# RTX Corp: Form 10-Q for the period ended Jun 30, 2017

- Company: [RTX Corp](/companies/rtx.md) (CIK 101829)
- Form: 10-Q
- Filed: 2017-07-28
- Accepted by EDGAR: Jul 28, 2017, 10:58 ET
- Period: 2017-06-30
- Accession: 0000101829-17-000034
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/101829/000010182917000034/a2017-06x3010xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/101829/000010182917000034/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-04-01 to 2017-06-30 | $7.91bn | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2017-01-01 to 2017-06-30 | $15.17bn | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2017-04-01 to 2017-06-30 | $609.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2017-01-01 to 2017-06-30 | $1.19bn | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2017-04-01 to 2017-06-30 | $1.54bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2017-01-01 to 2017-06-30 | $3.02bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-04-01 to 2017-06-30 | $2.29bn | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-01-01 to 2017-06-30 | $4.56bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-04-01 to 2017-06-30 | $226.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2017-01-01 to 2017-06-30 | $439.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | $532.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | $1.12bn | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | $1.44bn | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | $2.83bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | $1.80 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | $3.53 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | $1.83 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | $3.57 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 798,200,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 800,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2017-01-01 to 2017-06-30 | $3.14bn | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $771.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2017-01-01 to 2017-06-30 | $1.01bn | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2017-01-01 to 2017-06-30 | $1.37bn | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-06-30 | $9.35bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-06-30 | $32.83bn | us-gaap:AssetsCurrent |
| Total assets | at 2017-06-30 | $94.79bn | us-gaap:Assets |
| Current liabilities | at 2017-06-30 | $23.92bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-06-30 | $64.23bn | us-gaap:Liabilities |
| Short-term borrowings | at 2017-06-30 | $682.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2017-06-30 | $28.44bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2017-06-30 | 798,772,783 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 61,710 characters.

### BUSINESS OVERVIEW

We are a global provider of high technology products and services to the building systems and aerospace industries. Our operations for the periods presented herein are classified into four principal business segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems. Otis and UTC Climate, Controls & Security are referred to as the "commercial businesses," while Pratt & Whitney and UTC Aerospace Systems are referred to as the "aerospace businesses."

The current status of significant factors affecting our business environment in 2017 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 2016 Annual Report, which is incorporated by reference in our 2016 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 spares businesses, and longer cycles at Otis and in our aerospace OEM and aftermarket maintenance 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.

Our military businesses' sales are affected by U.S. Department of Defense budget and spending levels. Total sales to the U.S. Government were $1.4 billion and $1.3 billion, or 9% of total UTC sales, in the quarters ended June 30, 2017 and 2016, respectively. The defense portion of our aerospace business is affected by changes in market demand and the global political environment. 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 2017.

### Discontinued Operations

In the six months ended June 30, 2016, we recognized approximately $36 million of Loss on disposal of discontinued operations, primarily reflecting additional tax provision associated with the net gain realized on the sale of Sikorsky to Lockheed Martin Corp. in November 2015, and we had net cash outflows from discontinued operations of approximately $2.5 billion, primarily related to the payment of taxes related to this 2015 gain.

### 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. During the six months ended June 30, 2017, our investment in business acquisitions was $168 million, which includes a number of small acquisitions primarily in our commercial businesses. We expect cash investment in acquisitions to be approximately $1 billion to $2 billion in 2017. 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.

Global economic and political conditions, changes in raw material and commodity prices, interest rates, foreign currency exchange rates, energy costs, levels of end market demand in construction, levels of air travel, the financial condition of commercial airlines, and the impact from natural disasters and weather conditions create uncertainties that could impact our earnings outlook for the remainder of 2017. See Part I, Item 1A, "Risk Factors" in our 2016 Form 10-K for further discussion.

### 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 2016 Annual Report, incorporated by reference in our 2016 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 six months ended June 30, 2017.

### RESULTS OF OPERATIONS

### Net Sales

*(Dollars in millions)*

|  | Quarter Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $15,280 | $14,874 | $29,095 | $28,231 |

The factors contributing to the total percentage change year-over-year in total net sales for the quarter and six months ended June 30, 2017 are as follows:

|  | Quarter Ended June 30, 2017 | Six Months Ended June 30, 2017 |
| --- | ---: | ---: |
| Organic change | 3% | 3% |
| Foreign currency translation | (1)% | (1)% |
| Acquisitions and divestitures, net | 1% | 1% |
| Total % Change | 3% | 3% |

During the quarter ended June 30, 2017, organic sales growth at Pratt & Whitney (6%), UTC Climate, Controls & Security (5%) and Otis (1%) was partially offset by a decline at UTC Aerospace Systems (1%). The organic sales growth at Pratt & Whitney was driven by higher military revenues and an increase in commercial aftermarket sales. The organic growth at UTC Climate, Controls & Security was driven by higher sales in the North America residential HVAC, global commercial HVAC, and commercial refrigeration businesses, while growth at Otis was primarily driven by service sales growth in North America and Asia, and higher new equipment sales in North America and Europe, partially offset by lower new equipment sales in China. The organic sales decline at UTC Aerospace Systems was driven primarily by lower commercial aerospace OEM volume.

All four segments experienced organic sales growth during the six months ended June 30, 2017. Pratt & Whitney sales were up 5% organically, driven by higher military revenues and an increase in commercial aftermarket sales. Organic sales at UTC Climate, Controls & Security increased 3%, driven by higher sales in the North America residential HVAC, global commercial HVAC, and commercial refrigeration businesses. Otis sales increased 2% organically, driven by service sales growth in North America and Asia, and higher new equipment sales in North America and Europe, partially offset by lower new equipment sales in China. Organic sales at UTC Aerospace Systems grew 2%, primarily driven by an increase in commercial aerospace aftermarket sales.

### Cost of Products and Services Sold

*(Dollars in millions)*

|  | Quarter Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Cost of products sold | $7,907 | $7,933 | $15,170 | $15,020 |
| Percentage of product sales | 74.2% | 74.6% | 74.7% | 74.9% |
| Cost of services sold | $3,193 | $2,808 | $6,007 | $5,375 |
| Percentage of service sales | 69.1% | 66.2% | 68.3% | 65.7% |
| Total cost of products and services sold | $11,100 | $10,741 | $21,177 | $20,395 |

28

The factors contributing to the percentage change year-over-year for the quarter and six months ended June 30, 2017 in total cost of products and services sold are as follows:

|  | Quarter Ended June 30, 2017 | Six Months Ended June 30, 2017 |
| --- | ---: | ---: |
| Organic change | 4% | 4% |
| Foreign currency translation | (1)% | (1)% |
| Acquisitions and divestitures, net | — | 1% |
| Total % Change | 3% | 4% |

The organic increase in total cost of products and services sold in the quarter and six months ended June 30, 2017 was primarily driven by the organic sales increases noted above, additional unfavorable contract adjustments related to a large commercial project at UTC Climate, Controls & Security, and higher negative engine margin at Pratt & Whitney. The year-over-year increase in cost of services sold as a percentage of service sales in the quarter and six months ended June 30, 2017 was primarily driven by the absence of prior year favorable contract settlements at Pratt & Whitney.

### Gross Margin

*(Dollars in millions)*

|  | Quarter Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Gross margin | $4,180 | $4,133 | $7,918 | $7,836 |
| Percentage of net sales | 27.4% | 27.8% | 27.2% | 27.8% |

The 40 basis point decline in gross margin as a percentage of sales for the quarter ended June 30, 2017 primarily reflects lower gross margin at Otis (40 basis points) driven by price/mix pressure, primarily in China, and lower gross margin at UTC Climate, Controls & Security (30 basis points) primarily driven by an unfavorable contract adjustment related to a large commercial project. These declines were partially offset by gross margin improvement at Pratt & Whitney (30 basis points) driven primarily by higher commercial and military aftermarket sales volumes.

The 60 basis point decline in gross margin as a percentage of sales for the six months ended June 30, 2017 primarily reflects lower gross margin at UTC Climate, Controls & Security (30 basis points) primarily driven by unfavorable contract adjustments related to a large commercial project and lower gross margin at Otis (30 basis points) driven by price/mix pressure, primarily in China.

### Research and Development

*(Dollars in millions)*

|  | Quarter Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Company-funded | $609 | $588 | $1,186 | $1,129 |
| Percentage of net sales | 4.0% | 4.0% | 4.1% | 4.0% |
| Customer-funded | $386 | $359 | $718 | $714 |
| Percentage of net sales | 2.5% | 2.4% | 2.5% | 2.5% |

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 (4%) for the quarter ended June 30, 2017 is primarily driven by higher research and development spending at Pratt & Whitney (2%), driven by higher spending on Pratt & Whitney military development programs and various programs at Pratt & Whitney Canada; continued investment in new products at UTC Climate, Controls & Security (2%); and increased spending on strategic initiatives at Otis (1%). For the six months ended June 30, 2017, company-funded research and development increased 5% with increased spending across all segments. The growth consisted of continued investment in new products at UTC Climate, Controls & Security (2%), higher spending across various programs at UTC Aerospace Systems (1%), increased spending on strategic initiatives at Otis (1%) and an increase at Pratt & Whitney (1%) driven by higher spending on various Pratt & Whitney Canada programs and Pratt & Whitney military development programs.

The year-over-year increase in customer-funded research and development (8%) for the quarter ended June 30, 2017 is primarily driven by higher research and development spending on military development programs at Pratt & Whitney (8%). For the six months ended June 30, 2017, customer-funded research and development increased (1%) as higher spending on military development programs at Pratt & Whitney was largely offset by lower spending across various programs at UTC Aerospace Systems.

### Selling, General and Administrative

*(Dollars in millions)*

|  | Quarter Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expenses | $1,538 | $1,451 | $3,020 | $2,814 |
| Percentage of net sales | 10.1% | 9.8% | 10.4% | 10.0% |

Selling, general and administrative expenses increased 6% in the quarter ended June 30, 2017, including a 2% increase in expenses resulting from recent acquisitions. The increase also reflects higher expenses at Pratt & Whitney (2%) and UTC Aerospace Systems (1%), primarily driven by increased headcount and employee compensation related expenses.

Selling, general and administrative expenses increased 7% in the six months ended June 30, 2017 reflecting higher expenses at Pratt & Whitney (1%) and UTC Aerospace Systems (1%), primarily driven by increased headcount and employee compensation related expenses; higher spending at Otis (1%) resulting from higher labor and information technology costs; an increase in expenses resulting from recent acquisitions (1%) and an increase in general corporate expenses primarily driven by employee compensation related expenses.

### Other Income, Net

*(Dollars in millions)*

|  | Quarter Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Other income, net | $257 | $243 | $845 | $389 |

Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses, as well as other ongoing and nonrecurring items. The year-over-year increase in other income, net (6%) in the quarter ended June 30, 2017 is primarily driven by a gain on the sale of our investment in a UTC Climate, Controls & Security joint venture (9%) partially offset by the net unfavorable impact resulting from the absence of prior year contract settlements and transactional items, primarily at Pratt & Whitney.

The year-over-year increase in other income, net ($456 million, 117%) in the six months ended June 30, 2017 is primarily driven by $379 million of gains resulting from the sale of UTC Climate, Controls & Security's investments in Watsco, Inc.

### Interest Expense, Net

*(Dollars in millions)*

|  | Quarter Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Interest expense | $251 | $248 | $487 | $489 |
| Interest income | (25) | (23) | (48) | (41) |
| Interest expense, net | $226 | $225 | $439 | $448 |
| Average interest expense rate | 3.6% | 4.0% | 3.6% | 4.1% |

Interest expense was up (1%) for the quarter ended June 30, 2017 and essentially flat for the six months ended June 30, 2017 relative to the prior year. The unfavorable impact of the May 4, 2017 and November 1, 2016 issuance of notes representing $8 billion in aggregate principal was largely offset by the favorable impact of the significantly lower interest rates on these notes as compared to the 5.375% and 6.125% notes redeemed on December 1, 2016, representing $2.25 billion in aggregate principal, and the favorable impact of these early redemptions and the repayment at maturity of our 1.800% notes due 2017, representing $1.5 billion in aggregate principal. The average maturity of our long-term debt at June 30, 2017 is approximately twelve years.

### Income Taxes

|  | Quarter Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Effective tax rate | 25.7% | 27.8% | 27.1% | 27.5% |

The decrease in the effective tax rate for the quarter ended June 30, 2017 is primarily due to an increase in the tax benefits associated with equity compensation and the impact of incremental tax benefits related to a claim based on the outcome of a favorable Federal Court decision of another taxpayer.

The decrease in the effective tax rate for the six months ended June 30, 2017 is primarily related to the tax benefits described above, partially offset by the unfavorable impact of the first quarter gain on the sale of UTC Climate, Controls & Security's investments in Watsco, Inc.

As shown in the table above, the effective tax rate for the six months ended June 30, 2017 is 27.1%. We estimate our full year 2017 annual effective income tax rate to be approximately 27%, excluding restructuring and non-operational nonrecurring items.

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

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

|  | Quarter Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net income from continuing operations attributable to common shareowners | $1,439 | $1,426 | $2,825 | $2,598 |
| Diluted earnings per share from continuing operations | $1.80 | $1.71 | $3.53 | $3.12 |

Net income from continuing operations attributable to common shareowners for the quarter ended June 30, 2017 includes restructuring charges, net of tax benefit, of $40 million. The effect of restructuring charges on diluted earnings per share for the quarter ended June 30, 2017 was $0.05 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated a favorable impact of $0.03 per diluted share.

Net income from continuing operations attributable to common shareowners for the quarter ended June 30, 2016 includes restructuring charges, net of tax benefit, of $78 million as well as significant non-operational and/or nonrecurring items, net of tax, of $10 million. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the quarter ended June 30, 2016 was $0.11 per share while the effect of foreign currency translation and hedging generated an unfavorable effect of $0.01 per diluted share.

Net income from continuing operations attributable to common shareowners for the six months ended June 30, 2017 includes restructuring charges, net of tax benefit, of $74 million as well as the net favorable impact of significant non-operational and/or nonrecurring items, net of tax, of $238 million. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the six months ended June 30, 2017 was $0.20 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated a favorable impact of $0.06 per diluted share.

Net income from continuing operations attributable to common shareowners for the six months ended June 30, 2016 includes restructuring charges, net of tax benefit, of $120 million as well as significant non-operational and/or nonrecurring items, net of tax, of $10 million. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the six months ended June 30, 2016 was $0.16 per share. The effect of foreign currency translation and hedging did not materially impact earnings per diluted share.

### Net Loss from Discontinued Operations Attributable to Common Shareowners

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

|  | Quarter Ended June 30, 2017 | 2016 | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net loss from discontinued operations attributable to common shareowners | $— | $(47) | $— | $(36) |
| Diluted loss per share from discontinued operations | $— | $(0.06) | $— | $(0.04) |

Net loss from discontinued operations attributable to common shareowners for the quarter and six months ended June 30, 2016 primarily reflects additional tax provision associated with the net gain realized on the sale of Sikorsky to Lockheed Martin Corp. in November 2015.

### Restructuring Costs

*(Dollars in millions)*

|  | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Restructuring costs | $112 | $178 |

Restructuring actions are an essential component of our operating margin improvement efforts and relate to both existing operations and those recently acquired. Charges generally arise from severance related to workforce reductions, facility exit and lease termination costs associated with the consolidation of field and manufacturing operations and costs to exit legacy programs. We expect to incur restructuring costs in 2017 of approximately $300 million, including trailing costs related to prior actions associated with our continuing cost reduction efforts and the integration of acquisitions. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.

**2017 Actions.** During the six months ended June 30, 2017, we recorded net pre-tax restructuring charges of $63 million relating to ongoing cost reduction actions initiated in 2017. We expect to incur additional restructuring charges of $65 million to complete these actions. We are targeting to complete in 2017 and 2018 the majority of the remaining workforce and facility related cost reduction actions initiated in 2017. We expect recurring pre-tax savings in continuing operations to increase over the two-year period subsequent to initiating the actions to approximately $55 million annually. Approximately 70% of the total expected pre-tax charges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the six months ended June 30, 2017, we had cash outflows of approximately $18 million related to the 2017 actions.

**2016 Actions.** During the six months ended June 30, 2017 and 2016, we recorded net pre-tax restructuring charges of $40 million and $113 million, respectively, for actions initiated in 2016. We expect to incur additional restructuring charges of $59 million to complete these actions. We are targeting to complete in 2017 the majority of the remaining workforce and facility related cost reduction actions initiated in 2016. We expect recurring pre-tax savings in continuing operations to increase over the two-year period subsequent to initiating the actions to approximately $180 million annually, of which, approximately $46 million was realized during the six months ended June 30, 2017. Approximately 65% of the total expected pre-tax charge will require cash payments, which we have and expect to continue to fund with cash generated from operations. During the six months ended June 30, 2017, we had cash outflows of approximately $55 million related to the 2016 actions.

In addition, during the six months ended June 30, 2017, we recorded net pre-tax restructuring costs totaling $9 million for restructuring actions initiated in 2015 and prior. For additional discussion of restructuring, see Note 8 to the Condensed Consolidated Financial Statements.

### 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. Adjustments to reconcile segment reporting to the consolidated results for the quarters and six months ended June 30, 2017 and 2016 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, and 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.

At constant currency and excluding the effect of acquisitions and divestitures, UTC Climate, Controls & Security equipment orders in the quarter ended June 30, 2017 increased 11% in comparison to the same period of the prior year driven by increases in transport refrigeration (38%), global commercial HVAC (4%) and North America residential HVAC orders (16%). At constant currency, within the Otis segment, new equipment orders in the quarter were flat in comparison to the prior year as order growth in the Middle East (24%), the Americas (5%) and China (3%) was offset by order declines in Europe (14%).

Summary performance for each of the commercial businesses for the quarters ended June 30, 2017 and 2016 was as follows:

*(Dollars in millions)*

|  | Otis 2017 | 2016 | Change | UTC Climate, Controls & Security 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $3,131 | $3,097 | 1% | $4,712 | $4,459 | 6% |
| Cost of Sales | 2,174 | 2,085 | 4% | 3,281 | 3,040 | 8% |
|  | 957 | 1,012 | (5)% | 1,431 | 1,419 | 1% |
| Operating Expenses and Other | 413 | 431 | (4)% | 558 | 547 | 2% |
| Operating Profits | $544 | $581 | (6)% | $873 | $872 | — |

Operating Profit Margins 17.4 % 18.8 % 18.5 % 19.6 %

Summary performance for each of the commercial businesses for the six months ended June 30, 2017 and 2016 was as follows:

*(Dollars in millions)*

|  | Otis 2017 | 2016 | Change | UTC Climate, Controls & Security 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $5,935 | $5,812 | 2% | $8,604 | $8,187 | 5% |
| Cost of Sales | 4,114 | 3,947 | 4% | 6,036 | 5,641 | 7% |
|  | 1,821 | 1,865 | (2)% | 2,568 | 2,546 | 1% |
| Operating Expenses and Other | 825 | 818 | 1% | 732 | 1,068 | (31)% |
| Operating Profits | $996 | $1,047 | (5)% | $1,836 | $1,478 | 24% |

Operating Profit Margins 16.8 % 18.0 % 21.3 % 18.1 %

### Otis –

### Quarter Ended June 30, 2017 Compared with Quarter Ended June 30, 2016

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

The organic sales increase of 1% primarily reflects higher service sales (1%), driven by growth in North America and Asia. New equipment sales growth in North America (1%) and Europe (1%) was offset by a decline in China (2%).

The operational profit decrease of 7% was driven by:

- unfavorable price and mix (13%), primarily in China
- higher selling, general and administrative expenses (1%), including higher labor and information technology costs
- higher research and development spending (1%)

These decreases were partially offset by:

- favorable productivity (5%)
- profit contribution from the higher sales volumes noted above (2%)

### Six Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016

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

The organic sales increase of 2% reflects an increase in both service (2%) and new equipment sales (1%). The increase in service sales was primarily driven by growth in North America (1%) and Asia (1%), while the increase in new equipment sales was driven largely by growth in North America (1%) and Europe (1%), partially offset by a decline in China (2%).

The operational profit decrease of 6% was driven by:

- unfavorable price and mix (11%), primarily in China
- higher selling, general and administrative expenses (3%), primarily labor and information technology costs
- higher research and development spending (1%)

These decreases were partially offset by:

- favorable productivity (5%)
- profit contribution from the higher sales volumes noted above (4%)

### UTC Climate, Controls & Security –

### Quarter Ended June 30, 2017 Compared with Quarter Ended June 30, 2016

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 5% | (1)% | 2% | — | — |
| Cost of Sales | 7% | (2)% | 3% | — | — |
| Operating Profits | (5)% | (1)% | — | 1% | 5% |

The organic sales increase of 5% was driven by growth in North America residential HVAC (2%), global commercial HVAC (1%) and commercial refrigeration (1%).

The 5% operational profit decrease was primarily driven by:

- an additional unfavorable contract adjustment related to a large commercial project (4%)
- unfavorable mix and pricing across all businesses except North America residential HVAC, partially offset by profit contribution from the higher sales volumes noted above (net, 1%)

The 5% increase in “Other” primarily reflects a gain on the sale of our investment in a joint venture and the absence of prior year acquisition and integration costs.

### Six Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 3% | (1)% | 3% | — | — |
| Cost of Sales | 5% | (2)% | 4% | — | — |
| Operating Profits | (5)% | (1)% | — | 1% | 29% |

The organic sales increase of 3% was driven by growth in North America residential HVAC and global commercial HVAC (combined 2%) and commercial refrigeration (1%).

The 5% operational profit decrease was primarily driven by:

- unfavorable contract adjustments related to a large commercial project (4%)
- unfavorable mix and pricing, across all businesses except North America residential HVAC, partially offset by profit contribution from the higher sales volumes noted above (net, 2%)

The 29% increase in “Other” primarily reflects a gain on the sale of investments in Watsco, Inc.

### Aerospace Businesses

The aerospace businesses serve both commercial and government aerospace customers. 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.

We continue to see growth in a strong commercial airline industry which is benefiting from traffic growth, lower airfares, and stronger economic conditions. Airline traffic, as measured by RPMs, grew approximately 8% in the first five months of 2017.

Our commercial aftermarket businesses continue to evolve as an increasing proportion of our aerospace businesses' customers are covered under Fleet Management Programs (FMPs) at Pratt & Whitney and long-term aftermarket service agreements at UTC Aerospace Systems. FMPs are comprehensive long-term spare part and service agreements with our customers. We expect a continued shift to FMPs and long-term aftermarket service agreements in lieu of transactional spare part sales as new aerospace product offerings enter our customers' fleets under long-term service agreements and legacy fleets are retired. For the first six months of 2017, as compared with 2016, total commercial aerospace aftermarket sales increased 9% at UTC Aerospace Systems and 5% at Pratt & Whitney.

We record changes in contract estimates using the cumulative catch-up method in accordance with the Revenue Recognition Topic of the FASB ASC. Operating profit in the quarter ended June 30, 2017 included significant changes in aerospace contract estimates totaling $1 million, as favorable net contract adjustments recorded at UTC Aerospace Systems, were largely offset by unfavorable net contract adjustments recorded at Pratt & Whitney. Operating profit in the six months ended June 30, 2017 included significant net unfavorable changes in aerospace contract estimates of $29 million, primarily representing unfavorable contract adjustments recorded at Pratt & Whitney. For both the quarter and six months ended June 30, 2016, operating profit included significant net favorable changes in aerospace contract estimates of $4 million, primarily representing favorable contract adjustments recorded at UTC Aerospace Systems.

As previously disclosed, Pratt & Whitney's PurePower PW1500G engine models have been selected by Bombardier to power the new CSeries passenger aircraft, which entered into service on July 15, 2016. There have been multi-year delays in the development of the CSeries aircraft. Notwithstanding these delays, Bombardier reports that they have received over 300 orders for the aircraft and that both the CS100 and CS300 aircraft models have been certified and have entered into revenue service. We have made various investments in support of the production and delivery of our PW1500G engines and systems for the CSeries program, which we currently expect to recover through future deliveries of PW1500G powered CSeries aircraft. We will continue to monitor the progress of the program and our ability to recover our investments.

Summary performance for each of the aerospace businesses for the quarters ended June 30, 2017 and 2016 was as follows:

*(Dollars in millions)*

|  | Pratt & Whitney 2017 | 2016 | Change | UTC Aerospace Systems 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $4,070 | $3,813 | 7% | $3,640 | $3,716 | (2)% |
| Cost of Sales | 3,241 | 3,095 | 5% | 2,664 | 2,724 | (2)% |
|  | 829 | 718 | 15% | 976 | 992 | (2)% |
| Operating Expenses and Other | 427 | 332 | 29% | 397 | 410 | (3)% |
| Operating Profits | $402 | $386 | 4% | $579 | $582 | (1)% |

Operating Profit Margins 9.9 % 10.1 % 15.9 % 15.7 %

Summary performance for each of the aerospace businesses for the six months ended June 30, 2017 and 2016 was as follows:

*(Dollars in millions)*

|  | Pratt & Whitney 2017 | 2016 | Change | UTC Aerospace Systems 2017 | 2016 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $7,828 | $7,401 | 6% | $7,251 | $7,221 | — |
| Cost of Sales | 6,202 | 5,890 | 5% | 5,305 | 5,295 | — |
|  | 1,626 | 1,511 | 8% | 1,946 | 1,926 | 1% |
| Operating Expenses and Other | 831 | 715 | 16% | 791 | 806 | (2)% |
| Operating Profits | $795 | $796 | — | $1,155 | $1,120 | 3% |

Operating Profit Margins 10.2 % 10.8 % 15.9 % 15.5 %

### Pratt & Whitney –

### Quarter Ended June 30, 2017 Compared with Quarter Ended June 30, 2016

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation\* | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 6% | 1% | — | — | — |
| Cost of Sales | 6% | — | — | (1)% | — |
| Operating Profits | (11)% | 9% | — | 16% | (10)% |

The organic sales increase of 6% primarily reflects higher military sales (7%) and higher commercial aftermarket sales (5%), partially offset by the absence of prior year contract settlements (2%), unfavorable year-over-year sales of legacy hardware (1%) and lower commercial engines volume at Pratt & Whitney Canada (1%).

The operational profit decrease of 11% was primarily driven by:

- the absence of a prior year favorable contract settlement (12%)
- unfavorable year-over-year sales of legacy hardware (8%)
- higher selling, general and administrative expenses, research and development costs, and other ramp-related costs (8%)
- lower profit contribution from commercial engines (5%) reflecting lower volume at Pratt & Whitney Canada and higher negative engine margin

These decreases were partially offset by:

- profit contribution from the higher military sales noted above (15%)
- higher profit contribution from commercial aftermarket sales (9%)

The 10% decrease in "Other" primarily represents the absence of the favorable impact of a prior year program termination.

### Six Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation\* | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 5% | 1% | — | — | — |
| Cost of Sales | 6% | — | — | (1)% | — |
| Operating Profits | (13)% | 10% | — | 8% | (5)% |

\* *For Pratt & Whitney only, the transactional impact of foreign exchange hedging at Pratt & Whitney Canada 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 increase of 5% primarily reflects higher commercial aftermarket sales (5%) and higher military sales (4%), partially offset by the absence of prior year contract settlements (2%), unfavorable year-over-year sales of legacy hardware (1%) and lower commercial engines volume at Pratt & Whitney Canada (1%).

The operational profit decrease of 13% was primarily driven by:

- lower profit contribution from commercial engines (11%) reflecting lower volume at Pratt & Whitney Canada and higher negative engine margin
- unfavorable year-over-year contract settlements (10%)
- unfavorable year-over-year sales of legacy hardware (5%)
- higher selling, general and administrative expenses, research and development costs, and other ramp-related costs (5%)

These decreases were partially offset by:

- higher profit contribution from commercial aftermarket sales (14%)
- profit contribution from the higher military sales noted above (6%)

The 5% decrease in "Other" primarily represents the absence of the favorable impact of a prior year program termination.

### UTC Aerospace Systems –

### Quarter Ended June 30, 2017 Compared with Quarter Ended June 30, 2016

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | (1)% | — | (1)% | — | — |
| Cost of Sales | (1)% | — | (1)% | — | — |
| Operating Profits | (3)% | 1% | — | (3)% | 4% |

The organic sales decrease (1%) primarily reflects lower commercial aerospace OEM sales volume (4%) driven by Boeing 777 landing gear re-sourcing and legacy program rate reductions, partially offset by an increase in commercial aftermarket and military aftermarket volumes (combined, 3%).

The 3% operational profit decrease primarily reflects:

- lower commercial aerospace OEM profit contribution (14%), driven by adverse mix
- the absence of the favorable prior year impact from licensing agreements (3%)

These decreases were partially offset by:

- higher commercial and military aftermarket contribution (13%), driven by the volume increases noted above
- lower pension expense (2%)

### Six Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016

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

The organic sales growth of 2% primarily reflects an increase in commercial aerospace aftermarket sales (3%) partially offset by lower commercial aerospace OEM sales volume (1%).

The increase in organic operating profit of 2% primarily reflects:

- higher commercial aerospace profit contribution (5%), driven by the commercial aftermarket sales growth noted above, partially offset by adverse commercial aerospace OEM mix
- lower pension expense (2%)

These increases were partially offset by:

- the absence of the favorable prior year impact from licensing agreements (2%)
- higher selling, general, and administrative expenses (2%)

### Eliminations and other –

*(Dollars in millions)*

|  | Net Sales Quarter Ended June 30, 2017 | 2016 | Operating Profits Quarter Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Eliminations and other | $(273) | $(211) | $(2) | $13 |
| General corporate expenses | — | — | (106) | (97) |

*(Dollars in millions)*

|  | Net Sales Six Months Ended June 30, 2017 | 2016 | Operating Profits Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Eliminations and other | $(523) | $(390) | $(15) | $29 |
| General corporate expenses | — | — | (210) | (188) |

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 decrease in sales and operating profits for the quarter and six months ended June 30, 2017, as compared to the same periods of 2016, reflects an increase in the amount of inter-segment eliminations, principally between our aerospace businesses, and the unfavorable impact of a reallocation of pension benefit to the business segments. The year-over-year increase in general corporate expenses for the quarter and six months ended June 30, 2017, as compared to the same periods of 2016, primarily reflects an increase in employee compensation related expenses.

### LIQUIDITY AND FINANCIAL CONDITION

*(Dollars in millions)*

|  | June 30, 2017 | December 31, 2016 | June 30, 2016 |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $9,345 | $7,157 | $6,785 |
| Total debt | 26,626 | 23,901 | 22,537 |
| Net debt (total debt less cash and cash equivalents) | 17,281 | 16,744 | 15,752 |
| Total equity | 30,155 | 29,169 | 30,648 |
| Total capitalization (debt plus equity) | 56,781 | 53,070 | 53,185 |
| Net capitalization (debt plus equity less cash and cash equivalents) | 47,436 | 45,913 | 46,400 |

|  |  |  |  |
| --- | ---: | ---: | ---: |
| Debt to total capitalization | 47% | 45% | 42% |
| Net debt to net capitalization | 36% | 36% | 34% |

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 generally target to approximate net income from continuing operations attributable to common shareowners. For 2017, we expect this to approximate 90% to 100% of net income from continuing operations attributable to common shareowners. 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, redemptions of debt, and the ability to attract long-term capital at satisfactory terms.

Our domestic pension funds experienced a positive return on assets of 8.1% during the first six months of 2017. Approximately 89% 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 (11%) is invested in less-liquid but market-valued investments, including real estate and private equity. Across our global pension plans, the impact of the continued recognition of prior pension investment gains, 2016 actual returns on plan assets and lower discount rates for interest costs, offset by the lower discount rates for pension obligations, will result in a net periodic pension benefit in 2017 that is slightly favorable to 2016 amounts.

Historically, our strong debt ratings and financial position have enabled us to issue long-term debt at favorable market rates. 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 credit standing. Our debt-to-total-capitalization increased to 47% at June 30, 2017, primarily reflecting additional borrowings in 2017 to fund share repurchases and other general corporate purposes. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, debt refinancing, and repurchases of our common stock. The need for commercial paper borrowings arises when the use of domestic cash for acquisitions, dividends, and share repurchases exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.

At June 30, 2017, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $4.35 billion pursuant to a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement, both of which expire in August 2021. As of June 30, 2017, there were no borrowings under these revolving credit agreements. The undrawn portions of these revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of June 30, 2017, our maximum commercial paper borrowing limit was $4.35 billion.

On May 4, 2017, we issued $1.0 billion aggregate principal amount of 1.900% notes due 2020, $500 million aggregate principal amount of 2.300% notes due 2022, $800 million aggregate principal amount of 2.800% notes due 2024, $1.1 billion aggregate principal amount of 3.125% notes due 2027 and $600 million aggregate principal amount of 4.050% notes due 2047. The net proceeds received from these debt issuances were used to fund: the repayment at maturity of our 1.800% notes due 2017, representing $1.5 billion in aggregate principal; the repayment of commercial paper; and other general corporate purposes.

On February 22, 2016, we issued €950 million aggregate principal amount of 1.125% notes due 2021, €500 million aggregate principal amount of 1.875% notes due 2026 and €750 million aggregate principal amount of floating rate notes due 2018. The net proceeds from these debt issuances were used for general corporate purposes.

On November 6, 2015, we completed the sale of Sikorsky to Lockheed Martin Corp. for approximately $9.1 billion in cash. In connection with the sale of Sikorsky, we made tax payments of approximately $2.5 billion in 2016, primarily during the six months ended June 30, 2016. On November 11, 2015, we entered into ASR agreements to repurchase an aggregate of $6 billion of our common stock utilizing the net after-tax proceeds from the sale of Sikorsky. Under the terms of the ASR agreements, we made the aggregate payments and received an initial delivery of approximately 51.9 million shares of our common stock, representing approximately 85% of the shares expected to be repurchased. The shares associated with the remaining portion of the aggregate purchase were settled upon final delivery to us of approximately 2.1 million additional shares of common stock in the quarter ended March 31, 2016 and approximately 8.0 million additional shares of common stock in the quarter ended September 30, 2016.

At June 30, 2017, approximately 79% of our cash was held by UTC's foreign subsidiaries due to our extensive international operations. 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.

We continue to be involved in litigation with the German Tax Office in the German Tax Court with respect to certain tax benefits that we have claimed related to a 1998 reorganization of the corporate structure of Otis operations in Germany. We do not expect to make significant additional tax or interest payments pending final resolution of this matter. See Note 15 to the Condensed Consolidated Financial Statements for a further discussion of this German tax litigation.

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 June 30, 2017 and December 31, 2016, the amount of such restricted cash was approximately $36 million and $32 million, respectively.

We believe our future operating cash flows will be sufficient to meet our future operating cash needs. Further, 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)*

|  | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net cash flows provided by operating activities of continuing operations | $3,139 | $2,606 |

Cash generated from operating activities of continuing operations in the six months ended June 30, 2017 was $533 million higher than the same period in 2016. Cash outflows for working capital improved by $42 million in the six months ended June 30, 2017 over the prior year period. In the six months ended June 30, 2017, inventories increased approximately $1.1 billion, primarily in our aerospace businesses supporting an increase in forecasted OEM deliveries and related aftermarket demand, and in our commercial businesses primarily driven by seasonal demand in our North American HVAC business and installation projects in process in our refrigeration businesses. These increases were largely offset by increases in accounts payable and accrued liabilities, primarily at Pratt & Whitney, with other increases at UTC Climate, Controls & Security attributable to higher seasonal demand in our North American HVAC business. Accounts receivable increased primarily in our aerospace businesses, and were partially offset by increased customer advances at Pratt & Whitney and Otis. Factoring activity provided an increase of approximately $400 million in cash generated from operating activities of continuing operations in the six months ended June 30, 2017, as compared to the prior year period. This increase in factoring was driven largely by Pratt & Whitney's temporary extension of contractual payment terms with certain commercial aerospace customers.

For the six months ended June 30, 2016, accounts receivable increased approximately $679 million, primarily in our aerospace businesses, due to the growth in commercial aerospace OEM and aftermarket sales in the period, and at UTC Climate, Controls & Security, primarily reflecting seasonal volumes in the North American HVAC business and other growth in the refrigeration business. Increases in inventories were primarily in our aerospace businesses supporting an increase in customers' platform deliveries and related aftermarket demand, which were more than offset by increased customer advances at Pratt & Whitney and Otis, and increased accounts payable across all businesses.

Our domestic defined benefit pension plans are approximately 91% funded on a projected benefit obligation basis as of June 30, 2017, and we are not required to make additional contributions through the end of 2021. The funded status of our defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and actuarial mortality assumptions. We can contribute cash or UTC shares to our plans at our discretion, subject to applicable regulations. Total cash contributions to our global defined benefit pension plans during the six months ended June 30, 2017 and 2016 were $79 million and $107 million, respectively. Contributions to our global defined benefit pension plans in 2017 are expected to meet or exceed current funding requirements. Management is evaluating making voluntary discretionary contributions, which may be significant, to our global defined benefit pension plans in 2017. The amount and timing of any such contributions will be based on management’s assessment of cash flow and other factors, including our long-term strategy to de-risk our defined benefit pension plans.

### Cash Flow - Investing Activities of Continuing Operations

*(Dollars in millions)*

|  | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net cash flows used in investing activities of continuing operations | $(990) | $(1,380) |

Cash flows used in investing activities of continuing operations for the six months ended June 30, 2017 and 2016 primarily reflect capital expenditures, cash investments in businesses, and payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms. In the six months ended June 30, 2017, we realized net proceeds of $596 million from the sale of UTC Climate, Controls & Security's investments in Watsco, Inc.

During the six months ended June 30, 2017, our collaboration intangible assets increased by approximately $195 million, of which $164 million resulted from payments made under our 2012 agreement to acquire Rolls-Royce's collaboration interest in IAE. Capital expenditures for the six months ended June 30, 2017 ($771 million) primarily relate to investments in production capacity at Pratt & Whitney and UTC Aerospace Systems, as well as new facilities at Pratt & Whitney and UTC Climate, Controls & Security.

Cash investments in businesses in the six months ended June 30, 2017 ($168 million) consisted of a number of small acquisitions, primarily in our commercial businesses. We expect total cash investments for acquisitions in 2017 to be approximately $1 billion to $2 billion, including acquisitions completed during the six months ended June 30, 2017. However, actual acquisition spending may vary depending upon the timing, availability and appropriate value of acquisition opportunities.

As discussed in Note 9 to the Condensed Consolidated Financial Statements, we enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the FASB ASC and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures. During the six months ended June 30, 2017 and 2016, we had net cash payments of approximately $294 million and net cash receipts of approximately $86 million, respectively, from the settlement of these derivative instruments.

Customer financing activities were a net use of cash of $240 million, primarily driven by additional Geared Turbofan engines to support customer fleets, and $55 million for the six months ended June 30, 2017 and 2016, respectively. While we expect that 2017 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 $13.8 billion at June 30, 2017 related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which up to $0.7 billion may be required to be disbursed during the remainder of 2017. We had commercial aerospace financing and other contractual commitments of approximately $14.4 billion at December 31, 2016.

### Cash Flow - Financing Activities of Continuing Operations

*(Dollars in millions)*

|  | Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net cash flows (used in) provided by financing activities of continuing operations | $(52) | $914 |

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, including approximately $2.4 billion and $2.3 billion of net long-term debt issuances in the six months ended June 30, 2017 and 2016, respectively. 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 $0.6 billion of outstanding commercial paper at June 30, 2017.

At June 30, 2017, management had remaining authority to repurchase approximately $2.4 billion of our common stock under the October 14, 2015 share repurchase program. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase programs, 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. We made cash payments of approximately $1,370 million to repurchase approximately 12.2 million shares of our common stock during the six months ended June 30, 2017. We expect 2017 full year share repurchases to be approximately $3.5 billion, which we expect to fund with cash generated from operating activities of continuing operations as well as additional borrowings. Our share repurchase levels are influenced by various factors, including the level of other investing activities.

We paid dividends on common stock of $0.66 per share in both the first quarter and second quarter of 2017, totaling approximately $1,008 million in the aggregate for the six months ended June 30, 2017. On June 14, 2017, the Board of Directors declared a dividend of $0.70 per share payable September 10, 2017 to shareowners of record at the close of business on August 18, 2017.

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)*

|  | Six Months Ended June 30, 2016 |
| --- | ---: |
| Net cash flows used in discontinued operations | $(2,457) |

Cash flows used in discontinued operations for the six months ended June 30, 2016 primarily reflect the payment of taxes associated with the net gain realized on the sale of Sikorsky to Lockheed Martin Corp. in November 2015.

### Off-Balance Sheet Arrangements and Contractual Obligations

In our 2016 Annual Report, incorporated by reference in our 2016 Form 10-K, we disclosed our off-balance sheet arrangements and contractual obligations. As of June 30, 2017, there have been no material changes to these off-balance sheet arrangements and contractual obligations outside the ordinary course of business.

## Market risk

As filed, 279 characters.

There has been no significant change in our exposure to market risk during the six months ended June 30, 2017. For discussion of our exposure to market risk, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," contained in our 2016 Form 10-K.

## Controls and procedures

As filed, 7,627 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, President and Chief Executive Officer (CEO), the Executive Vice President & Chief Financial Officer (CFO) and the Corporate Vice President, Controller (Controller), of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2017. 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 June 30, 2017, 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 six months ended June 30, 2017, 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 information 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, share repurchases and other measures of financial performance or potential future plans, strategies or transactions. 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 condition of commercial airlines, the impact of weather conditions and natural disasters and the financial condition of our customers and suppliers;
- challenges in the development, production, delivery, support, performance and realization of the anticipated benefits of advanced technologies and new products and services;
- 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;
- the timing and scope of future repurchases of our common stock, which may be suspended at any time due to various factors, including market conditions and the level of other investing activities and uses of cash;
- delays and disruption in delivery of materials and services from suppliers;
- company and customer-directed cost reduction efforts and restructuring costs and savings and other consequences thereof;
- the scope, nature, impact or timing of acquisition and divestiture activity, including among other things integration of acquired businesses into our existing businesses and realization of synergies and opportunities for growth and innovation;
- new business and investment opportunities;
- our ability to realize the intended benefits of organizational changes;
- the anticipated benefits of diversification and balance of operations across product lines, regions and industries;
- the outcome of legal proceedings, investigations and other contingencies;
- pension plan assumptions and future contributions;
- the impact of the negotiation of collective bargaining agreements and labor disputes;
- the effect of changes in political conditions in the U.S. and other countries in which we operate, including the effect of changes in U.S. trade policies or the U.K.'s pending withdrawal from the EU, on general market conditions, global trade policies and currency exchange rates in the near term and beyond; and
- the effect of changes in tax, environmental, regulatory (including among other things import/export) and other laws and regulations 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 "Note 15: Contingent Liabilities," the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Business Overview," "Results of Operations," "Liquidity and Financial Condition," and "Critical Accounting Estimates," and the sections titled "Legal Proceedings" and "Risk Factors" in this Form 10-Q and in our 2016 Annual Report and 2016 Form 10-K. Additional important information as to these factors is included in our 2016 Annual Report in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Restructuring Costs," "Environmental Matters" and "Governmental Matters" and in our 2016 Form 10-K in the "Business" section under the headings "General," "Description of Business by Segment" and "Other Matters Relating to Our Business as a Whole." The forward-looking statements speak only as of the date of this report 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, 143 characters.

There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A, Risk Factors, in our 2016 Form 10-K.

Filed Jul 28, 2017.
Source: SEC EDGAR, the filing index for accession 0000101829-17-000034. Last ingested by Listed: Nov 3, 2026, 21:25 ET. No prices; not investment advice.