 million. In the first quarter of 2019, Rockwell Collins completed the sale of all businesses which were held for sale as of December 31, 2018. On November 26, 2018, the Company announced its intention to separate into three independent companies. Following the separations, the Company will operate as an aerospace company comprised of Collins Aerospace Systems and the Pratt & Whitney businesses, and Otis and Carrier will become independent companies. The proposed separations are expected to be effected through spin-offs of Otis and Carrier that are intended to be tax-free for the Company’s shareowners for U.S. federal income tax purposes, and are expected to be completed in the first half of 2020. Separation of Otis and Carrier from UTC via spin-off transactions will be subject to the satisfaction of customary conditions, including, among others, final approval by the Company’s Board of Directors, receipt of tax rulings in certain jurisdictions and/or a tax opinion from external counsel (as applicable), the filing with the Securities and Exchange Commission (SEC) and effectiveness of Form 10 registration statements, and satisfactory completion of financing (subject to UTC’s agreement to consummate the distributions pursuant to, and subject to the terms and conditions of, the Raytheon merger agreement). In the nine months ended September 30, 2019, $342 million of Selling, general and administrative costs and $618 million of tax charges have been incurred related to the portfolio separation activities. Goodwill. Changes in our goodwill balances for the nine months ended September 30, 2019 were as follows:
(dollars in millions) | Balance as of January 1, 2019 |  | Goodwill Resulting from Business Combinations |  | Foreign Currency Translation and Other |  | Balance as of September 30, 2019
Otis | $ | 1,688 |  |  | $ | 14 |  |  | $ | (80 | ) |  | $ | 1,622 |
Carrier | 9,835 |  |  | 1 |  |  | (136 | ) |  | 9,700 |
Pratt & Whitney | 1,567 |  |  | 1 |  |  | (4 | ) |  | 1,564 |
Collins Aerospace Systems | 35,001 |  |  | 394 |  |  | (261 | ) |  | 35,134 |
Total Segments | 48,091 |  |  | 410 |  |  | (481 | ) |  | 48,020 |
Eliminations and other | 21 |  |  | — |  |  | — |  |  | 21 |
Total | $ | 48,112 |  |  | $ | 410 |  |  | $ | (481 | ) |  | $ | 48,041 |
Goodwill increased $394 million at Collins Aerospace Systems resulting from several insignificant purchase accounting adjustments made during the nine months ended September 30, 2019, including a reduction in acquired customer relationship intangible assets of $100 million and a reduction in fixed assets of approximately $130 million. Intangible Assets. Identifiable intangible assets are comprised of the following:
| September 30, 2019 |  | December 31, 2018
(dollars in millions) | Gross Amount |  | Accumulated Amortization |  | Gross Amount |  | Accumulated Amortization
Amortized: |  |  |  |  |  |  |
Service portfolios | $ | 2,105 |  |  | $ | (1,607 | ) |  | $ | 2,164 |  |  | $ | (1,608 | )
Patents and trademarks | 353 |  |  | (244 | ) |  | 361 |  |  | (236 | )
Collaboration intangible assets | 4,770 |  |  | (857 | ) |  | 4,509 |  |  | (649 | )
Customer relationships and other | 22,594 |  |  | (5,318 | ) |  | 22,525 |  |  | (4,560 | )
| 29,822 |  |  | (8,026 | ) |  | 29,559 |  |  | (7,053 | )
Unamortized: |  |  |  |  |  |  |
Trademarks and other | 3,890 |  |  | — |  |  | 3,918 |  |  | — |
Total | $ | 33,712 |  |  | $ | (8,026 | ) |  | $ | 33,477 |  |  | $ | (7,053 | )
In addition to customer relationship intangible assets obtained through business combinations, customer relationship intangible assets include payments made to our customers to secure certain contractual rights. Such payments are capitalized when distinct rights are obtained and sufficient incremental cash flows to support the recoverability of the assets have been established. Otherwise, the applicable portion of the payments is expensed. We amortize these intangible assets based on the underlying pattern of economic benefit, which may result in an amortization method other than straight-line. In the aerospace industry, amortization based on the pattern of economic benefit generally results in lower amortization expense during the development period with amortization expense increasing as programs enter full production and aftermarket cycles. If a pattern of economic benefit cannot be reliably determined, a straight-line amortization method is used. We classify amortization of such payments as a reduction of sales. The collaboration intangible assets are amortized based upon the pattern of economic benefits as represented by the underlying cash flows. Amortization of intangible assets for the quarter and nine months ended September 30, 2019 was $369 million and $1,091 million, respectively, compared with $225 million and $680 million for the same periods of 2018. The following is the expected amortization of intangible assets for the years 2019 through 2024, which reflects the pattern of expected economic benefit on certain aerospace intangible assets.
(dollars in millions) |  | Remaining 2019 |  | 2020 |  | 2021 |  | 2022 |  | 2023 |  | 2024
Amortization expense |  | $ | 363 |  |  | $ | 1,422 |  |  | $ | 1,410 |  |  | $ | 1,410 |  |  | $ | 1,404 |  |  | $ | 1,370 |

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