# RTX Corp: Form 10-Q for the period ended Sep 30, 2013

- Company: [RTX Corp](/companies/rtx.md) (CIK 101829)
- Form: 10-Q
- Filed: 2013-10-25
- Accepted by EDGAR: Oct 25, 2013, 10:59 ET
- Period: 2013-09-30
- Accession: 0000101829-13-000045
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/101829/000010182913000045/a2013-09x3010xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/101829/000010182913000045/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-07-01 to 2013-09-30 | $15.46bn | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2013-01-01 to 2013-09-30 | $45.87bn | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2013-07-01 to 2013-09-30 | $8.32bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2013-01-01 to 2013-09-30 | $24.88bn | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2013-07-01 to 2013-09-30 | $630.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2013-01-01 to 2013-09-30 | $1.87bn | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2013-07-01 to 2013-09-30 | $1.63bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2013-01-01 to 2013-09-30 | $5.00bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2013-07-01 to 2013-09-30 | $2.37bn | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2013-01-01 to 2013-09-30 | $6.88bn | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2013-07-01 to 2013-09-30 | $614.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2013-01-01 to 2013-09-30 | $1.68bn | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-07-01 to 2013-09-30 | $1.43bn | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2013-01-01 to 2013-09-30 | $4.26bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-07-01 to 2013-09-30 | $1.57 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2013-01-01 to 2013-09-30 | $4.66 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-07-01 to 2013-09-30 | $1.59 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2013-01-01 to 2013-09-30 | $4.73 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-07-01 to 2013-09-30 | 915,500,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2013-01-01 to 2013-09-30 | 914,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2013-01-01 to 2013-09-30 | $4.89bn | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2013-01-01 to 2013-09-30 | $1.05bn | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2013-01-01 to 2013-09-30 | $1.40bn | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2013-01-01 to 2013-09-30 | $1.00bn | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Current assets | at 2013-09-30 | $29.35bn | us-gaap:AssetsCurrent |
| Total assets | at 2013-09-30 | $90.33bn | us-gaap:Assets |
| Current liabilities | at 2013-09-30 | $23.52bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2013-09-30 | $60.28bn | us-gaap:Liabilities |
| Long-term debt | at 2013-09-30 | $20.89bn | us-gaap:LongTermDebt |
| Short-term borrowings | at 2013-09-30 | $303.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2013-09-30 | $28.58bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2013-09-30 | 917,581,965 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 87,044 characters.

### BUSINESS OVERVIEW

We are a global provider of high technology products and services to the building systems and aerospace industries. Our operations are classified into five principal business segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems and Sikorsky. Otis and UTC Climate, Controls & Security are referred to as the “commercial businesses,” while Pratt & Whitney, UTC Aerospace Systems and Sikorsky are collectively referred to as the “aerospace businesses.” On September 23, 2013, we announced the formation of UTC Building and Industrial Systems, a new organizational structure consisting of Otis and UTC Climate, Controls & Security. This new organizational structure will enhance our ability to deliver more integrated solutions to our customers and accelerate innovation in smart building technologies and sustainable designs. Otis and UTC Climate, Controls & Security each will continue to report their financial and operational results as separate segments, which is consistent with how we will allocate resources and measure the financial performance of these businesses.

On July 26, 2012, UTC acquired Goodrich Corporation (Goodrich) pursuant to a merger agreement dated September 21, 2011. As a result of the acquisition, Goodrich became a wholly-owned subsidiary of UTC. The acquired Goodrich business and the legacy Hamilton Sundstrand business have been combined to form a new segment named UTC Aerospace Systems. The results of the acquired Goodrich business have been included in UTC’s financial statements only for periods subsequent to the completion of the acquisition. The acquisition resulted in the inclusion of Goodrich’s assets and liabilities as of the acquisition date at their respective fair values. Accordingly, the acquisition materially affected UTC’s results of operations and financial position.

Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The current status of significant factors impacting our business environment in 2013 is discussed below. For additional discussion, refer to the “Business Overview” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2012 Annual Report, which is incorporated by reference in our 2012 Form 10-K.

### General

Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. To limit the impact of any one industry, or the economy of any single country on our consolidated operating results, our strategy has been, and continues to be, the maintenance of a balanced and diversified portfolio of businesses. Our operations include original equipment manufacturing (OEM) and extensive related aftermarket parts and services in both our commercial and aerospace businesses. Our business mix also reflects the combination of shorter cycles at UTC Climate, Controls & Security and in our commercial aerospace aftermarket businesses, and longer cycles at Otis and in our aerospace OEM businesses. Our customers include companies in the private sector and governments, and our businesses reflect an extensive geographic diversification that has evolved with the continued globalization of world economies.

Growth in emerging markets continues to be led by China where our sales for the quarter grew 11% over the prior year, while European economic conditions continue to stagnate. During the first nine months of 2013, organic sales in Europe declined 3% across our commercial businesses. The European market, together with U.S. Government defense spending, represent over 35% of UTC sales. The economic environment in North America has continued to rebound on improving consumer sentiment, lower unemployment rates, an improving housing market, and increasing commercial construction. However, economic uncertainty persists in the U.S., in part as a result of the continued political impasse in Washington D.C, including the sequestration, government shut-down and Congressional fight over the debt ceiling.

U.S. Government deficit reduction measures continue to pressure U.S. Department of Defense spending and adversely affect our military businesses. Total sales to the U.S. Government were $2.4 billion and $2.6 billion, or 16% and 17% of total UTC sales in the third quarter of 2013 and 2012, respectively. Our participation in long-term production and development programs for the U.S. Government has, and is expected to contribute positively to our results in 2013. In July 2012, the U.S. Government and Sikorsky signed a five-year multiservice contract (Multi-year 8) for approximately 650 H-60 helicopters. Actual production quantities will be determined year-by-year over the life of the program based on funding allocations set by Congress and Pentagon acquisition priorities. Sikorsky's commercial business has benefited from increases in off-shore oil platform activity and those benefits are projected to continue throughout 2013.

### Disposition Activity

In 2012, the Board of Directors of the Company approved a plan for the divestiture of a number of non-core businesses. Cash generated from these divestitures has been used to repay debt incurred to finance the acquisition of Goodrich. The legacy Hamilton Sundstrand Industrial businesses, as well as Clipper Windpower (Clipper), Pratt & Whitney Rocketdyne (Rocketdyne) and UTC Power all met the "held-for-sale" criteria in 2012. The results of operations, including the net realized gain and losses on disposition, and the related cash flows which result from these non-core businesses have been reclassified to Discontinued Operations in our Condensed Consolidated Statements of Comprehensive Income and Cash Flows. The dispositions of Clipper and the legacy Hamilton Sundstrand Industrial businesses were completed in 2012. On February 12, 2013, we completed the disposition of UTC Power to ClearEdge Power. The UTC Power disposition resulted in payments by UTC totaling $48 million, which included capitalization of the business prior to the sale and interim funding of operations as the buyer took control of a loss generating business. We have no continuing involvement with the UTC Power business.

On June 14, 2013, we completed the sale of substantially all operations of Rocketdyne to GenCorp Inc. for $411 million. The sale generated a pre-tax loss of approximately $7 million ($3 million after tax) through September 30, 2013, which has been included in discontinued operations in the accompanying Condensed Consolidated Statement of Comprehensive Income. On May 17, 2013, we completed the sale of the Pratt & Whitney Power Systems business to Mitsubishi Heavy Industries (MHI) and entered into a long-term engineering and manufacturing agreement with MHI. The sale generated a pre-tax gain of approximately $193 million ($132 million after tax). Cash received in connection with the sale was $432 million, and excludes contingent consideration valued at approximately $200 million. Pratt & Whitney Power Systems was not reclassified to Discontinued Operations due to our level of continuing involvement in the business post-sale.

In connection with regulatory approval of the Goodrich acquisition, regulatory authorities required UTC to dispose of the Goodrich electric power systems and the pumps and engine controls businesses. Pursuant to these regulatory obligations, these businesses had been held separately from UTC's and Goodrich's ongoing businesses since the acquisition of Goodrich by UTC. On March 18, 2013, we completed the sale of the Goodrich pumps and engine controls business to Triumph Group, Inc., and on March 26, 2013, we completed the sale of the Goodrich electric power systems business to Safran S.A. Combined proceeds from the sales of the two businesses were approximately $600 million.

As discussed below in “Results of Operations,” our results include the impact from non-recurring items such as the beneficial impact of gains from business divestiture activities, including those related to the ongoing portfolio transformation at UTC Climate, Controls & Security.

### Acquisition Activity

Our growth strategy contemplates acquisitions. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated, and anticipated synergies or cost savings are achieved. On February 7, 2013, we completed the acquisition of Grupo Ascensores Enor, S.A. (Enor), a privately held company headquartered in Spain with operations in Spain and Portugal, which designs, manufactures, installs and services elevators. Enor's 2012 sales were approximately $50 million. Under the terms of the transaction, Zardoya Otis, S.A. (ZOSA), a non-wholly owned subsidiary of the Company, exchanged publicly traded shares of ZOSA with a fair value of approximately $240 million as of the transaction completion date for all of the shares of Enor.

During the nine months ended September 30, 2013, our cash investment in business acquisitions was approximately $120 million and consisted of a number of additional small acquisitions primarily in our commercial businesses. We expect cash investment in businesses of approximately $250 million in 2013. However, actual acquisition spending may vary depending upon the timing, availability and value of acquisition opportunities.

### Other

Government legislation, policies and regulations can have a negative impact on our worldwide operations. Government regulation of refrigerants and energy efficiency standards, elevator safety codes and fire protection regulations are important to our commercial businesses. Government and market-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, and government procurement practices can impact our aerospace and defense businesses.

Commercial airline financial distress and consolidation, global economic conditions, changes in raw material and commodity prices, interest rates, foreign currency exchange rates, energy costs, and the impact from natural disasters and weather conditions create uncertainties that could impact our earnings outlook for the remainder of 2013. See Part II, Item 1A, “Risk Factors” in this Form 10-Q for further discussion.

The following activities are disclosed as required by Section 13(r)(1)(D)(iii) of the Securities Exchange Act of 1934, as amended (Exchange Act), as transactions or dealings with the government of Iran that have not been specifically authorized by a U.S. federal department or agency:

In 2012 and 2013, non-U.S. affiliates of Otis provided elevator maintenance services at the residence of the Iranian Ambassador in Athens, Greece, pursuant to a contract executed in September 2012; the London branch office of Bank Sepah (an Iranian bank), pursuant to a contract executed in 2005; and the London branch office of the Persia International Bank (an Iranian bank), pursuant to a contract executed in 2008. Both banks are designated by the U.S. Department of the Treasury’s

Office of Foreign Assets Control on the Specially Designated Nationals and Blocked Persons List pursuant to Executive Order 13382. In 2012, the aggregate revenues and net profits attributable to these three contracts were approximately $21 thousand and $16 thousand, respectively. In 2013, the aggregate revenues and net profits attributable to these three contracts were approximately $20 thousand and $15 thousand, respectively.

The provision of elevator maintenance services by non-U.S. affiliates of Otis was permissible under applicable law when the associated contracts were executed. However, the services continued after the President issued Executive Order 13628 on October 9, 2012, which implemented Section 218 of the Iran Threat Reduction and Syria Human Rights Act (ITRA) by prohibiting any entity owned or controlled by a U.S. person and established or maintained outside the U.S. from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran. Otis has filed appropriate disclosures with the Office of Foreign Assets Control. The non-U.S. Otis affiliates have ceased performance under these contracts and do not intend to continue or enter into any new Iran-related activity.

### CRITICAL ACCOUNTING ESTIMATES

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the Consolidated Financial Statements in our 2012 Annual Report, incorporated by reference in our 2012 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2013.

### RESULTS OF OPERATIONS

### Net Sales

*(Dollars in millions)*

|  | Quarter Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $15,462 | $15,042 | $45,867 | $41,265 |

The factors contributing to the total percentage change year-over-year in total net sales for the quarter and nine months ended September 30, 2013 are as follows:

|  | Quarter Ended September 30, 2013 | Nine Months Ended September 30, 2013 |
| --- | ---: | ---: |
| Organic change | 1% | —% |
| Foreign currency translation | — | — |
| Acquisitions and divestitures, net | 2% | 11% |
| Other | — | — |
| Total % Change | 3% | 11% |

During the third quarter of 2013, organic sales growth at Otis (4%), UTC Climate, Controls & Security (2%) and UTC Aerospace Systems (2%), was offset by organic sales contraction at Sikorsky (7%). Organic sales growth at Otis was led by higher new equipment sales volume in the U.S., China, Russia and Brazil, while the organic sales decline at Sikorsky was driven by lower military helicopter and aftermarket sales.

During the nine months ended September 30, 2013, Otis experienced organic sales growth of 3% driven by higher new equipment sales, while UTC Aerospace Systems realized organic sales growth of 2% on higher commercial aerospace OEM volume. These increases were offset by a contraction in Sikorsky organic sales (6%) driven by lower aircraft and aftermarket sales to the U.S. Government, and organic sales contraction at Pratt & Whitney (3%) driven by lower military engine volume.

The sales increase from acquisitions for the quarter ended September 30, 2013 was primarily a result of the acquisition of Goodrich, partially offset by the ongoing portfolio transformation initiatives at UTC Climate, Controls & Security. The sales increase from acquisitions for the nine months ended September 30, 2013 was primarily a result of the acquisitions of Goodrich and IAE, partially offset by the ongoing portfolio transformation initiatives at UTC Climate, Controls & Security.

### Cost of Products and Services Sold

*(Dollars in millions)*

|  | Quarter Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Cost of products sold | $8,316 | $8,278 | $24,876 | $21,724 |
| Percentage of product sales | 74.0% | 76.4% | 75.0% | 75.3% |
| Cost of services sold | $2,704 | $2,725 | $8,161 | $8,143 |
| Percentage of service sales | 64.1% | 64.8% | 64.2% | 65.6% |
| Total cost of products and services sold | $11,020 | $11,003 | $33,037 | $29,867 |

The factors contributing to the percentage change year-over-year for the quarter and nine months ended September 30, 2013 in total cost of products and services sold are as follows:

|  | Quarter Ended September 30, 2013 | Nine Months Ended September 30, 2013 |
| --- | ---: | ---: |
| Organic change | (2)% | (1)% |
| Foreign currency translation | — | — |
| Acquisitions and divestitures, net | 2% | 12% |
| Restructuring | — | — |
| Other | — | — |
| Total % Change | —% | 11% |

The organic decrease in total cost of products and services sold (2%) in the third quarter of 2013 was driven by the absence of amortization of inventory fair-value adjustments related to the Goodrich acquisition that were recorded in 2012 within the UTC Aerospace Systems segment. The increase in “Acquisitions and divestitures, net” (2%) is largely attributable to the acquisition of Goodrich, partially offset by the disposition of the Pratt & Whitney Power Systems business.

The organic decrease in total cost of products and services sold (1%) in the nine months ended September 30, 2013 is a result of the absence of inventory fair-value adjustment amortization noted above. The increase in “Acquisitions and divestitures, net” (12%) is attributable to the acquisitions of Goodrich and IAE, partially offset by the ongoing portfolio transformation initiatives at UTC Climate, Controls & Security and the disposition of the Pratt & Whitney Power Systems business.

### Gross Margin

*(Dollars in millions)*

|  | Quarter Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Gross margin | $4,442 | $4,039 | $12,830 | $11,398 |
| Percentage of net sales | 28.7% | 26.9% | 28.0% | 27.6% |

The 180 basis point increase in gross margin as a percentage of sales for the third quarter of 2013 is due to the absence of amortization of an inventory fair-value adjustment related to the Goodrich acquisition that was recorded in 2012 (100 basis points) favorable military contract performance at Pratt & Whitney, the favorable gross margin impact of higher commercial spares sales at Pratt & Whitney and the benefit of increased productivity and restructuring savings at UTC Climate, Controls & Security.

The 40 basis point increase in gross margin as a percentage of sales for the first nine months of 2013 is largely due to the absence of amortization of inventory fair-value adjustment related to the Goodrich acquisition that was recorded in 2012 (30 basis points) and the benefit of increased productivity and restructuring savings at UTC Climate, Controls & Security.

### Research and Development

*(Dollars in millions)*

|  | Quarter Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Company-funded | $630 | $590 | $1,871 | $1,659 |
| Percentage of net sales | 4.1% | 3.9% | 4.1% | 4.0% |
| Customer-funded | $514 | $508 | $1,607 | $1,146 |
| Percentage of net sales | 3.3% | 3.4% | 3.5% | 2.8% |

38

Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year fluctuations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses. The year-over-year increase in company-funded research and development (7%) in the third quarter of 2013 is primarily related to the acquisition of Goodrich. Customer-funded research and development increased (1%) due to higher customer-funded spending at Pratt & Whitney on U.S. military programs (11%), offset by lower customer-funded spending at UTC Aerospace Systems on space programs and within U.S. Government programs at Sikorsky.

The year-over-year increase in company-funded research and development (13%) in the first nine months of 2013 is primarily related to the acquisition of Goodrich (17%), partially offset by lower research and development spending at Pratt & Whitney related to the development of multiple geared turbofan platforms (3%). The increase in customer-funded research and development (40%) is due to the acquisition of Goodrich (27%) and at Pratt & Whitney to military programs (12%).

We expect company-funded research and development for the full year 2013 to increase approximately $200 million, as compared with 2012.

### Selling, General and Administrative

*(Dollars in millions)*

|  | Quarter Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expenses | $1,633 | $1,619 | $4,997 | $4,657 |
| Percentage of net sales | 10.6% | 10.8% | 10.9% | 11.3% |

Selling, general and administrative expenses increased 1% in the third quarter of 2013 due to the impact of acquisitions, net of divestitures, completed over the preceding twelve months (1%) and higher restructuring costs (1%), partially offset by savings from previous restructuring actions.

Selling, general and administrative expenses increased 7% in the first nine months of 2013 due primarily to the impact of acquisitions, net of divestitures, completed over the preceding twelve months. Higher pension and export compliance costs (combined 1%) were largely offset by savings from previous restructuring actions. The 40 basis point year-over-year decrease as a percentage of sales reflects higher sales volume as a result of the Goodrich acquisition and the benefits from previous restructuring actions.

### Other Income, Net

*(Dollars in millions)*

|  | Quarter Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Other income, net | $187 | $211 | $917 | $851 |

Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses as well as other ongoing and non-recurring items. The year-over-year decrease in other income, net in the third quarter of 2013 (11%) is a result of the charge to adjust the fair value of a Pratt & Whitney joint venture investment (12%) and the absence of gains recognized in the third quarter of 2012 including the fair value re-measurement of the shares held by the Company prior to the acquisition of Goodrich (16%) and the effective settlement of a pre-existing contractual dispute in connection with the acquisition of Goodrich (22%). These decreases were partially offset by licensing income recognized in the third quarter of 2013 (10%), net gains recognized on miscellaneous asset sales (11%) and normal recurring operational activity as disclosed above.

The year-over-year increase in other income, net in the first nine months of 2013 (8%) is a result of a gain on the sale of Pratt & Whitney Power Systems (23%), the benefit of a settlement with an engine program partner (5%), higher licensing income (3%) and net gains recognized on miscellaneous asset sales (5%). These results were partially offset by a charge to adjust the fair value of a Pratt & Whitney joint venture investment (3%); the absence of gains recorded in the third quarter of 2012, including a fair value re-measurement of the shares of Goodrich held by the Company prior to the acquisition of Goodrich (4%) and a gain as a result of the effective settlement of a pre-existing contractual dispute in connection with the acquisition of Goodrich (5%); and a decline in net gains related to the ongoing UTC Climate, Controls & Security portfolio transformation (20%). The remaining increase in other income, net is attributable to normal recurring operational activity as disclosed above.

### Interest Expense, Net

*(Dollars in millions)*

|  | Quarter Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Interest expense | $248 | $260 | $775 | $614 |
| Interest income | (22) | (44) | (96) | (101) |
| Interest expense, net | $226 | $216 | $679 | $513 |
| Average interest expense rate | 4.1% | 3.5% | 4.2% | 5.4% |

The decrease in interest expense in the third quarter of 2013 is a result of lower average debt balances as a result of debt repayments made since September 30, 2012. The decrease in interest income in the third quarter of 2013 reflects the absence of $25 million favorable pre-tax interest adjustments related to the resolution of disputes with the Appeals Division of the IRS for the Company's 2004 - 2005 tax years, which were recognized in the third quarter of 2012.

The increase in interest expense in the first nine months of 2013 is a result of higher average debt balances associated with the financing of our acquisition of Goodrich. The decrease in interest income in the first nine months of 2013 reflects the absence of approximately $40 million of favorable pre-tax interest adjustments related to the conclusion of the IRS's examination of our tax returns for the years 2006 to 2008 and resolution of disputes with the Appeals Division of the IRS for the Company's 2004 - 2005 tax years, which were recorded in 2012. This was partially offset by $36 million of favorable pre-tax interest adjustments, which were recorded in 2013, related to settlements for the Company's tax years prior to 2006, as well as the conclusion of certain IRS examinations of the 2009 and 2010 tax years.

### Income Taxes

|  | Quarter Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Effective tax rate | 28.7% | 26.6% | 27.1% | 23.2% |

The increase in the effective tax rate for the quarter ended September 30, 2013, primarily reflects the absence of a favorable non-cash income tax adjustment of $34 million, recorded in the third quarter of 2012, related to the resolution of disputed tax matters with the Appeals Division of the IRS for the Company's 2004 and 2005 tax years. This increase is partially offset by the favorable tax impact of a U.K. tax rate reduction enacted in July 2013.

In addition to the item noted above, the increase in the effective tax rate for the nine months ended September 30, 2013, reflects the absence of a favorable non-cash tax adjustment of $203 million, recorded in the first quarter of 2012, related to the conclusion of the IRS's examination of the Company's 2006 - 2008 tax years. The increase also reflects the absence of a favorable non-cash income adjustment of $168 million, recorded in the second quarter of 2012, related to the release of valuation allowances resulting from internal legal entity reorganizations. Those items were partially offset by a favorable tax impact of $95 million associated with the legislative corporate tax extenders enacted in January 2013, as part of the American Taxpayer Relief Act of 2012. That impact, related to the 2012 retroactive effect of the law, was recorded in the first quarter of 2013.

We anticipate that our full year annual effective income tax rate in 2013 will be approximately 29%, absent one-time adjustments.

### Net Income Attributable to Common Shareowners from Continuing Operations

*(Dollars in millions, except per share amounts)*

|  | Quarter Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Income from continuing operations attributable to common shareowners | $1,415 | $1,247 | $4,237 | $3,902 |
| Diluted earnings per share from continuing operations | $1.55 | $1.37 | $4.64 | $4.31 |

Net income attributable to common shareowners from continuing operations for the third quarter of 2013 includes restructuring charges, net of tax benefit, of $69 million. The net effect on diluted earnings per share of restructuring charges was $0.08 per share. The results for the third quarter of 2012 included a net $0.09 per share benefit from non-recurring items, offset by $0.09 per share of restructuring charges. The impact of foreign currency translation and hedging generated a favorable effect of $0.01 per diluted share on our operational performance in the third quarter of 2013.

Net income attributable to common shareowners from continuing operations for the first nine months of 2013 includes restructuring charges, net of tax benefit, of $230 million as well as a benefit from non-recurring items, net of tax expense, of $307 million. The net benefit on diluted earnings per share of non-recurring items in excess of restructuring charges was $0.08 per share. The results for the first nine months of 2012 included a net $0.49 per share benefit from non-recurring items, partially offset by $0.25 per share of restructuring charges. Foreign currency translation and hedging generated an adverse effect of $0.02 per diluted share on our operational performance in the first nine months of 2013.

### Net Gain (Loss) Attributable to Common Shareowners from Discontinued Operations

*(Dollars in millions, except per share amounts)*

|  | Quarter Ended September 30, 2013 | 2012 | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Net gain (loss) attributable to common shareowners from discontinued operations | $17 | $168 | $21 | $(829) |
| Diluted earnings (loss) per share from discontinued operations | $0.02 | $0.19 | $0.02 | $(0.92) |

Diluted earnings per share from discontinued operations for the third quarter of 2013 includes $0.02 earnings per share primarily reflecting favorable income tax adjustments related to the revaluation of a deferred tax liability initially recorded during the quarter ended December 31, 2012 on the planned repatriation of the non-U.S. proceeds from the sale of the Hamilton Sundstrand Industrial businesses. Diluted loss per share from discontinued operations for the third quarter of 2012 includes $0.14 per share of favorable income tax adjustments related to the reversal of a portion of the deferred tax liability initially recorded during the quarter ended March 31, 2012 on the existing difference between the expected accounting versus tax gain on the planned disposition of the legacy Hamilton Sundstrand Industrial businesses, which was completed in December 2012.

Diluted earnings per share from discontinued operations for the first nine months of 2013 includes $0.03 earnings per share from the results of operations of the discontinued entities offset by $0.01 loss per share on the sales of Rocketdyne and UTC Power. Diluted loss per share from discontinued operations for the first nine months of 2012 includes $0.82 per share of goodwill impairment charges related to Rocketdyne and Clipper and net asset impairment charges at UTC Power, and $0.12 per share unfavorable income tax adjustments related to the recognition of a deferred tax liability on the existing difference between the accounting versus tax gain on the planned disposition of Hamilton Sundstrand’s Industrial businesses. A $0.09 per share benefit from the results of operations of discontinued entities was partially offset by the $0.07 per share Clipper warranty charge.

### Restructuring Costs

We recorded net pre-tax restructuring costs totaling $343 million and $360 million in the first nine months of 2013 and 2012, respectively, for new and ongoing restructuring actions as follows:

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Otis | $68 | $105 |
| UTC Climate, Controls & Security | 66 | 98 |
| Pratt & Whitney | 122 | 57 |
| UTC Aerospace Systems | 65 | 40 |
| Sikorsky | 25 | 18 |
| Eliminations and other | (1) | 14 |
| Restructuring costs recorded within continuing operations | 345 | 332 |
| Restructuring costs recorded within discontinued operations | (2) | 28 |
| Total | $343 | $360 |

41

The net costs for the first nine months of 2013 and 2012 were recorded as follows:

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Cost of sales | $145 | $191 |
| Selling, general and administrative | 199 | 141 |
| Other income, net | 1 | — |
| Restructuring costs recorded within continuing operations | 345 | 332 |
| Restructuring costs recorded within discontinued operations | (2) | 28 |
| Total | $343 | $360 |

As described below, the charges incurred in the first nine months of 2013 primarily relate to actions initiated during 2013 and 2012, while the charges incurred in the first nine months of 2012 primarily relate to actions initiated during 2012 and 2011.

**2013 Actions.** During the nine months ended September 30, 2013, we initiated restructuring actions relating to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We incurred net pre-tax restructuring costs totaling $298 million as follows:

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 |
| --- | ---: |
| Otis | $53 |
| UTC Climate, Controls & Security | 60 |
| Pratt & Whitney | 121 |
| UTC Aerospace Systems | 47 |
| Sikorsky | 18 |
| Eliminations and other | (1) |
| Restructuring costs recorded within continuing operations | 298 |
| Restructuring costs recorded within discontinued operations | — |
| Total | $298 |

The following table summarizes the charges associated with the 2013 restructuring actions:

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 |
| --- | ---: |
| Cost of sales | $100 |
| Selling, general and administrative | 198 |
| Restructuring costs recorded within continuing operations | 298 |
| Restructuring costs recorded within discontinued operations | — |
| Total | $298 |

The following table summarizes the charges associated with the 2013 restructuring actions by cost type:

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 |
| --- | ---: |
| Severance | $271 |
| Asset write-downs | 13 |
| Facility exit, lease termination and other costs | 14 |
| Restructuring costs recorded within continuing operations | 298 |
| Restructuring costs recorded within discontinued operations | — |
| Total | $298 |

We expect the 2013 actions that were initiated in the first nine months to result in net workforce reductions of approximately 3,600 hourly and salaried employees, the exiting of approximately 600 thousand net square feet and the disposal of assets associated with exited facilities. As of September 30, 2013, we have completed net workforce reductions of approximately 2,400 employees and have exited approximately 5 thousand net square feet. We are targeting the majority of the remaining workforce and all facility related cost reduction actions for completion during 2013 and 2014. Approximately 75% of the total pre-tax charge will require cash payments, which we expect to fund with cash generated from operations. During the nine months ended September 30, 2013, we had cash outflows of approximately $132 million related to the 2013 actions. We expect to incur additional restructuring costs of $43 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating these actions to approximately $300 million annually.

**2012 Actions.** During the nine months ended September 30, 2013 and 2012, we recorded net pre-tax restructuring costs totaling $44 million and $310 million, respectively, for restructuring actions initiated in 2012. The 2012 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations. We incurred net pre-tax restructuring costs for the nine months ended September 30, 2013 and 2012 as follows:

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Otis | $4 | $92 |
| UTC Climate, Controls & Security | 14 | 73 |
| Pratt & Whitney | 1 | 52 |
| UTC Aerospace Systems | 18 | 41 |
| Sikorsky | 7 | 11 |
| Eliminations and other | — | 14 |
| Restructuring costs recorded within continuing operations | 44 | 283 |
| Restructuring costs recorded within discontinued operations | — | 27 |
| Total | $44 | $310 |

The following table summarizes the charges for the nine months ended September 30, 2013 and 2012 associated with the 2012 restructuring actions:

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Cost of sales | $40 | $166 |
| Selling, general and administrative | 3 | 117 |
| Other income, net | 1 | — |
| Restructuring costs recorded within continuing operations | 44 | 283 |
| Restructuring costs recorded within discontinued operations | — | 27 |
| Total | $44 | $310 |

The following table summarizes the charges for the nine months ended September 30, 2013 and 2012 associated with the 2012 restructuring actions by cost type:

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Severance | $14 | $237 |
| Asset write-downs | 1 | 14 |
| Facility exit, lease termination and other costs | 29 | 32 |
| Restructuring costs recorded within continuing operations | 44 | 283 |
| Restructuring costs recorded within discontinued operations | — | 27 |
| Total | $44 | $310 |

We expect the 2012 actions to result in net workforce reductions of approximately 7,300 hourly and salaried employees, the exiting of approximately 3.6 million net square feet of facilities and the disposal of assets associated with the exited facilities. As of September 30, 2013, we completed net workforce reductions of approximately 6,100 employees and exited approximately 1.6 million net square feet of facilities. We are targeting the majority of the remaining workforce and facility related cost reduction actions for completion during 2013 and 2014. Approximately 80% of the total pre-tax charge will require cash payments, which we expect to fund with cash generated from operations. During the nine months ended September 30, 2013, we had cash outflows of approximately $220 million related to the 2012 actions. We expect to incur additional restructuring costs of $40 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating these actions to approximately $550 million annually.

**Additional 2013 Actions.** We expect to initiate additional restructuring actions during the remainder of 2013. Including trailing costs related to previously initiated actions, we now expect full year 2013 restructuring costs from continuing operations of approximately $500 million, including the $343 million of charges incurred during the first nine months of 2013. The expected adverse impact on full year earnings in 2013 from anticipated restructuring costs is expected to be offset by the beneficial impact from net non-recurring items. Except for those actions described above, no specific plans for significant other actions have been finalized at this time.

### Segment Review

Segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. Subsequent to the completion of our acquisition of Goodrich on July 26, 2012, we combined the Goodrich businesses with the legacy Hamilton Sundstrand businesses to form the UTC Aerospace Systems segment. Adjustments to reconcile segment reporting to the consolidated results for the quarters and nine months ended September 30, 2013 and 2012 are included in “Eliminations and other” below, which also includes certain smaller subsidiaries. We attempt to quantify material cited factors within our discussion of the results of each segment whenever those factors are determinable. However, in some instances, the factors we cite within our segment discussion are based upon input measures or qualitative information that does not lend itself to quantification when discussed in the context of the financial results measured on an output basis and are not, therefore, quantified in the below discussions.

### Commercial Businesses

Our commercial businesses generally serve customers in the worldwide commercial and residential property industries, although UTC Climate, Controls & Security also serves customers in the commercial and transport refrigeration industries. Sales in the commercial businesses are influenced by a number of external factors, including fluctuations in residential and commercial construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, credit markets and other global and political factors. UTC Climate, Controls & Security’s financial performance can also be influenced by production and utilization of transport equipment, and, in the case of its residential business, weather conditions. To ensure adequate supply of products in the distribution channel, UTC Climate, Controls & Security customarily offers its customers incentives to purchase products. The principal incentive program provides reimbursements to distributors for offering promotional pricing on UTC Climate, Controls & Security products. We account for incentive payments made as a reduction to sales.

Global commercial heating, ventilation, and air conditioning (HVAC) orders increased 10% in the third quarter with growth in Asia and Europe. North American residential HVAC orders increased 7% in the third quarter of 2013, due largely to an improving housing market. Transicold orders increased approximately 70% in the third quarter of 2013 due to order growth in the container business as the shipping container market has recovered.

Within the Otis segment, new equipment orders increased 4% in the third quarter of 2013 with growth in China (15%) and the Americas (13%). New equipment orders declined in Europe (6%) with growth in Russia and Germany more than offset by a decline in the United Kingdom due to the absence of a major contract award in the third quarter of 2012. Otis continues to face pricing pressures, primarily in the European service business and in the new equipment business in China.

Summary performance for each of the commercial businesses for the quarters ended September 30, 2013 and 2012 was as follows:

*(Dollars in millions)*

|  | Otis 2013 | 2012 | Change | UTC Climate, Controls & Security 2013 | 2012 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $3,188 | $3,054 | 4% | $4,237 | $4,259 | (1)% |
| Cost of Sales | 2,114 | 2,034 | 4% | 2,981 | 3,035 | (2)% |
|  | 1,074 | 1,020 | 5% | 1,256 | 1,224 | 3% |
| Operating Expenses and Other | 393 | 369 | 7% | 560 | 592 | (5)% |
| Operating Profits | $681 | $651 | 5% | $696 | $632 | 10% |
| Operating Profit Margins | 21.4% | 21.3% |  | 16.4% | 14.8% |  |

44

Summary performance for each of the commercial businesses for the nine months ended September 30, 2013 and 2012 was as follows:

*(Dollars in millions)*

|  | Otis 2013 | 2012 | Change | UTC Climate, Controls & Security 2013 | 2012 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $9,140 | $8,851 | 3% | $12,617 | $12,943 | (3)% |
| Cost of Sales | 6,088 | 5,848 | 4% | 8,941 | 9,302 | (4)% |
|  | 3,052 | 3,003 | 2% | 3,676 | 3,641 | 1% |
| Operating Expenses and Other | 1,146 | 1,135 | 1% | 1,708 | 1,676 | 2% |
| Operating Profits | $1,906 | $1,868 | 2% | $1,968 | $1,965 | — |
| Operating Profit Margins | 20.9% | 21.1% |  | 15.6% | 15.2% |  |

### Otis –

### Quarter Ended September 30, 2013 Compared with Quarter Ended September 30, 2012

|  | Factors contributing to total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 4% | — | — | — | — |
| Cost of Sales | 4% | — | 1% | (1)% | — |
| Operating Profits | 1% | 1% | — | 4% | (1)% |

The organic sales increase in the quarter (4%) is due to higher new equipment sales (3%) primarily in China, the U.S., Russia and Brazil partially offset by a decline in South Korea. Higher service sales (1%) in the U.S. and Asia were partially offset by declines in Southern Europe.

The operational profit increase in the quarter (1%) was driven by higher service contribution (3%) primarily due to higher repair and modernization volume and improved margins, partially offset by higher overhead expenses (2%) due to continued investments in emerging markets. The benefits of higher new equipment volume and lower commodity costs (combined 3%) were partially offset by costs associated with the factory transformation in North America.

### Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

|  | Factors contributing to total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 3% | — | — | — | — |
| Cost of Sales | 5% | — | — | (1)% | — |
| Operating Profits | (1)% | — | — | 2% | 1% |

The organic sales increase in the first nine months (3%) is due to higher new equipment sales (3%) primarily in China, the U.S. and Russia partially offset by declines in South Korea and Hong Kong. Service sales increases in the U.S., Asia and Brazil (combined 1%) were partially offset by declines in Southern Europe.

The operational profit decrease in the first nine months (1%) is due to lower service contribution (1%) principally due to continued pricing pressures, most notably in Europe. New equipment contribution increased (1%) due to higher new equipment volume and the impact of lower commodity costs, partially offset by costs associated with the factory transformation in North America. Overhead expenses increased (1%) due to continued investments in emerging markets.

### UTC Climate, Controls & Security –

### Quarter Ended September 30, 2013 Compared with Quarter Ended September 30, 2012

|  | Factors contributing to total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 2% | — | (3)% | — | — |
| Cost of Sales | — | 1% | (3)% | — | — |
| Operating Profits | 12% | — | (1)% | — | (1)% |

Organic sales increased (2%) reflecting growth in the transport refrigeration business (2%) and in the Americas (1%) driven by U.S. residential HVAC, partially offset by weakness in Europe and Australia (combined 1%). The decrease in "Acquisitions and divestitures, net" (3%) reflects the year over year impact of divestitures completed in the preceding twelve months associated with UTC Climate, Controls & Security's ongoing portfolio transformation.

The 12% operational profit increase was driven largely by the benefits of restructuring actions and cost productivity (combined 6%), positive volume, mix, and pricing (combined 4%) and lower commodities costs (2%).

### Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

|  | Factors contributing to total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | — | — | (3)% | — | — |
| Cost of Sales | (1)% | — | (3)% | — | — |
| Operating Profits | 8% | — | — | 2% | (10)% |

Organic sales were flat reflecting growth in the Americas (1%), driven by the U.S. residential HVAC, which was offset by lower volumes in Europe (1%) resulting from weak markets in the region. The decrease in "Acquisitions and divestitures, net" (3%) reflects the year over year impact of divestitures completed in the preceding twelve months associated with UTC Climate, Controls & Security's ongoing portfolio transformation.

The 8% operational profit increase was driven largely by the benefits of restructuring actions and cost productivity (combined 5%), favorable commodity costs (2%) and net positive volume, mix and price (combined 1%). The decrease in "Other" primarily reflects the net year-over-year impact of transactions associated with ongoing portfolio transformation activities. This includes an approximate $38 million net gain in the first quarter of 2013 from the sale of a business in Hong Kong. Prior year portfolio transformation included approximately $215 million of gains primarily from the sale of a majority interest in a manufacturing and distribution joint venture in Thailand, and an approximately $142 million gain from the sale of a controlling interest in the Canadian distribution business. These gains were partially offset by approximately $103 million of impairment charges for assets which had been classified as held for sale and by a $32 million loss on the disposition of the U.S. fire and security branch operations.

### Aerospace Businesses

Effective July 1, 2012, we transferred the auxiliary power unit business (APU) of the UTC Aerospace Systems business segment to the Pratt & Whitney business segment. The APU business designs and manufactures a variety of products for commercial and military aircraft. Annual sales for the APU business are approximately $600 million. The reclassification has been made prospectively; prior year segment results have not been restated for the transfer of the business.

The aerospace businesses serve both commercial and government aerospace customers. In addition, Pratt & Whitney also serves customers in the industrial markets. Revenue passenger miles (RPMs), U.S. Government military and space spending, and the general economic health of airline carriers are all barometers for our aerospace businesses. Performance in the general aviation sector is closely tied to the overall health of the economy and is positively correlated to corporate profits.

The commercial airline industry has remained generally strong for the last three years. Airline traffic, as measured by RPMs, has grown 5.1% through the first eight months of 2013. Airlines generally remain profitable and are forecasted to earn $11.7 billion in 2013. Nevertheless, high fuel prices continue to challenge the airlines to consider the need for more fuel efficient aircraft. Pratt & Whitney continues to invest in engineering and development of five separate geared turbofan platforms to meet demand for new engines which are fuel efficient and have reduced noise levels and exhaust emissions. Commercial aerospace spares orders at Pratt & Whitney’s large commercial engine business increased 17% in the third quarter of 2013 as compared to the same period of 2012. Defense spending has declined during 2013, and we expect U.S. Government deficit reduction measures to continue to adversely affect our military aerospace businesses into 2014.

We record changes in contract estimates using the cumulative catch-up method in accordance with the Revenue Recognition Topic of the FASB Accounting Standards Codification. The net increase in operating profit as a result of significant changes in aerospace contract estimates was $89 million and $158 million in the quarter and nine months ended September 30, 2013, respectively.

Summary performance for each of the aerospace businesses for the quarters ended September 30, 2013 and 2012 was as follows:

*(Dollars in millions)*

|  | Pratt & Whitney 2013 | 2012 | Change | UTC Aerospace Systems 2013 | 2012 | Change | Sikorsky 2013 | 2012 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $3,386 | $3,574 | (5)% | $3,312 | $2,670 | 24% | $1,541 | $1,649 | (7)% |
| Cost of Sales | 2,513 | 2,767 | (9)% | 2,348 | 1,970 | 19% | 1,258 | 1,346 | (7)% |
|  | 873 | 807 | 8% | 964 | 700 | 38% | 283 | 303 | (7)% |
| Operating Expenses and Other | 434 | 398 | 9% | 463 | 429 | 8% | 124 | 100 | 24% |
| Operating Profits | $439 | $409 | 7% | $501 | $271 | 85% | $159 | $203 | (22)% |
| Operating Profit Margins | 13.0% | 11.4% |  | 15.1% | 10.1% |  | 10.3% | 12.3% |  |

Summary performance for each of the aerospace businesses for the nine months ended September 30, 2013 and 2012 was as follows:

*(Dollars in millions)*

|  | Pratt & Whitney 2013 | 2012 | Change | UTC Aerospace Systems 2013 | 2012 | Change | Sikorsky 2013 | 2012 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $10,412 | $10,073 | 3% | $9,896 | $5,160 | 92% | $4,356 | $4,615 | (6)% |
| Cost of Sales | 7,947 | 7,599 | 5% | 7,042 | 3,745 | 88% | 3,571 | 3,725 | (4)% |
|  | 2,465 | 2,474 | — | 2,854 | 1,415 | 102% | 785 | 890 | (12)% |
| Operating Expenses and Other | 1,053 | 1,249 | (16)% | 1,353 | 735 | 84% | 380 | 338 | 12% |
| Operating Profits | $1,412 | $1,225 | 15% | $1,501 | $680 | 121% | $405 | $552 | (27)% |
| Operating Profit Margins | 13.6% | 12.2% |  | 15.2% | 13.2% |  | 9.3% | 12.0% |  |

### Pratt & Whitney –

### Quarter Ended September 30, 2013 Compared with Quarter Ended September 30, 2012

|  | Factors contributing to total % Change Organic / Operational | FX Translation\* | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | — | — | (5)% | — | — |
| Cost of Sales | (4)% | — | (5)% | — | — |
| Operating Profits | 21% | 1% | (6)% | (5)% | (4)% |

Organic sales remain unchanged for the quarter as higher sales volume within the commercial (4%) and Pratt & Whitney Canada (P&WC) (1%) businesses were offset by lower military OEM sales volume (5%) due in part to the completion of the F119 program at the end of 2012. The decrease in "Acquisitions and divestitures, net" (5%) reflects the divestiture of Pratt & Whitney Power Systems.

The operational profit increase (21%) is due to the change in sales mix noted above (16%), favorable military contract performance (8%), higher income from licensing agreements (5%), profits from industrial turbines and related development contracts (4%), favorable mix within the Aeropower business (3%), and benefits from restructuring actions. This was partially offset by the absence of a gain as a result of the effective settlement of a pre-existing contractual dispute in connection with the acquisition of Goodrich in 2012 (11%) and additional pension expense during the quarter (4%). The decrease in "Acquisitions and divestitures, net" (6%) reflects the divestiture of Pratt & Whitney Power Systems. "Other" reflects a gain on the sale of intellectual property (3%), offset by a fair value adjustment to a joint venture investment (6%).

### Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

|  | Factors contributing to total % Change Organic / Operational | FX Translation\* | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | (2)% | (1)% | 6% | — | — |
| Cost of Sales | (2)% | — | 7% | — | — |
| Operating Profits | 7% | (2)% | 5% | (5)% | 10% |

\* *As discussed further in the “Business Overview” and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, for Pratt & Whitney only, the transactional impact of foreign exchange hedging at P&WC has been netted against the translational foreign exchange impact for presentation purposes in the above tables. For all other segments, these foreign exchange transactional impacts are included within the organic/operational caption in their respective tables. Due to its potential significance to Pratt & Whitney’s overall operating results, we believe it is useful to segregate the foreign exchange transactional impact in order to clearly identify the underlying financial performance.*

The organic sales decrease (2%) was primarily driven by lower military OEM sales (5%), partially offset by higher military spares and development program sales (combined 2%). Sales increased (6%) as a result of the consolidation of IAE and the transfer of the AeroPower business to Pratt & Whitney from UTC Aerospace Systems, partially offset by the divestiture of Pratt & Whitney Power Systems.

The operational profit increase (7%) was driven by lower research and development spending (4%), favorable commercial aftermarket mix (3%), income from licensing agreements (1%), and profits from industrial turbines and related development contracts (5%), partially offset by the change in military sales mix noted above (2%), and the absence of a gain as a result of the of the effective settlement of a pre-existing contractual dispute in connection with the acquisition of Goodrich in 2012 (4%). Restructuring savings were largely offset by higher pension costs. The increase in "Acquisitions and divestitures, net" (5%) reflects the consolidations of IAE and the transfer of the AeroPower business to Pratt & Whitney from UTC Aerospace Systems, partially offset by the divestiture of Pratt & Whitney Power Systems. "Other" reflects a gain on the sale of Pratt & Whitney Power Systems (16%) and a gain on the sale of intellectual property (1%), offset by a fair value adjustment of a joint venture investment (2%), and the absence of gains on the sale of intellectual property (1%), on the sale of an equity interest in a venture (2%), and on the acquisition of a controlling interest in IAE (2%) in 2012.

### UTC Aerospace Systems –

### Quarter Ended September 30, 2013 Compared with Quarter Ended September 30, 2012

|  | Factors contributing to total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 2% | — | 22% | — | — |
| Cost of Sales | (3)% | — | 22% | — | — |
| Operating Profits | 59% | — | 22% | 4% | — |

The organic sales growth (2%) primarily reflects an increase in commercial aerospace OEM sales volume (3%) and higher commercial and military aftermarket volumes (1%), partially offset by lower military OEM volumes (1%). Operational cost-of-sales declined (3%) due to the absence of inventory step-up amortization (8%) related to the Goodrich acquisition in 2012, partially offset by the sales volume increases.

The operational profit increase (59%) primarily reflects the absence of amortization of inventory fair-value adjustments (55%) related to the Goodrich acquisition, lower selling, general and administrative expenses (8%) including the impact synergies from the integration of Goodrich, and lower research and development costs (7%), partially offset by lower profits on OEM sales (13%) for military related products. “Acquisitions and Divestitures, net” is principally a result of the acquisition of Goodrich.

### Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

|  | Factors contributing to total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 2% | — | 90% | — | — |
| Cost of Sales | — | — | 88% | — | — |
| Operating Profits | 21% | — | 102% | (3)% | 1% |

The organic sales growth (2%) primarily reflects an increase in commercial aerospace OEM sales volume (4%) partially offset by lower military OEM volumes (1%). Operational cost-of-sales was flat versus the prior year due to the absence of inventory step-up amortization (4%) related to the Goodrich acquisition in 2012, partially offset by volume increases.

The operational profit increase (21%) primarily reflects the absence of amortization of inventory fair-value adjustments (22%), lower selling, general and administrative expenses (5%) primarily from synergies on the integration of Goodrich, lower research and development costs (4%), and higher licensing income (2%), partially offset by lower profits on OEM sales (12%) primarily attributable to adverse mix for military related products. “Acquisitions and Divestitures, net” is principally a result of the acquisition of Goodrich.

### Sikorsky –

### Quarter Ended September 30, 2013 Compared with Quarter Ended September 30, 2012

|  | Factors contributing to total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | (7)% | — | — | — | — |
| Cost of Sales | (7)% | — | — | — | — |
| Operating Profits | (22)% | — | — | — | — |

The organic sales decrease (7%) reflects decreased international military sales (5%), lower volume on customer funded development programs (2%), decreased U.S. Government sales (6%) primarily due to lower Naval Hawk deliveries, and decreased aftermarket sales (4%) due primarily to lower military spares activity. These decreases were partially offset by increased commercial aircraft sales (10%) due to higher S-92 sales and S-76D aircraft volume.

The operational profit decrease (22%) reflects lower profitability from U.S. Government contracts (22%) due to lower aircraft volume, increased selling, general and administrative expenses (8%) due largely to higher pension and export compliance costs, and higher research and development costs (5%), and lower profits from customer funded development programs (7%). These decreases were partially offset by increased profitability from commercial operations (10%) due to increased S-92 aircraft sales and completions volume and increased profitability in international military (9%) due to favorable product mix.

### Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

|  | Factors contributing to total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | (6)% | — | — | — | — |
| Cost of Sales | (4)% | — | — | — | — |
| Operating Profits | (25)% | — | — | (2)% | — |

The organic sales decrease (6%) reflects decreased international military sales (5%), decreased U.S. Government sales (3%) due to lower volume and unfavorable Multi-year 8 pricing provisions, lower volume on customer funded development programs (1%) and decreased aftermarket sales (6%) due to lower military spares activity. These decreases were partially offset by increased commercial aircraft sales (9%) due to increased S-92 aircraft sales volume and completion services and higher S-76D aircraft volume.

The operational profit decrease (25%) reflects lower profitability from the U.S. Government (23%) due to lower aircraft volume and Multi-year 8 pricing and reset provisions, lower profitability in aftermarket (7%) due to lower military spares volume and increased selling, general and administrative expenses (8%) due largely to increased pension and export compliance costs. These decreases were partially offset by increased profitability from commercial operations (13%) due to increased S-92 aircraft sales and completions volume.

### Eliminations and other –

*(Dollars in millions)*

|  | Net Sales Quarter Ended September 30, 2013 | 2012 | Operating Profits Quarter Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Eliminations and other | $(202) | $(164) | $7 | $(22) |
| General corporate expenses | — | — | (117) | (103) |

*(Dollars in millions)*

|  | Net Sales Nine Months Ended September 30, 2013 | 2012 | Operating Profits Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Eliminations and other | $(554) | $(377) | $32 | $(54) |
| General corporate expenses | — | — | (345) | (303) |

Eliminations and other reflects the elimination of sales, other income and operating profit transacted between segments, as well as the operating results of certain smaller businesses. The year-over-year change in sales for the quarter and nine months ended September 30, 2013, as compared with the same periods of 2012, reflects an increase in the amount of inter-segment sales eliminations, due in part to the acquisition of Goodrich. The year-over-year change in operating profit for the third quarter of 2013, as compared with the same period of 2012, primarily reflects lower acquisitions and divestiture costs of $34 million. Similarly, the year-over-year change in operating profit for the nine months ended September 30, 2013, as compared with the same period of 2012, reflects lower acquisitions and divestiture costs of $70 million.

### LIQUIDITY AND FINANCIAL CONDITION

*(Dollars in millions)*

|  | September 30, 2013 | December 31, 2012 | September 30, 2012 |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $4,621 | $4,819 | $6,242 |
| Total debt | 21,188 | 23,221 | 28,700 |
| Net debt (total debt less cash and cash equivalents) | 16,567 | 18,402 | 22,458 |
| Total equity | 29,919 | 27,069 | 26,091 |
| Total capitalization (debt plus equity) | 51,107 | 50,290 | 54,791 |
| Net capitalization (debt plus equity less cash and cash equivalents) | 46,486 | 45,471 | 48,549 |
| Debt to total capitalization | 41% | 46% | 52% |
| Net debt to net capitalization | 36% | 40% | 46% |

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows of continuing operations, which, after netting out capital expenditures, we target to equal or exceed net income attributable to common shareowners from continuing operations. For the full year of 2013, we expect operating cash flows of continuing operations less capital expenditures to be essentially equal to net income attributable to common shareowners from continuing operations. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, customer financing requirements, investments in businesses, dividends, common stock repurchases, pension funding, access to the commercial paper markets, adequacy of available bank lines of credit, and the ability to attract long-term capital at satisfactory terms.

Improvement in the global economy remains uneven. In the U.S., economic indicators have generally been strengthening, but U.S. Government spending, the recent political impasse in the U.S. and the impact of sequestration have increased market uncertainties. There continues to be fiscal uncertainty in Europe, while emerging markets have shown more moderate levels of growth. In light of these circumstances, we continue to assess our current business and closely monitor the impact of global economic conditions on our customers and suppliers. We have determined that these circumstances have not had a significant impact on our financial position, results of operations or liquidity during the first nine months of 2013.

Our domestic pension funds experienced a positive return on assets of 6.02% during the first nine months of 2013. Approximately 88% of these domestic pension plans' funds are invested in readily-liquid investments, including equity, fixed income, asset-backed receivables and structured products. The balance of these domestic pension plans' funds (12%) is invested in less-liquid but market-valued investments, including real estate and private equity. Across our global pension plans, the continued recognition of prior pension losses and the impact of a lower discount rate, partially offset by additional funding, the sunset of the final average earning (FAE) provision for the legacy Goodrich salaried employees' plan, and the positive returns experienced during 2012, are expected to result in increased pension expense in 2013 of approximately $225 million as compared to 2012.

Our strong debt ratings and financial position have historically enabled us to issue long-term debt at favorable market rates, including our issuance of $9.8 billion of long-term debt in June 2012. Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing debt-to-total-capitalization level as well as our current credit standing.

The purchase price of Goodrich of $127.50 per share in cash equated to a total enterprise value of $18.3 billion, including $1.9 billion in net debt assumed. To finance the cash consideration for the Goodrich acquisition and pay related fees, expenses and other amounts due and payable as a result of the acquisition, we utilized the net proceeds of approximately $9.6 billion from the $9.8 billion of long-term notes issued on June 1, 2012, the net proceeds of approximately $1.1 billion from the equity units issued on June 18, 2012, $3.2 billion from the issuance of commercial paper during July 2012 and $2.0 billion of proceeds borrowed on July 26, 2012 pursuant to our April 24, 2012 term loan credit agreement. We prepaid all of the $2.0 billion borrowed pursuant to this term loan credit agreement in November and December 2012. For the remainder of the cash consideration, we utilized approximately $0.5 billion of cash and cash equivalents generated from operating activities.

On May 7, 2013, we commenced cash tender offers for two series of outstanding notes issued by Goodrich and the 2015 UTC 1.200% Senior Notes. These offers expired on June 4, 2013. Approximately $874.2 million in aggregate principal amount of these outstanding notes were tendered pursuant to these tender offers, including notes validly tendered prior to an early tender date in May 2013 and thereby eligible for an early tender premium. Total payments under these tender offers were approximately $935 million including principal, premium and interest. On June 24, 2013 we redeemed all remaining outstanding 2015 UTC 1.200% Senior Notes, representing $327 million in aggregate principal, under our redemption notice issued on May 24, 2013.

On August 23, 2013, we redeemed all remaining outstanding 2019 Goodrich 6.125% notes, representing $202 million in aggregate principal, under our redemption notice issued on July 24, 2013. On September 27, 2013, we redeemed all remaining outstanding 2021 Goodrich 3.600% notes, representing $294 million in aggregate principal, under our redemption notice issued on August 28, 2013.

We expect full year 2013 debt repayments to be approximately $2.5 billion. We expect full year 2014 debt repayments to be approximately $1 billion.

On December 6, 2012, we commenced cash tender offers for six series of outstanding notes originally issued by Goodrich. These offers expired on January 7, 2013. Approximately $635 million in aggregate principal amount of the outstanding Goodrich notes were tendered pursuant to these tender offers prior to an early tender date in December 2012 and, as a result, were eligible for an early tender premium. Additionally, approximately $2 million in aggregate principal amount of the outstanding Goodrich notes not eligible for an early tender premium were tendered prior to the January 7, 2013 expiration date. Total payments under these tender offers were approximately $790 million including principal, premium and interest.

In 2012, the Board approved plans for the divestiture of a number of non-core businesses. On December 13, 2012, we completed the sale of the legacy Hamilton Sundstrand Industrial businesses to a private limited liability company formed by affiliates of BC Partners and affiliates of The Carlyle Group for $3.4 billion. On February 12, 2013 we completed the disposition of our UTC Power unit to ClearEdge Power. In connection with regulatory approval of the Goodrich acquisition, we completed the sale of the Goodrich pumps and engine controls business to Triumph Group, Inc. and the sale of the Goodrich electric power systems business to Safran S.A. for combined proceeds of approximately $600 million. We completed these transactions on March 18, 2013 and March 26, 2013, respectively. On May 17, 2013, we completed the sale of our Pratt & Whitney Power Systems business to MHI and entered into a long-term engineering and manufacturing agreement with MHI. Cash received in connection with the sale was $432 million, excluding contingent consideration valued at approximately $200 million. On June 14, 2013, we completed the sale of Rocketdyne to GenCorp Inc. Cash generated from these divestitures was used to repay debt incurred to finance the Goodrich acquisition.

Tax payments related to discontinued operations were approximately $604 million for the nine months ended September 30, 2013, inclusive of approximately $91 million of tax benefit realized during the quarter ended September 30, 2013 reflecting the cash tax impact of transactions previously reported in discontinued operations. We do not expect remaining net tax payments related to these discontinued operations to be significant.

To manage the cash flow and liquidity impact of the Goodrich acquisition, we suspended share repurchases during 2012. In 2013, we resumed share repurchase activity and repurchased approximately $1 billion of our common stock in the nine months ended September 30, 2013. We expect 2013 full year share repurchases to be approximately $1.2 billion.

At September 30, 2013, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $4 billion pursuant to a $2 billion revolving credit agreement and a $2 billion multicurrency revolving credit agreement, both of which expire in November 2016. As of September 30, 2013, there were no borrowings under either of these revolving credit agreements. The undrawn portions of our revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of September 30, 2013, our maximum commercial paper borrowing authority as set by our Board of Directors was $4 billion. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions and repurchases of our common stock.

We continue to have access to the commercial paper markets and our existing credit facilities, and continue to expect strong generation of operating cash flows. While the impact of market volatility cannot be predicted, we believe we have sufficient operating flexibility, cash reserves and funding sources to maintain adequate amounts of liquidity and to meet our future operating cash needs.

Given our extensive international operations, most of our cash is denominated in foreign currencies. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to capital controls; however, those balances are generally available without legal restrictions to fund ordinary business operations. With few exceptions, U.S. income taxes have not been provided on undistributed earnings of international subsidiaries. Our intention is to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so.

On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions or divestitures or other legal obligations. As of September 30, 2013 and December 31, 2012, the amount of such restricted cash was approximately $40 million and $35 million, respectively, and is primarily included in current assets.

We believe our future operating cash flows will be sufficient to meet our future operating cash needs. Further, despite our higher debt levels incurred to finance the Goodrich acquisition in 2012, our ability to obtain debt or equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate.

### Cash Flow - Operating Activities of Continuing Operations

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Net cash flows provided by operating activities of continuing operations | $4,891 | $4,651 |

Cash generated from operating activities of continuing operations in the first nine months of 2013 was $240 million higher than the same period in 2012, driven primarily by higher income from continuing operations of $360 million and non-cash depreciation and amortization charges of $288 million. During the first nine months of 2013, the net increase in working capital resulted in a cash outflow of $464 million, an increase of $315 million over the first nine months of 2012. The 2013 cash outflows for working capital were primarily driven by increases in inventory to support deliveries and other contractual commitments at Pratt & Whitney and Sikorsky, contracts in progress at Otis and UTC Climate, Controls & Security, as well as increases in accounts receivable at Pratt & Whitney attributable to volume, partially offset by increases in accounts payable and accrued liabilities primarily at Pratt & Whitney, Otis and Sikorsky and lower levels of accounts receivable at UTC Climate, Controls & Security primarily attributable to seasonality.

The funded status of our defined benefit pension plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. We can contribute cash or company stock to our plans at our discretion, subject to applicable regulations. Total cash contributions to our global defined benefit pension plans during the first nine months of 2013 and 2012 were $72 million and $233 million, respectively. We expect to make total cash contributions of approximately $200 million to our global defined benefit pension plans in 2013. Our domestic pension plans are approximately 93% funded on a projected benefit obligation basis as of September 30, 2013 and we are not required to make additional contributions through the end of 2013. Contributions to our global defined benefit pension plans in 2013 are expected to meet or exceed the current funding requirements.

### Cash Flow - Investing Activities of Continuing Operations

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Net cash flows used in investing activities of continuing operations | $(599) | $(17,995) |

Cash flows used in investing activities of continuing operations for the nine months ended September 30, 2013 primarily reflect the net proceeds of approximately $1.5 billion from business dispositions, offset by capital expenditures of approximately $1.0 billion and payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms of approximately $740 million. Business dispositions include the sale of the legacy Goodrich pumps and engine controls business to Triumph Group, Inc. on March 18, 2013, the sale of the legacy Goodrich electric power systems business to Safran S.A. on March 26, 2013, and the sale of Pratt & Whitney Power Systems to MHI on May 17, 2013.

In October 2011, Pratt & Whitney and Rolls-Royce announced their intention to form a new partnership to develop an engine to power future mid-size aircraft. In September 2013, following further discussion and because of the current regulatory environment, the parties have agreed not to proceed with the partnership. During the nine months ended September 30, 2013, we increased our collaboration intangible assets by approximately $550 million, including net payments of $335 million made under our 2012 agreement to acquire Rolls-Royce's collaboration interest in IAE and the September 2013 agreement not to proceed with the partnership with Rolls-Royce. Capital expenditures for the nine months ended September 30, 2013 primarily relate to investments in new programs at Pratt & Whitney, and continuing Goodrich integration activities at UTC Aerospace Systems.

Investments in businesses in the first nine months of 2013 included a number of small acquisitions, primarily in our commercial businesses. We expect total cash investments for acquisitions in 2013 to be approximately $250 million, including acquisitions completed during the first nine months of 2013. However, actual acquisition spending may vary depending upon the timing, availability and appropriate value of acquisition opportunities.

Customer financing activities were a net use of cash of $121 million for the first nine months of 2013 and a net source of cash of $1 million for the first nine months of 2012. While we expect that 2013 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. We may also arrange for third-party investors to assume a portion of our commitments. We had commercial aerospace financing and other contractual commitments of approximately $11.7 billion at September 30, 2013, including approximately $6.4 billion of IAE commitments, related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which up to $600 million may be required to be disbursed during the remainder of 2013. We had commercial aerospace financing and other contractual commitments of approximately $10.9 billion at December 31, 2012.

### Cash Flow - Financing Activities of Continuing Operations

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Net cash flows (used in) provided by financing activities of continuing operations | $(4,226) | $13,986 |

The timing and levels of certain cash flow activities, such as acquisitions and repurchases of our stock, have resulted in the issuance of both long-term and short-term debt. In June 2012, we issued $9.8 billion of long-term debt and $1.1 billion of Equity Units, and in July 2012, we borrowed $2.0 billion from our term loan credit agreement and issued $3.2 billion of commercial paper primarily to partially finance our acquisition of Goodrich and pay related fees, expenses and other amounts due and payable by UTC as a result of the acquisition. Commercial paper borrowings and revolving credit facilities provide short-term liquidity to supplement operating cash flows and are used for general corporate purposes, including the funding of potential acquisitions and repurchases of our stock. We had approximately $100 million of outstanding commercial paper at September 30, 2013.

At September 30, 2013, management had authority to repurchase approximately 53.1 million shares under the share repurchase program announced on February 4, 2013. Under this program, shares may be purchased on the open market, in privately negotiated transactions and under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended. We may also reacquire shares outside of the program from time to time in connection with the surrender of shares to cover taxes on vesting of restricted stock. In connection with our acquisition of Goodrich, we suspended share repurchases during 2012. During the nine months ended September 30, 2013, we resumed repurchase activity and repurchased approximately 10.7 million shares of our common stock for approximately $1 billion. Our share repurchase levels are influenced by various factors, including the level of other investing activities.

We paid dividends on Common Stock of $0.535 per share in the first quarter of 2013 totaling $465 million in the aggregate, $0.535 per share in the second quarter of 2013 totaling $465 million in the aggregate and $0.535 per share in the third quarter of 2013 totaling $465 million in the aggregate. On October 9, 2013, the Board of Directors declared a dividend of $0.59 per share payable December 10, 2013 to shareowners of record at the close of business on November 15, 2013.

We have an existing universal shelf registration statement filed with the SEC for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of debt to be issued under this shelf registration statement.

### Cash Flow - Discontinued Operations

*(Dollars in millions)*

|  | Nine Months Ended September 30, 2013 | 2012 |
| --- | ---: | ---: |
| Net cash flows used in discontinued operations | $(252) | $(330) |

Cash flows used in discontinued operations primarily relate to the completed divestitures of the legacy Hamilton Sundstrand Industrial businesses in December 2012 and Rocketdyne on June 14, 2013. Tax payments related to discontinued operations were approximately $603 million for the nine months ended September 30, 2013, inclusive of approximately $91 million of cash tax benefit realized during the quarter ended September 30, 2013 reflecting the tax impact of transactions reported in discontinued operations. We do not expect remaining net tax payments related to these discontinued operations to be significant. Net cash flows used in discontinued operations for the nine months ended September 30, 2013 includes positive cash flows of approximately $400 million related to the sale of Rocketdyne, and cash flows from the operating activities of Rocketdyne and of UTC Power, through its date of disposition of February 12, 2013, as well as payments made in settlement of liabilities, transaction costs, and interim funding of UTC Power and of Clipper, which was divested in 2012.

### Off-Balance Sheet Arrangements and Contractual Obligations

In our 2012 Annual Report, incorporated by reference in our 2012 Form 10-K, we disclosed our off-balance sheet arrangements and contractual obligations. As of September 30, 2013, there have been no material changes to these off-balance sheet arrangements and contractual obligations outside the ordinary course of business except as otherwise disclosed.

In finalizing the purchase accounting for the acquisition of Goodrich, we finalized the fair value measurement of our existing customer contractual obligations which resulted in an incremental $200 million of obligations recognized during the second quarter of 2013. Based on the estimated net cash outflows of the OEM developmental programs plus a reasonable contracting profit margin required to transfer the contracts to market participants, we recorded total assumed liabilities of approximately $2.2 billion. 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. Total consumption of the contractual obligation through the next five years is expected to be as follows: $70 million remaining in 2013, $274 million in 2014, $213 million in 2015, $242 million in 2016, $233 million in 2017 and $894 million thereafter.

On June 14, 2013 we completed the sale of substantially all operations of Rocketdyne to GenCorp Inc. Following the sale, certain guarantees of Rocketdyne's performance under existing contracts remain in place, which resulted in an increase in our performance guarantees of approximately $124 million, with no associated significant carrying amount of a liability as of September 30, 2013. There have been no other material changes to guarantees outstanding since December 31, 2012.

## Market risk

As filed, 285 characters.

There has been no significant change in our exposure to market risk during the nine months ended September 30, 2013. For discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in our 2012 Form 10-K.

## Controls and procedures

As filed, 7,154 characters.

As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation under the supervision and with the participation of our management, including the Chairman & Chief Executive Officer (CEO), the Senior Vice President and Chief Financial Officer (CFO) and the Acting Controller and Assistant Controller, Financial Reporting (Controller), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2013. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our CEO, our CFO and our Controller have concluded that, as of September 30, 2013, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our CEO, our CFO and our Controller, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting during the three months ended September 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

### Cautionary Note Concerning Factors That May Affect Future Results

This Form 10-Q 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 our future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “expectations,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “will,” “should,” “see,” “guidance,” “confident” and other words of similar meaning in connection with a discussion of future operating or financial performance. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash and other measures of financial performance. All forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For those statements we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Such risks, uncertainties and other factors include, without limitation:

- the effect of economic conditions in the industries and markets in which we operate in the U.S. and globally and any changes therein, including financial market conditions, fluctuations in commodity prices, interest rates and foreign currency exchange rates, levels of end market demand in construction and in both the commercial and defense segments of the aerospace industry, levels of air travel, financial difficulties (including bankruptcy) of commercial airlines, the impact of weather conditions and natural disasters and the financial condition of our customers and suppliers;
- our ability to integrate the acquired Goodrich operations and to realize synergies and opportunities for growth and innovation;
- our ability to realize the intended benefits of recently announced organizational changes;
- future levels of indebtedness and capital spending and research and development spending;
- future availability of credit and factors that may affect such availability, including credit market conditions and our capital structure;
- delays and disruption in delivery of materials and services from suppliers;
- new business opportunities;
- cost reduction efforts and restructuring costs and savings and other consequences thereof;
- the scope, nature, impact or timing of acquisition, divestiture and joint venture activity, including integration of other acquired businesses into our existing businesses;
- the development, production, delivery, support, performance and anticipated benefits of advanced technologies and new products and services;
- the impact of customer driven cost and product efficiency initiatives;
- the anticipated benefits of diversification and balance of operations across product lines, regions and industries;
- the impact of the negotiation of collective bargaining agreements and labor disputes;
- the outcome of legal proceedings and other contingencies;
- future repurchases of our common stock;
- pension plan assumptions and future contributions; and
- the effect of changes in tax, environmental and other laws and regulations or political conditions in the U.S. and other countries in which we operate.

In addition, this Form 10-Q includes important information as to risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. See the “Notes to Condensed Consolidated Financial Statements” under the heading “Contingent Liabilities,” the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Business Overview,” “Critical Accounting Estimates,” “Results of Operations,” and “Liquidity and Financial Condition,” and the section titled “Risk Factors” in this Form 10-Q and in our 2012 Form 10-K. Our Form 10-K also includes important information as to these factors in the “Business” section under the headings “General,” “Description of Business by Segment” and “Other Matters Relating to Our Business as a Whole,” and in the “Legal Proceedings” section. Additional important information as to these factors is included in our 2012 Annual Report in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Environmental Matters” and “Restructuring Costs.” The forward-looking statements speak only as of the date of this Form 10-Q or, in the case of any document incorporated by reference, the date of that document. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Additional information as to factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements is disclosed from time to time in our other filings with the SEC.

## Risk factors

As filed, 41,902 characters.

Our business, financial condition, operating results and cash flows can be impacted by the factors set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results.

### Our Global Growth Is Subject to a Number of Economic Risks.

Over the past few years, market and economic conditions in the U.S. and globally have been highly challenging with tighter credit conditions and slower economic growth. The U.S. economy has experienced a recession and faces continued concerns about the systemic impacts of adverse economic conditions such as the growing U.S. deficit, high energy costs, geopolitical issues, the availability and cost of credit, and an unstable real estate market. In 2012, the global economy improved as compared to 2011 and continued to show signs of a gradual recovery from the significant downturn of 2008 and 2009 when the global economy experienced widespread recessionary conditions, record levels of unemployment, significant distress of financial institutions, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. However, despite positive economic indicators seen since the beginning of 2011, uncertainty continues to exist as to the overall rate and stability of the recovery. Despite a recent slowdown in growth rates in China and other emerging economies, global gross domestic product growth continues to be led by emerging markets. In the developed economies, particularly in Europe, economic conditions continue to stagnate. Further disruptions in Europe or in other economies could affect our sales or liquidity.

While improvement in the global economy remains uneven, in the U.S., economic conditions have continued to rebound on improving consumer sentiment, lower unemployment rates, an improving housing market and increasing commercial construction. However, U.S. Government deficit reduction measures, the recent U.S. Government shut-down, the Congressional fight over the debt ceiling and the impact of sequestration have increased market uncertainties and adversely affected our military businesses. There continues to be fiscal uncertainty in Europe while emerging markets have shown continued but modest strength. There can be no assurance that any of the recent economic improvements will be broad-based and sustainable, or that they will enhance conditions in markets relevant to us. Further, there can be no assurance that we will not experience further adverse effects that may be material to our cash flows, competitive position, financial condition, results of operations, or our ability to access capital. While these economic developments have not impaired our ability to access credit markets and finance our operations to date, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies. These economic developments affect businesses such as ours in a number of ways. The tightening of credit in financial markets adversely affects the ability of our customers and suppliers to obtain financing for significant purchases and operations and could result in a decrease in or cancellation of orders for our products and services as well as impact the ability of our customers to make payments. Similarly, this tightening of credit may adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy. Our global business is also adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending, air travel, construction activity, the financial strength of airlines and business jet operators, and government procurement. Strengthening of the rate of exchange for the U.S. Dollar against certain major currencies such as the Euro, the Canadian Dollar and other currencies could also adversely affects our results, as the majority of our sales are non-U.S. based.

***Our Financial Performance Is Dependent on the Conditions of the Construction and Aerospace Industries.***

The results of our commercial and industrial businesses, which generated approximately 51 percent of our consolidated sales in 2012, are influenced by a number of external factors including fluctuations in residential and commercial construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, the tightening of global credit markets, and other global and political factors. For example, a slowdown in building and remodeling activity can adversely affect the financial performance of Otis and UTC Climate, Controls & Security. In addition, the financial performance of UTC Climate, Controls & Security can also be influenced by production and utilization of transport equipment and, particularly in its residential business, weather conditions.

The results of our commercial and military aerospace businesses, which generated approximately 49 percent of our consolidated sales in 2012, are directly tied to the economic conditions in the commercial aviation and defense industries, which are cyclical in nature. Although the operating environment currently faced by commercial airlines has shown signs of gradual improvement since 2011, uncertainty continues to exist. As a result, financial difficulties, including bankruptcy, of one or more of the major commercial airlines could result in significant cancellations of orders, reductions in our aerospace sales and losses under existing contracts. In addition, capital spending and demand for aircraft engines, aerospace products and component aftermarket parts and service by commercial airlines, aircraft operators and aircraft manufacturers are influenced by a wide variety of factors, including current and predicted traffic levels, load factors, aircraft fuel pricing, labor issues, worldwide airline profits, airline consolidation, competition, the retirement of older aircraft, regulatory changes, terrorism and related safety concerns, general economic conditions, corporate profitability, and backlog levels, all of which could reduce the aftermarket sales and margins of our aerospace businesses. Other factors, including future terrorist actions, pandemic health issues or major natural disasters, could also dramatically reduce the demand for air travel, which could negatively impact the aftermarket sales and margins of our aerospace businesses. Additionally, because a substantial portion of the backlog for commercial aerospace customers is scheduled for delivery beyond 2013, changes in economic conditions may cause customers to request that firm orders be rescheduled or canceled. At times, our aerospace businesses also enter into firm fixed-price development contracts, which may require us to bear cost overruns related to unforeseen technical and design challenges that arise during the development stage of the program. In addition, our aerospace businesses face intense competition from domestic and foreign manufacturers of new equipment and spare parts. The defense industry is also affected by a changing global political environment, continued pressure on U.S. and global defense spending and U.S. foreign policy and the level of activity in military flight operations. U.S. Government deficit reduction measures, the recent U.S. Government shut-down, the Congressional fight over the debt ceiling and the impact of sequestration have increased market uncertainty and adversely affected our military businesses. Should these factors continue and overall U.S. Government defense spending decline, it could result in significant reductions to revenue, cash flow, profit and backlog for our military businesses. Spare parts sales and aftermarket service trends are affected by similar factors, including usage, pricing, technological improvements, regulatory changes and the retirement of older aircraft. Furthermore, because of the lengthy research and development cycle involved in bringing products in these business segments to market, we cannot predict the economic conditions that will exist when any new product is complete. A reduction in capital spending in the commercial aviation or defense industries could have a significant effect on the demand for our products, which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

### Our Business May Be Affected by Government Contracting Risks.

U.S. Government contracts are subject to termination by the government, either for the convenience of the government or for default as a result of our failure to perform under the applicable contract. If terminated by the government as a result of our default, we could be liable for additional costs the government incurs in acquiring undelivered goods or services from another source and any other damages it suffers. We are now, and believe that in light of the current U.S. Government contracting environment we will continue to be, the subject of one or more U.S. Government investigations relating to certain of our U.S. Government contracts. If we or one of our business units were charged with wrongdoing as a result of any U.S. Government investigation (including violation of certain environmental or export laws, as further described below), the U.S. Government could suspend us from bidding on or receiving awards of new U.S. Government contracts pending the completion of legal proceedings. If convicted or found liable, the U.S. Government could subject us to fines, penalties, repayments and treble and other damages, and/or bar us from bidding on or receiving new awards of U.S. Government contracts. The U.S. Government could void any contracts found to be tainted by fraud. The U.S. Government also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other seriously improper conduct. Debarment generally does not exceed three years. We are also sensitive to U.S. military budgets, which may be impacted by numerous economic and political factors and which may fluctuate based on the policies of the current administration or Congress. In addition, the specific government programs in which we participate or in which we may seek to participate in the future, compete with other programs for consideration during the budget formulation and appropriation processes. One or more of the programs that we currently support could be phased-out or terminated. Reductions in these existing programs, unless offset by other programs and opportunities, could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***Our International Operations Subject Us to Economic Risk As Our Results of Operations May Be Adversely Affected by Changes in Foreign Currency Fluctuations, Economic Conditions and Changes in Local Government Regulation.***

We conduct our business on a global basis, with approximately 60 percent of our 2012 consolidated sales derived from international operations, including U.S. export sales. Changes in local and regional economic conditions, including fluctuations in exchange rates, may affect product demand and reported profits in our non-U.S. operations (primarily the commercial businesses), where transactions are generally denominated in local currencies. In addition, currency fluctuations may affect the prices we pay suppliers for materials used in our products. As a result, our operating margins may also be negatively impacted by worldwide currency fluctuations that result in higher costs for certain cross border transactions. Our financial statements are denominated in U.S. Dollars. Accordingly, fluctuations in exchange rates may also give rise to translation gains or losses when financial statements of non-U.S. operating units are translated into U.S. Dollars. Given that the majority of our sales are non-U.S. based, a strengthening of the U.S. Dollar against other major foreign currencies could adversely affect our results of operations.

The majority of sales in the aerospace businesses are transacted in U.S. Dollars, consistent with established industry practice, while the majority of costs at locations outside the U.S. are incurred in the applicable local currency (principally the Euro, the Canadian Dollar, and the Polish Zloty). For operating units with U.S. Dollar sales and local currency costs, there is foreign currency exposure that could impact our results of operations depending on market changes in the exchange rate of the U.S. Dollar against the applicable foreign currencies. To manage certain exposures, we employ long-term hedging strategies associated with U.S. Dollar sales. See Note 1 and Note 14 to the Consolidated Financial Statements in our 2012 Annual Report and Note 9 to the Condensed Consolidated Financial Statements in this Form 10-Q for further discussion of our hedging strategies.

Our international sales and operations are subject to risks associated with changes in local government laws, regulations and policies, including those related to tariffs and trade barriers, investments, taxation, exchange controls, capital controls, employment regulations, and repatriation of earnings. Our international sales and operations are also sensitive to changes in foreign national priorities, including government budgets, as well as to political and economic instability. International transactions may involve increased financial and legal risks due to differing legal systems and customs in foreign countries. For example, as a condition of sale or award of a contract, some international customers require us to agree to offset arrangements, which may include in-country purchases, manufacturing and financial support arrangements. The contract may provide for penalties in the event we fail to perform in accordance with the offset requirements.

In addition, as part of our globalization strategy, we have invested in certain countries, including Argentina, Brazil, China, India, Mexico, Russia, South Africa and countries in the Middle East, that carry high levels of currency, political, compliance and economic risk. We expect that sales to emerging markets will continue to account for a significant portion of our sales as our business evolves and as these and other developing nations and regions around the world increase their demand for our products. Emerging market operations can present many risks, including cultural differences (such as employment and business practices), volatility in gross domestic product, economic and government instability, and the imposition of exchange controls and capital controls. While these factors and their impact are difficult to predict, any one or more of them could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***We Use a Variety of Raw Materials, Supplier-Provided Parts, Components, Sub-Systems and Third Party Contract Manufacturing Services in Our Businesses, and Significant Shortages, Supplier Capacity Constraints, Supplier Production Disruptions or Price Increases Could Increase Our Operating Costs and Adversely Impact the Competitive Positions of Our Products.***

Our reliance on suppliers, third party contract manufacturing and commodity markets to secure raw materials, parts, components and sub-systems used in our products exposes us to volatility in the prices and availability of these materials. In many instances, we depend upon a single source of supply, manufacturing or assembly or participate in commodity markets that may be subject to allocations of limited supplies by suppliers. A disruption in deliveries from our suppliers or third party contract manufacturers, supplier capacity constraints, supplier and third party contract manufacturer production disruptions, closing or bankruptcy of our suppliers, price increases, or decreased availability of raw materials or commodities, could have a material adverse effect on our ability to meet our commitments to customers or increase our operating costs. We believe that our supply management and production practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. Nonetheless, price increases, supplier capacity constraints, supplier production disruptions or the unavailability of some raw materials may have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***We Engage in Acquisitions and Divestitures, and May Encounter Difficulties Integrating Acquired Businesses with, or Disposing of Divested Businesses From, Our Current Operations; Therefore, We May Not Realize the Anticipated Benefits of these Acquisitions and Divestitures.***

We seek to grow through strategic acquisitions in addition to internal growth. In the past several years, we have made various acquisitions and have entered into joint venture arrangements intended to complement and expand our businesses, and expect to do so in the future. For example, on June 29, 2012, Pratt & Whitney acquired Rolls-Royce's ownership and collaboration interests in IAE, and on July 26, 2012, we completed our acquisition of Goodrich. Our due diligence reviews may not identify all of the material issues necessary to accurately estimate the cost and potential loss contingencies of a particular transaction, including potential exposure to regulatory sanctions resulting from an acquisition target’s previous activities. We may incur unanticipated costs or expenses, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation, and other liabilities. We also may encounter difficulties in integrating acquisitions with our operations, applying our internal controls processes to these acquisitions, or in managing strategic investments. Additionally, we may not realize the degree or timing of benefits we anticipate when we first enter into a transaction. Any of the foregoing could adversely affect our business and results of operations. In addition, accounting requirements relating to business combinations, including the requirement to expense certain acquisition costs as incurred, may cause us to incur greater earnings volatility and generally lower earnings during periods in which we acquire new businesses. Furthermore, we make strategic divestitures from time to time. For example, we completed the disposition of UTC Power to ClearEdge Power in February 2013, the disposition of the legacy Hamilton Sundstrand Industrial businesses to affiliates of BC Partners and The Carlyle Group in December 2012, and the disposition of Clipper to a private equity acquirer in August 2012. Additionally, in June 2013 we completed the sale of substantially all operations of our Pratt & Whitney Rocketdyne business to GenCorp Inc., and in May 2013 we completed the sale of our Pratt & Whitney Power Systems unit to Mitsubishi Heavy Industries. Our divestitures may result in continued financial involvement in the divested businesses, such as through guarantees or other financial arrangements, following the transaction. Under these arrangements, nonperformance by those divested businesses could result in obligations imposed on us and could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. The success of future acquisitions and divestitures will depend on the satisfaction of conditions precedent to, and consummation of, the pending transactions, the timing of consummation of these pending transactions, and the ability of the parties to secure any required regulatory approvals in a timely manner.

***The Acquired Goodrich Business May Underperform Relative to Our Expectations; The Transaction May Cause Our Financial Results to Differ From Our Expectations or the Expectations of the Investment Community; We May Not Be Able to Achieve Anticipated Cost Savings or Other Anticipated Synergies.***

The success of the Goodrich acquisition will continue to depend, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from the integration of Goodrich with our existing businesses. The integration process is complex, costly and time-consuming. The potential difficulties of integrating the operations of Goodrich and realizing our expectations for the acquisition include, among others:

- failure to implement our business plan for the combined business;
- unanticipated issues in integrating manufacturing, logistics, information, communications and other systems;
- unanticipated changes in applicable laws and regulations;
- operating risks inherent in the Goodrich business and our business;
- retaining key customers, suppliers and employees;
- retaining and obtaining required regulatory approvals, licenses and permits;
- unanticipated changes in the combined business due to divestitures imposed by antitrust regulators; and
- the impact on our internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002.

***Our Debt Has Increased As a Result of the Goodrich Acquisition and Will Increase If We Incur Additional Debt in the Future and Do Not Retire Existing Debt.***

We have outstanding debt and other financial obligations and significant unused borrowing capacity. We have incurred substantial additional debt as a result of the Goodrich acquisition. As of September 30, 2013, we had approximately $21.2 billion of total debt on a consolidated basis. Our debt level and related debt service obligations could have negative consequences, including, among others:

- requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which would reduce the funds we have available for other purposes, such as acquisitions and reinvestment in our businesses;
- reducing our flexibility in planning for or reacting to changes in our business and market conditions; and
- exposing us to interest rate risk since a portion of our debt obligations are at variable rates.

We may incur significantly more debt in the future. If we add new debt and do not retire existing debt, the risks described above could increase.

Our global and domestic revolving credit facilities impose restrictions on us, including certain restrictions on our ability to incur liens on our assets. Our revolving credit facilities are available for general corporate purposes. There are currently no amounts outstanding under these credit facilities. Our long-term debt obligations include covenants that may adversely affect our ability to incur certain secured indebtedness or engage in certain types of sale and leaseback transactions. Our ability to comply with these restrictions and covenants may be affected by events beyond our control. If we breach any of these restrictions or covenants and do not obtain a waiver from the lenders, then, subject to applicable cure periods, our outstanding indebtedness could be declared immediately due and payable.

***We Design, Manufacture and Service Products that Incorporate Advanced Technologies; The Introduction of New Products and Technologies Involves Risks and We May Not Realize the Degree or Timing of Benefits Initially Anticipated.***

We seek to achieve growth through the design, development, production, sale and support of innovative products that incorporate advanced technologies. The product, program and service needs of our customers change and evolve regularly, and we invest substantial amounts in research and development efforts to pursue advancements in a wide range of technologies, products and services. Our ability to realize the anticipated benefits of these advancements depends on a variety of factors, including meeting development, production, certification and regulatory approval schedules; execution of internal and external performance plans; availability of supplier- and internally-produced parts and materials; performance of suppliers and subcontractors; hiring and training of qualified personnel; achieving cost and production efficiencies; identification of emerging technological trends in our target end-markets; validation of innovative technologies; the level of customer interest in new technologies and products; and customer acceptance of our products and products that incorporate technologies we develop. For example, certain of our aerospace products are incorporated into larger systems and end products manufactured by our customers. These systems and end products may incorporate additional technologies manufactured by third parties and involve additional risks and uncertainties. As a result, the performance and market acceptance of these larger systems and end products could affect the level of customer interest and acceptance of our own products in the marketplace.

Any development efforts divert resources from other potential investments in our businesses, and these efforts may not lead to the development of new technologies or products on a timely basis or meet the needs of our customers as fully as competitive offerings. In addition, the markets for our products or products that incorporate our technologies may not develop or grow as we anticipate. We or our customers, suppliers or subcontractors may encounter difficulties in developing and producing new products and services, and may not realize the degree or timing of benefits initially anticipated or may otherwise suffer significant adverse financial consequences. Due to the design complexity of our products, we may in the future experience delays in completing the development and introduction of new products. Any delays could result in increased development costs or deflect resources from other projects. In particular, we cannot predict with certainty whether, when and in what quantities our aerospace businesses will produce and sell aircraft engines, helicopters, aircraft systems and components and other products currently in development or pending required certifications. Our contracts are typically awarded on a competitive basis. Our bids are based upon, among other items, the cost to provide the products and services. To generate an acceptable return on our investment in these contracts, we must be able to accurately estimate our costs to provide the services required by the contract and to be able to complete the contracts in a timely manner. If we fail to accurately estimate our costs or the time required to complete a contract, the profitability of our contracts may be materially and adversely affected. Some of our contracts provide for liquidated damages in the event that we are unable to perform and deliver in accordance with the contractual specifications and schedule. Furthermore, we cannot be sure that our competitors will not develop competing technologies which gain market acceptance in advance of or instead of our products. The possibility exists that our competitors might develop new technology or offerings that might cause our existing technology and offerings to become obsolete. Any of the foregoing could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***Exports of Certain of Our Products Are Subject to Various Export Control Regulations and May Require a License From the U.S. Department of State, the U.S. Department of Commerce or the U.S. Department of the Treasury.***

As an exporter, we must comply with various laws and regulations relating to the export of products, services and technology from the U.S. and other countries having jurisdiction over our operations. In the U.S., these laws include, among others, the U.S. Export Administration Regulations (EAR) administered by the U.S. Department of Commerce, Bureau of Industry and Security, the International Traffic in Arms Regulations (ITAR) administered by the U.S. Department of State, Directorate of Defense Trade Controls (DDTC), and trade sanctions, regulations and embargoes administered by the U.S. Department of the Treasury, Office of Foreign Assets Control. Certain of our products have military or strategic applications and are on the munitions list of the ITAR, or represent so-called “dual use” items governed by the EAR. As a result, these products require individual validated licenses in order to be exported to certain jurisdictions. Any failures to comply with these laws and regulations could result in civil or criminal penalties, fines, investigations, adverse publicity and restrictions on our ability to export our products, and repeat failures could carry more significant penalties. As previously disclosed, on June 28, 2012, we entered into a consent agreement with the DDTC and a deferred prosecution agreement with the U.S. Department of Justice regarding separate but related export licensing compliance violations, both of which impose significant continuing obligations. In connection with the foregoing, we entered into an administrative agreement with the Department of the Army Suspension and Debarment Official, in which Army officials determined that we are presently responsible and that further action is not necessary pursuant to the Federal Acquisition Regulation and National Defense Appropriations Act. Any changes in export regulations may further restrict the export of our products. The length of time required by the licensing processes can vary, potentially delaying the shipment of products and the recognition of the corresponding revenue. Any restrictions on the export of our products or product lines could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***We Are Subject to Litigation, Tax, Environmental and Other Legal Compliance Risks.***

We are subject to a variety of litigation, tax and other legal compliance risks. These risks include, among other things, possible liability relating to product liability matters, personal injuries, intellectual property rights, contract-related claims, government contracts, taxes, environmental matters and compliance with U.S. and foreign laws, competition laws and laws governing improper business practices. We or one of our business units could be charged with wrongdoing as a result of such matters. If convicted or found liable, we could be subject to significant fines, penalties, repayments, other damages (in certain cases, treble damages). As a global business, we are subject to complex laws and regulations in the U.S. and other countries in which we operate. Those laws and regulations may be interpreted in different ways. They may also change from time to time, as may related interpretations and other guidance. Changes in laws or regulations could result in higher expenses and payments, and uncertainty relating to laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights. Changes in environmental and climate change laws or regulations, including laws relating to greenhouse gas emissions, could lead to new or additional investment in product designs and could increase environmental compliance expenditures. Changes in climate change concerns, or in the regulation of such concerns, including greenhouse gas emissions, could subject us to additional costs and restrictions, including increased energy and raw materials costs.

In the area of taxes, changes in tax laws and regulations, as well as changes in related interpretations and other tax guidance could materially impact our tax receivables and liabilities and our deferred tax assets and deferred tax liabilities. Additionally, in the ordinary course of business we are subject to examinations by various authorities, including tax authorities. In addition to ongoing investigations, there could be additional investigations launched in the future by governmental authorities in various jurisdictions, and existing investigations could be expanded. The global and diverse nature of our operations means that these risks will continue to exist and additional legal proceedings and contingencies will arise from time to time. Our results may be affected by the outcome of legal proceedings and other contingencies that cannot be predicted with certainty.

For non-income tax risks, we estimate material loss contingencies and establish reserves as required by generally accepted accounting principles based on our assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known to us at a particular point in time or there is a reasonable possibility that a loss or additional loss may have been incurred and determine if accruals and related disclosures are appropriate. Subsequent developments in legal proceedings may affect our assessment and estimates of the loss contingency recorded as a liability or as a reserve against assets in our financial statements and could result in a material adverse effect on our results of operations in the period in which a liability would be recognized or cash flows or financial position for the period in which damages would be paid. For a description of current legal proceedings, see Part I, Item 3 “Legal Proceedings,” in our Form 10-K, as updated from time to time in subsequent filings, including this Form 10-Q. For income tax risks, we recognize tax benefits based on our assessment that a tax benefit has a greater than 50 percent likelihood of being sustained upon ultimate settlement with the applicable taxing authority that has full knowledge of all relevant facts. For those income tax positions where we assess that there is not a greater than 50 percent likelihood that such tax benefits will be sustained, we do not recognize a tax benefit in our financial statements. Subsequent events may cause us to change our assessment of the likelihood of sustaining a previously-recognized benefit which could result in a material adverse effect on our financial condition or results of operations in the period in which any such event occurs or on our cash flows in the period in which the ultimate settlement with the applicable taxing authority occurs. See Note 6 to the Condensed Consolidated Financial Statements in this Form 10-Q for further discussion on income taxes.

In addition, the U.S. Foreign Corrupt Practices Act (FCPA) and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, U.S. companies may be held liable for actions taken by strategic or local partners or representatives. The FCPA also imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments. Certain of our customer relationships outside of the U.S. are with governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. Despite meaningful measures that we undertake to facilitate lawful conduct, which include training and internal control policies, these measures may not always prevent our employees or agents from violating the FCPA or similar laws. As a result, we could be subject to criminal and civil penalties, disgorgement, further changes or enhancements to our procedures, policies and controls, personnel changes or other remedial actions. Violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction and result in a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***We May Be Unable to Realize Expected Benefits From Our Cost Reduction and Restructuring Efforts and Our Profitability May Be Hurt or Our Business Otherwise Might Be Adversely Affected.***

In order to operate more efficiently and control costs, we announce from time to time restructuring plans, which include workforce reductions as well as global facility consolidations and other cost reduction initiatives. These plans are intended to generate operating expense savings through direct and indirect overhead expense reductions as well as other savings. We may undertake further workforce reductions or restructuring actions in the future. These types of cost reduction and restructuring activities are complex. If we do not successfully manage our current restructuring activities, or any other restructuring activities that we may undertake in the future, expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. Risks associated with these actions and other workforce management issues include delays in implementation of anticipated workforce reductions, additional unexpected costs, changes in restructuring plans that increase or decrease the number of employees affected, adverse effects on employee morale and the failure to meet operational targets due to the loss of employees, any of which may impair our ability to achieve anticipated cost reductions or may otherwise harm our business, which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***Our Business and Financial Performance May Be Adversely Affected By Information Technology and Other Business Disruptions.***

Our business may be impacted by disruptions, including information technology attacks or failures, threats to physical security, as well as damaging weather or other acts of nature, pandemics or other public health crises. Cybersecurity attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data (our own or that of third parties). We have experienced cybersecurity attacks and may continue to experience them going forward, potentially with more frequency. We believe that we have adopted appropriate measures to mitigate potential risks to our technology and our operations from these information technology-related and other potential disruptions. However, given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising of confidential or otherwise protected information, misappropriation, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

***We Depend On Our Intellectual Property, and Have Access to Certain Intellectual Property and Information of Our Customers and Suppliers; Infringement or Failure to Protect Our Intellectual Property Could Adversely Affect Our Future Growth and Success.***

We rely on a combination of patents, trademarks, copyrights, trade secrets, nondisclosure agreements, information technology security systems and other measures to protect our proprietary intellectual property. We also rely on nondisclosure agreements, information technology security systems and other measures to protect certain customer and supplier information and intellectual property that we have in our possession or to which we have access. Our efforts to protect intellectual property and proprietary rights may not be sufficient. We cannot be sure that our pending patent applications will result in the issuance of patents to us, that patents issued to or licensed by us in the past or in the future will not be challenged or circumvented by competitors, or that these patents will be found to be valid or sufficiently broad to preclude our competitors from introducing technologies similar to those covered by our patents and patent applications. In addition, our ability to enforce and protect our intellectual property rights may be limited in certain countries outside the U.S., which could have a material negative impact on our sales volume and therefore could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition. We may also be subject to disruptions, losses and liability resulting from various cybersecurity attacks or information technology failures, as described above.

Any of these events or factors could diminish or cause us to lose the competitive advantages associated with our intellectual property, subject us to judgments, penalties and significant litigation costs or temporarily or permanently disrupt our sales and marketing of the affected products or services. Any of the foregoing could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.

Filed Oct 25, 2013.
Source: SEC EDGAR, the filing index for accession 0000101829-13-000045. Last ingested by Listed: Nov 3, 2026, 21:25 ET. No prices; not investment advice.