# RTX Corp: Form 10-Q for the period ended Mar 31, 2018

- Company: [RTX Corp](/companies/rtx.md) (CIK 101829)
- Form: 10-Q
- Filed: 2018-04-27
- Accepted by EDGAR: Apr 27, 2018, 06:45 ET
- Period: 2018-03-31
- Accession: 0000101829-18-000009
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/101829/000010182918000009/a2018-03x3110xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/101829/000010182918000009/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2018-01-01 to 2018-03-31 | $8.02bn | us-gaap:CostOfGoodsSold |
| Research and development | 3 months, 2018-01-01 to 2018-03-31 | $554.0m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2018-01-01 to 2018-03-31 | $1.71bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-01-01 to 2018-03-31 | $1.93bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-01-01 to 2018-03-31 | $229.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | $522.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | $1.30bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | $1.62 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-31 | $1.64 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 800,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | $453.0m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $337.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2018-01-01 to 2018-03-31 | $535.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2018-01-01 to 2018-03-31 | $25.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-03-31 | $7.67bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-31 | $32.74bn | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-31 | $98.78bn | us-gaap:Assets |
| Current liabilities | at 2018-03-31 | $24.75bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-03-31 | $66.15bn | us-gaap:Liabilities |
| Short-term borrowings | at 2018-03-31 | $1.07bn | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2018-03-31 | $30.53bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2018-03-31 | 800,059,478 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 61,961 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 2018 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 2017 Annual Report, which is incorporated by reference in our 2017 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 are in the public and private sectors, and our businesses reflect an extensive geographic diversification that has evolved with continued globalization.

Our military businesses' sales are affected by U.S. Department of Defense budget and spending levels. Total sales to the U.S. Government were $1.6 billion and $1.3 billion for the quarters ended March 31, 2018 and 2017, 10% and 9% of total UTC sales for those periods, 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 2018.

### 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 quarter ended March 31, 2018, our investment in business acquisitions was $125 million, which primarily reflects an acquisition at Pratt & Whitney. We do not expect to have additional significant acquisition spend, other than the expected acquisition of Rockwell Collins. However, actual acquisition spending may vary depending upon the timing, availability and value of acquisition opportunities.

On September 4, 2017, we announced that we had entered into a merger agreement with Rockwell Collins, under which we agreed to acquire Rockwell Collins. Under the terms of the merger agreement, each Rockwell Collins shareowner will receive $93.33 per share in cash and a fraction of a share of UTC common stock equal to the quotient obtained by dividing $46.67 by the average of the volume-weighted average price per share of UTC common stock on the NYSE on each of the 20 consecutive trading days ending with the trading day immediately prior to the closing date (the “UTC Stock Price”), subject to adjustment based on a two-way collar mechanism as described below (the “Stock Consideration”). The cash and UTC stock payable in exchange for each such share of Rockwell Collins common stock are collectively the “Merger Consideration.” The fraction of a share of UTC common stock into which each such share of Rockwell Collins common stock will be converted is the “Exchange Ratio.” The Exchange Ratio will be determined based upon the UTC Stock Price. If the UTC Stock Price is greater than $107.01 but less than $124.37, the Exchange Ratio will be equal to the quotient of (i) $46.67 divided by (ii) the UTC Stock Price, which, in each case, will result in the Stock Consideration having a value equal to $46.67. If the UTC Stock Price is less than or equal to $107.01 or greater than or equal to $124.37, then a two-way collar mechanism will apply, pursuant to which, (x) if the UTC Stock Price is greater than or equal to $124.37, the Exchange Ratio will be fixed at 0.37525 and the value of the Stock Consideration will be greater than $46.67, and (y) if the UTC Stock Price is less than or equal to $107.01, the Exchange Ratio will be fixed at 0.43613 and the value of the Stock Consideration will be less than $46.67. On January 11, 2018, the merger was approved by Rockwell Collins' shareowners. We currently expect that the merger will be completed mid-year 2018, subject to customary closing conditions, including the receipt of required regulatory approvals.

We anticipate that approximately $15 billion will be required to pay the aggregate cash portion of the Merger Consideration. We expect to fund the cash portion of the Merger Consideration through debt issuances and cash on hand. We have entered into a $6.5 billion 364-day unsecured bridge loan credit agreement that would be funded only to the extent certain of the anticipated debt issuances are not completed prior to the completion of the merger. Additionally, we expect to assume approximately $7 billion of Rockwell Collins' outstanding debt upon completion of the merger. To help manage the cash flow and liquidity resulting from the proposed acquisition, we have suspended share repurchases, excluding activity relating to our employee savings plans.

### 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 2018. See Part I, Item 1A, "Risk Factors" in our 2017 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 2017 Annual Report, incorporated by reference in our 2017 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.

Effective January 1, 2018, we adopted ASU 2014-09 and its related amendments (collectively, the New Revenue Standard) and elected the modified retrospective approach.

**Revenue Recognition Accounting Policy Summary.** We account for revenue in accordance with Accounting Standards Codification (ASC) Topic 606: *Revenue from Contracts with Customers*. Under Topic 606, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Some of our contracts with customers contain a single performance obligation, while other contracts contain multiple performance obligations most commonly when contracts span multiple phases of the product life-cycle such as development, production, maintenance and support. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on its standalone selling price.

We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price, including contractual discounts, contract incentive payments, estimates of award fees, and other sources of variable consideration, when determining the transaction price of each contract. We include variable consideration in estimated transaction price when there is a basis to reasonably estimate the amount. These estimates are based on historical experience, anticipated performance and our best judgment at the time. We consider whether our contracts provide customers with significant financing. Generally, our contracts do not contain significant financing.

*Point in time revenue recognition.* Timing of the satisfaction of performance obligations varies across our businesses due to our diverse product and service mix, customer base, and contractual terms. Performance obligations are satisfied as of a point in time for heating, ventilating, air-conditioning and refrigeration systems, certain alarm and fire detection and suppression systems, and certain aerospace components and engines components. Revenue is recognized when control of the product transfers to the customer, generally upon product shipment.

*Over-time revenue recognition.* Performance obligations are satisfied over-time if the customer receives the benefits as we perform work, if the customer controls the asset as it is being produced, or if the product being produced for the customer has no alternative use and we have a contractual right to payment. Revenue is recognized for our construction-type and certain production-type contracts on an over-time basis. We recognize revenue on an over-time basis on certain long-term aerospace aftermarket contracts and aftermarket service work; development, fixed price, and other cost reimbursement contracts in our aerospace businesses; and elevator and escalator sales, installation, service, modernization and other construction contracts in our commercial businesses. Commercial businesses service revenue is primarily recognized on a straight-line basis over the contract period. For construction and installation contracts within our commercial businesses and aerospace performance obligations satisfied over time, revenue is recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs include labor, materials, and subcontractors' costs, or other direct costs, and where applicable on government and commercial contracts, indirect costs.

For certain of our long-term aftermarket contracts, revenue is recognized over the contract period. In the commercial businesses, revenue is primarily recognized on a straight-line basis over the contract period. In the aerospace businesses, we generally account for such contracts as a series of daily obligations to stand ready to provide product maintenance and aftermarket services. Revenues are primarily recognized in proportion to cost as sufficient historical evidence indicates that the cost of performing services under the contract are incurred on an other than straight-line basis. Aerospace contract modifications are routine, and contracts are often modified to account for changes in contract specifications or requirements. Contract modifications that are for goods or services that are not distinct are accounted for as part of the existing contract.

We incur costs for engineering and development of aerospace products directly related to existing or anticipated contracts with customers. Such costs generate or enhance our ability to satisfy our performance obligations under these contracts. We capitalize these costs as contract fulfillment costs to the extent the costs are recoverable from the associated contract margin and subsequently amortize the costs as the original equipment (OEM) products are delivered to the customer. In instances where intellectual property does not transfer to the customer, we defer the customer funding of OEM product engineering and development and recognize revenue when the OEM products are delivered to the customer. Costs to obtain contracts are not material.

Loss provisions on OEM contracts are recognized to the extent that estimated contract costs exceed the estimated consideration from the products contemplated under the contractual arrangement. For new commitments, we generally record loss provisions at the earlier of contract announcement or contract signing except for certain contracts under which losses are recorded upon receipt of the purchase order that obligates us to perform. For existing commitments, anticipated losses on contractual arrangements are recognized in the period in which losses become evident. Products contemplated under contractual arrangements include firm quantities of product sold under contract and, in the large commercial engine and wheels and brakes businesses, future highly probable sales of replacement parts required by regulation that are expected to be sold subsequently for incorporation into the original equipment. In the large commercial engine and wheels and brakes businesses, when the combined original equipment and aftermarket arrangement for each individual sales campaign are profitable, we record original equipment product losses, as applicable, at the time of delivery.

We review our cost estimates on significant contracts on a quarterly basis, and for others, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. We record changes in contract estimates using the cumulative catch-up method.

Note 2 of the condensed consolidated financial statements contains further detail regarding the adoption of the New Revenue Standard and its impact on the statement of operations for the three months ended March 31, 2018 and the balance sheet as of March 31, 2018.

### RESULTS OF OPERATIONS

### Net Sales

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net Sales | $15,242 | $13,815 |

The factors contributing to the total percentage change year-over-year in total net sales for the quarter ended March 31, 2018 are as follows:

|  | Quarter Ended March 31, 2018 |
| --- | ---: |
| Organic change | 6% |
| Foreign currency translation | 3% |
| Other | 1% |
| Total % Change | 10% |

All four segments experienced organic sales growth during the quarter ended March 31, 2018. Pratt & Whitney sales grew 9% organically, driven by higher commercial aftermarket sales and higher military sales. Climate, Controls & Security sales grew 7% organically, driven by growth in residential HVAC, global commercial HVAC, and transport refrigeration. Organic sales growth of 5% at UTC Aerospace Systems was driven by higher commercial aerospace aftermarket sales and higher military OEM and aftermarket sales, partially offset by lower commercial OEM sales. Otis sales grew 1% organically, reflecting higher service sales, driven by growth in North America, partially offset by lower new equipment sales. The decline in new equipment sales was driven by a decline in China, partially offset by growth in North America.

### Cost of Products and Services Sold

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Total cost of products and services sold | $11,280 | $10,136 |
| Percentage of net sales | 74.0% | 73.4% |

The factors contributing to the percentage change year-over-year for the quarter ended March 31, 2018 in total cost of products and services sold are as follows:

|  | Quarter Ended March 31, 2018 |
| --- | ---: |
| Organic change | 5% |
| Foreign currency translation | 4% |
| Other | 2% |
| Total % Change | 11% |

The organic increase in total cost of products and services sold for the quarter ended March 31, 2018 was primarily driven by the organic sales increases noted above and higher negative engine margin at Pratt & Whitney.

### Gross Margin

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Gross margin | $3,962 | $3,679 |
| Percentage of net sales | 26.0% | 26.6% |

The decrease in gross margin as a percentage of sales for the quarter ended March 31, 2018 primarily reflects a 190 basis point decline in Pratt & Whitney's gross margin, driven by higher negative engine margin that include higher customer support provisions and a 100 basis point decline in gross margin at Otis that was driven by pricing pressure, primarily in China. These declines were offset by a 100 basis point improvement at UTC Aerospace Systems reflecting higher commercial aftermarket volumes that was partially offset by adverse commercial OEM mix; and a 10 basis point increase in gross margin at UTC Climate, Controls & Security, reflecting the absence of a prior year unfavorable contract adjustment related to a large commercial project, partially offset by period costs associated with a product recall program.

### Research and Development

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Company-funded | $554 | $586 |
| Percentage of net sales | 3.6% | 4.2% |
| Customer-funded | $323 | $340 |
| Percentage of net sales | 2.1% | 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 decrease (5%) in company-funded research and development for the quarter ended March 31, 2018 was driven by UTC Aerospace Systems (4%) reflecting the capitalization of certain development costs in accordance with the New Revenue Standard and lower spending across various programs, and lower spending at Pratt & Whitney (3%), partially offset by an increase at UTC Climate, Controls & Security (1%) that was primarily driven by the impact of foreign exchange.

Customer-funded research and development for the quarter ended March 31, 2018 decreased 5% year over year, primarily driven by UTC Aerospace Systems (6%), reflecting the capitalization of certain development costs in accordance with the New Revenue Standard, partially offset by higher research and development spending on military development programs at Pratt & Whitney (2%).

### Selling, General and Administrative

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Selling, general and administrative expenses | $1,711 | $1,537 |
| Percentage of net sales | 11.2% | 11.1% |

Selling, general and administrative expenses increased 11% in the quarter ended March 31, 2018, primarily driven by the impact of foreign exchange (4%) and transaction costs related to the merger agreement with Rockwell Collins (2%). The growth in Selling, general and administrative expenses also reflects higher expenses at UTC Aerospace Systems (2%), primarily driven by increased headcount and employee compensation related expenses, higher expenses at UTC Climate, Controls & Security (2%) including the impact of costs associated with a product recall program, and an increase at Pratt & Whitney (1%) driven by increased headcount and employee compensation related expenses and related costs to support higher volumes.

### Other Income, Net

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Other income, net | $231 | $588 |

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 decrease in other income, net ($357 million, 61%) for the quarter ended March 31, 2018 is driven by the absence of gains on the sale of investments in the prior year (69%) primarily from the sale of UTC Climate, Controls & Security's investments in Watsco, Inc, partially offset by the year-over-year impact of favorable insurance settlements (6%) and a gain on a divestiture at Pratt & Whitney (4%).

### Interest Expense, Net

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Interest expense | $256 | $236 |
| Interest income | (27) | (23) |
| Interest expense, net | $229 | $213 |
| Average interest expense rate | 3.4% | 3.5% |

Interest expense, net increased 8% for the quarter ended March 31, 2018 relative to the prior year. The increase in interest expense reflects the impact of the May 4, 2017 issuance of notes representing $4 billion in aggregate principal, partially offset by the favorable impact of using a portion of the net proceeds of that issuance for the repayment at maturity of 1.800% notes, representing $1.5 billion in aggregate principal. The average maturity of our long-term debt at March 31, 2018 is approximately 12 years.

### Income Taxes

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Effective tax rate | 27.6% | 28.5% |

On December 22, 2017 Public Law 115-97 “An Act to Provide for Reconciliation Pursuant to Titles II and V of the

Concurrent Resolution on the Budget for Fiscal Year 2018” was enacted. This law is commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA). In accordance with Staff Accounting Bulletin 118 (SAB 118) issued on December 22, 2017, the U.S. income tax amounts recorded attributable to the TCJA’s deemed repatriation provision, the revaluation of U.S. deferred taxes and the tax consequences relating to states with current conformity to the Internal Revenue Code are provisional amounts. Due to the enactment date and tax complexities of the TCJA, the Company has not completed its accounting related to these items.

Prior to enactment of the TCJA, with few exceptions, U.S. income taxes had not been provided on undistributed earnings of UTC's international subsidiaries as the Company had intended to reinvest such earnings permanently outside the U.S. or to repatriate such earnings only when it was tax effective to do so. The Company continues to evaluate the impact of the TCJA on its existing accounting position related to the undistributed earnings. Due to the inherent complexities in determining any incremental U.S. Federal and State taxes and the non-U.S. taxes that may be due if all of these earnings were remitted to the U.S. and as provided for by SAB 118 this evaluation has not yet been completed and no provisional amount has been recorded in regard to the undistributed amounts. After completing its evaluation, the Company will accrue any additional taxes due on previously undistributed earnings to be distributed in the future.

The Company will continue to accumulate and refine the relevant data and computational elements needed to finalize its accounting for the effects of the TCJA by December 22, 2018.

The decrease in the effective tax rate for the quarter ended March 31, 2018 is primarily due to a reduction of the estimated full year forecasted effective tax rate as a result of the enactment of TCJA. In addition, the rate reflects a tax charge of $44 million primarily related to provisional adjustments associated with regulatory guidance issued during the first quarter regarding the deemed repatriation provisions of the TCJA. This is partially offset by the absence of the unfavorable tax impact in the March 31, 2017 period related to the gain on the sale of UTC Climate Control & Security’s investment in Watsco, Inc.

As shown in the table above, the effective tax rate for the quarter ended March 31, 2018 is 27.6%; the effective income tax rate for the same period, excluding restructuring, non-operational nonrecurring items, is 25.0%. We estimate our full year 2018 annual effective income tax rate to be approximately 25.5%, excluding restructuring, non-operational nonrecurring items and adjustments related to the TCJA.

### Net Income Attributable to Common Shareowners

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

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net income attributable to common shareowners | $1,297 | $1,386 |
| Diluted earnings per share from operations | $1.62 | $1.73 |

Net income attributable to common shareowners for the quarter ended March 31, 2018 includes restructuring charges, net of tax benefit, of $52 million as well as a net charge for significant non-operational and/or nonrecurring items, including the impact of taxes, of $72 million. The effect of restructuring charges and significant non-operational and/or nonrecurring items on diluted earnings per share for the quarter ended March 31, 2018 was a charge of $0.15 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated a favorable impact of $0.04 per diluted share.

Net income attributable to common shareowners for the quarter ended March 31, 2017 includes restructuring charges, net of tax benefit, of $34 million as well as gains from the sale of available-for-sale securities, net of tax, of $238 million. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the quarter ended March 31, 2017 was a gain of $0.25 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated a favorable impact of $0.03 per diluted share.

### Restructuring Costs

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Restructuring costs | $69 | $52 |

Restructuring actions are an essential component of our operating margin improvement efforts and relate to existing and recently acquired operations. 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 restructuring costs in 2018 to be consistent with 2017, 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.

**2018 Actions.** During the quarter ended March 31, 2018, we recorded net pre-tax restructuring charges of $12 million relating to ongoing cost reduction actions initiated in 2018. We expect to incur additional restructuring charges of $40 million to complete these actions. We are targeting to complete in 2018 and 2019 the majority of the remaining workforce and facility related cost reduction actions initiated in 2018. We expect recurring pre-tax savings in continuing operations to increase to approximately $26 million annually over the two-year period subsequent to initiating the actions. Approximately 95% 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 quarter ended March 31, 2018, we had cash outflows of approximately $4 million related to the 2018 actions.

**2017 Actions.** During the quarter ended March 31, 2018 and 2017, we recorded net pre-tax restructuring charges of $51 million and $24 million, respectively, for actions initiated in 2017. We expect to incur additional restructuring charges of $103 million to complete these actions. We are targeting to complete in 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 $207 million annually, of which, approximately $43 million was realized during the quarter ended March 31, 2018. Approximately 81% 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 quarter ended March 31, 2018, we had cash outflows of approximately $39 million related to the 2017 actions.

In addition, during the quarter ended March 31, 2018, we recorded net pre-tax restructuring costs totaling $6 million for restructuring actions initiated in 2016 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 ended March 31, 2018 and 2017 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 March 31, 2018 increased 10% in comparison to the same period of the prior year, driven by increases in transport refrigeration (37%) and residential equipment (24%). At constant currency, and excluding the impact of the New Revenue Standard, Otis new equipment orders in the quarter were down 4% in comparison to the prior year, driven by a decrease in orders in North America (9%) and China (2%).

Summary performance for each of the commercial businesses for the quarters ended March 31, 2018 and 2017 was as follows:

*(dollars in millions)*

|  | Otis 2018 | 2017 | Change | UTC Climate, Controls & Security 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $3,037 | $2,804 | 8% | $4,376 | $3,892 | 12% |
| Cost of Sales | 2,134 | 1,941 | 10% | 3,104 | 2,762 | 12% |
|  | 903 | 863 | 5% | 1,272 | 1,130 | 13% |
| Operating Expenses and Other | 453 | 416 | 9% | 680 | 199 | 242% |
| Operating Profits | $450 | $447 | 1% | $592 | $931 | (36)% |

Operating Profit Margins 14.8 % 15.9 % 13.5 % 23.9 %

### Otis –

### Quarter Ended March 31, 2018 Compared with Quarter Ended March 31, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 1% | 6% | — | — | 1% |
| Cost of Sales | 1% | 7% | — | 1% | 1% |
| Operating Profits | (2)% | 7% | — | (4)% | — |

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

The operational profit decrease of 2% was driven by:

- unfavorable price and mix (12%), primarily driven by China
- higher selling, general and administrative expenses (2%)
- unfavorable commodities impact (2%)

These decreases were partially offset by:

- profit contribution from the higher sales volumes noted above (8%)
- favorable transactional foreign exchange gains from mark-to-market adjustments and embedded foreign currency derivatives within certain new equipment contracts (4%)
- favorable productivity (3%).

### UTC Climate, Controls & Security –

### Quarter Ended March 31, 2018 Compared with Quarter Ended March 31, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 7% | 5% | — | — | — |
| Cost of Sales | 7% | 5% | — | — | — |
| Operating Profits | 7% | 2% | — | 1% | (46)% |

The organic sales increase of 7% was driven by growth in residential HVAC (2%), global commercial HVAC (2%), and transport refrigeration (2%) primarily driven by strong performance in the container division.

The operational profit increase of 7% was driven by:

- profit contribution from the higher sales volumes noted above, net of unfavorable mix (5%)
- the absence of a prior year unfavorable contract adjustment related to a large commercial project (3%)

These increases were partially offset by:

- higher commodity cost, net of favorable pricing (1%)

The 46% decrease in “Other” primarily reflects the absence of gains on the sale of investments in the prior year (44%), driven by Watsco, Inc., and the impact of period costs associated with a product recall program (2%).

### 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 6% in the first two months of 2018.

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 three months of 2018, as compared with 2017, total commercial aerospace aftermarket sales increased 18% at Pratt & Whitney and 16% at UTC Aerospace Systems.

We record changes in contract estimates using the cumulative catch-up method. Operating profit in the quarter ended March 31, 2018 included significant net unfavorable changes in aerospace contract estimates totaling $41 million, primarily reflecting unfavorable net contract adjustments recorded at Pratt & Whitney and UTC Aerospace Systems. Operating profit in the quarter ended March 31, 2017 included significant net unfavorable changes in aerospace contract estimates of $29 million, primarily representing unfavorable contract adjustments recorded at Pratt & Whitney.

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. On October 16, 2017, Bombardier and Airbus announced an agreement to become partners on the CSeries aircraft program. We will continue to monitor the progress of the program and our ability to recover our investments, which we believe would be strengthened by this partnership.

Summary performance for each of the aerospace businesses for the quarters ended March 31, 2018 and 2017 was as follows:

*(dollars in millions)*

|  | Pratt & Whitney 2018 | 2017 | Change | UTC Aerospace Systems 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $4,329 | $3,758 | 15% | $3,817 | $3,611 | 6% |
| Cost of Sales | 3,521 | 2,986 | 18% | 2,783 | 2,667 | 4% |
|  | 808 | 772 | 5% | 1,034 | 944 | 10% |
| Operating Expenses and Other | 395 | 416 | (5)% | 446 | 413 | 8% |
| Operating Profits | $413 | $356 | 16% | $588 | $531 | 11% |

Operating Profit Margins 9.5 % 9.5 % 15.4 % 14.7 %

### Pratt & Whitney –

### Quarter Ended March 31, 2018 Compared with Quarter Ended March 31, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation\* | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 9% | 1% | — | — | 5% |
| Cost of Sales | 11% | 1% | — | — | 6% |
| Operating Profits | 4% | 4% | — | — | 8% |

\* *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 table. For all other segments these foreign exchange transactional impacts are included within the organic/operational caption in their respective tables. Due to its 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 9% primarily reflects higher commercial aftermarket sales (7%) and higher military sales (2%). The 5% increase in "Other" reflects the sales impact of adopting the New Revenue Standard.

The operational profit increase of 4% was primarily driven by:

- higher commercial aftermarket profit contribution (15%), driven by the sales increase noted above
- higher military profit contribution (9%), driven by the sales increase noted above

These increases were partially offset by:

- lower commercial OEM profit contribution (22%), primarily driven by higher negative engine margin due to unfavorable mix and customer support costs

The 8% increase in "Other" primarily reflects a gain on a divestiture (5%) and the operating profit impact of adopting the New Revenue Standard (3%).

### UTC Aerospace Systems –

### Quarter Ended March 31, 2018 Compared with Quarter Ended March 31, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 5% | 1% | — | — | — |
| Cost of Sales | 2% | 2% | — | — | — |
| Operating Profits | 15% | (3)% | — | (1)% | — |

The organic sales increase of 5% primarily reflects higher commercial aerospace aftermarket sales (5%) and higher military OEM and aftermarket sales (3%), partially offset by lower commercial OEM sales (3%).

The operational profit increase of 15% primarily reflects:

- higher commercial aerospace profit contribution driven by commercial aftermarket sales growth, partially offset by lower commercial aerospace OEM profit contribution (net, 13%)
- higher military OEM and aftermarket profit contribution (6%)
- lower research and development costs (3%)

These increases were partially offset by:

- higher selling, general and administrative expenses (7%)

### Eliminations and other –

*(dollars in millions)*

|  | Net Sales Quarter Ended March 31, 2018 | 2017 | Operating Profits Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Eliminations and other | $(317) | $(250) | $(11) | $(18) |
| General corporate expenses | — | — | (104) | (103) |

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 for the quarter ended March 31, 2018, as compared to the same period of 2017, reflects an increase in the amount of inter-segment eliminations, principally between our aerospace businesses. The increase in operating profits for the quarter ended March 31, 2018, includes the year-over-year impact of favorable insurance settlements and the favorable year-over-year impact of foreign exchange, partially offset by transaction costs related to the merger agreement with Rockwell Collins. General corporate expenses for the quarter ended March 31, 2018, were consistent with the corresponding period of 2017.

### LIQUIDITY AND FINANCIAL CONDITION

*(dollars in millions)*

|  | March 31, 2018 | December 31, 2017 | March 31, 2017 |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $7,667 | $8,985 | $7,156 |
| Total debt | 27,347 | 27,485 | 24,582 |
| Net debt (total debt less cash and cash equivalents) | 19,680 | 18,500 | 17,426 |
| Total equity | 32,492 | 31,421 | 29,272 |
| Total capitalization (total debt plus total equity) | 59,839 | 58,906 | 53,854 |
| Net capitalization (total debt plus total equity less cash and cash equivalents) | 52,172 | 49,921 | 46,698 |

|  |  |  |  |
| --- | ---: | ---: | ---: |
| Total debt to total capitalization | 46% | 47% | 46% |
| Net debt to net capitalization | 38% | 37% | 37% |

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 from continuing operations. For 2018, we expect cash flows from continuing operations, net of capital expenditures, to approximate $4.5 billion to $5.0 billion. 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.

At March 31, 2018, we had cash and cash equivalents of $7,667 million, of which approximately 51% was held by UTC's foreign subsidiaries. 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. As previously discussed, on December 22, 2017, the TCJA was enacted. Prior to enactment of the TCJA, with few exceptions, U.S. income taxes had not been provided on undistributed earnings of UTC's international subsidiaries as the Company had intended to reinvest such earnings permanently outside the U.S. or to repatriate such earnings only when it was tax effective to do so. The Company continues to evaluate the impact of the TCJA on its existing accounting position related to the undistributed earnings. Due to the inherent complexities in determining any incremental U.S. Federal and State taxes and the non-U.S. taxes that may be due if all of these earnings were remitted to the U.S. and in accordance with SAB 118 this evaluation has not been completed and no provisional amount has been recorded in regard to the undistributed amounts. After completing its evaluation, the Company will accrue any additional taxes due on previously undistributed earnings to be distributed in the future.

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 March 31, 2018 and December 31, 2017, the amount of such restricted cash was approximately $37 million and $33 million, respectively.

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 of 46% at March 31, 2018, remained consistent with the prior year. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, discretionary pension contributions, debt refinancing, dividend payments and repurchases of our common stock. The need for commercial paper borrowings arises when the use of domestic cash for general corporate purposes exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.

At March 31, 2018, 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 March 31, 2018, 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 March 31, 2018, our maximum commercial paper borrowing limit was $4.35 billion.

Commercial paper borrowings at March 31, 2018 include approximately €750 million ($930 million) of euro-denominated commercial paper.

On February 1, 2018, we repaid at maturity the $99 million 6.80% notes due in 2018 and on February 22, 2018, we repaid at maturity the €750 million EURIBOR plus 0.80% floating rate notes due in 2018.

On November 13, 2017, we issued €750 million aggregate principal amount of floating rate notes due 2019. The net proceeds from this debt issuance were used to fund the repayment of commercial paper and for other general corporate purposes.

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 and other general corporate purposes.

Within the Business Overview of Management's Discussion and Analysis, we have described the pending acquisition of Rockwell Collins. The purchase consideration will be a combination of UTC shares and cash. We anticipate that approximately $15 billion will be required to pay the aggregate cash portion of the Merger Consideration. We expect to fund the cash portion of the Merger Consideration through debt issuances and cash on hand. Additionally, we have entered into a $6.5 billion 364-day unsecured bridge loan credit agreement that would be funded only to the extent certain anticipated debt issuances are not completed prior to the completion of the merger. We expect to assume approximately $7 billion of Rockwell Collins’ outstanding debt. To help manage the cash flow and liquidity impact resulting from the proposed acquisition, we have suspended share repurchases, excluding activity relating to our employee savings plans. As we continue to assess the impacts of the TCJA, future opportunities for repatriation of our non-U.S. earnings, and accelerated de-leveraging, we may consider, in addition to investments in our operations, limited additional share repurchases to offset the effects of dilution related to our stock-based compensation programs. We have repatriated $3.8 billion of overseas cash for the quarter ended March 31, 2018. Available cash on hand will be used to reduce the debt funding requirements for the transaction.

We believe our future operating cash flows will be sufficient to meet our future operating cash needs. Further, we continue to have access to the commercial paper markets and our existing credit facilities, and 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

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash flows provided by operating activities | $453 | $993 |

Cash generated from operating activities in the quarter ended March 31, 2018 was $540 million lower than the same period in 2017. This decrease in cash flows provided by operations is driven by an increase in working capital of $497 million, primarily due to an increase in accounts receivable of $872 million and an increase in short term contract assets of $417 million, partially offset by an increase in short term contract liabilities of $652 million. The primary drivers for the growth in accounts receivable are sales growth and a reduction in factoring activity. The reduced volume of factoring activity resulted in a decrease of approximately $560 million in cash generated from operating activities in the quarter ended March 31, 2018, as compared to the prior year. This decrease does not reflect the factoring of certain aerospace receivables performed at customer request for which we are compensated by the customer for the extended payment cycle.

In the quarter ended March 31, 2018, cash outflows from working capital were $972 million. Accounts receivables increased due to an increase in sales volume driven by UTC Climate, Controls & Security North American HVAC Residential business and UTC Aerospace Systems and Pratt & Whitney, timing, and a decrease in factoring activity on receivables , primarily at Pratt & Whitney. Current contract assets increased primarily due to progress and spend on fleet maintenance contracts and government contracts at Pratt & Whitney. Inventory increased in the quarter primarily driven by UTC Climate, Controls & Security seasonal build and an increase in production work in process for the A320 NEO in the aerospace businesses. These increases were partially offset by increases in accounts payable and accrued liabilities, driven by the higher inventory purchasing activity and customer advances at Pratt & Whitney as well as an increase in current contract liabilities driven by seasonal advanced billings and progress payments on major contracts at Otis and the timing of billings on aftermarket contracts at Pratt & Whitney.

In the quarter ended March 31, 2017, inventories increased $654 million, primarily in our aerospace businesses supporting an increase in forecasted OEM deliveries and related aftermarket demand, and at UTC Climate, Controls & Security primarily driven by seasonal demand in our North American HVAC and refrigeration businesses. 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 $500 million in cash generated from operating activities of continuing operations in the quarter ended March 31, 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. Increases in accrued liabilities were driven primarily by higher accruals for taxes and interest due to the timing of payments.

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 quarter ended March 31, 2018 and 2017 were approximately $37 million and $46 million, respectively. Although our domestic pension plans are approximately 102% funded on a projected benefit obligation basis as of March 31, 2018, and we are not required to make additional contributions through the end of 2028, we may elect to make discretionary contributions in 2018. We expect to make total contributions of approximately $100 million to our global defined benefit pension plans in 2018. Contributions to our global defined benefit pension plans in 2018 are expected to meet or exceed the current funding requirements.

### Cash Flow - Investing Activities

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash flows used in investing activities | $(976) | $(139) |

Cash flows used in investing activities of continuing operations for the quarter ended March 31, 2018 and 2017 primarily reflect capital expenditures, cash investments in businesses, cash investments in customer financing assets, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms, and settlements of derivative contracts. The increase in cash flows used in investing activities in the quarter ended March 31, 2018 compared to March 31, 2017 of $837 million primarily relates to the absence of net proceeds received of $596 million from UTC Climate, Controls & Security's sale of investments in Watsco, Inc. in the quarter ended March 31, 2017 as well as an increase in customer financing asset of $94 million, and an increase in payment from settlements of derivatives contracts of $108 million.

Capital expenditures for the quarter ended March 31, 2018 ($337 million) primarily relate to investments in production capacity at Pratt & Whitney, new facilities at UTC Climate, Controls & Security, as well as several small projects at UTC Aerospace Systems.

Cash investments in businesses in the quarter ended March 31, 2018 ($125 million) primarily consisted of an acquisition at Pratt & Whitney. We do not expect to have additional significant acquisition spend, other than the expected acquisition of Rockwell Collins. 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 $241 million, primarily driven by additional Geared Turbofan engines to support customer fleets, and $147 million for the quarter ended March 31, 2018 and 2017, respectively. While we expect that 2018 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 $15.1 billion at March 31, 2018 related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which up to $0.8 billion may be required to be disbursed during the remainder of 2018. We had commercial aerospace financing and other contractual commitments of approximately $15.3 billion at December 31, 2017.

During the quarter ended March 31, 2018, our collaboration intangible assets increased by approximately $78 million, of which $72 million resulted from payments made under our 2012 agreement to acquire Rolls-Royce's collaboration interest in IAE.

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. The settlement of these derivative instruments resulted in a net cash outflow of approximately $221 million and $113 million during the quarter ended March 31, 2018 and 2017, respectively.

### Cash Flow - Financing Activities

*(dollars in millions)*

|  | Quarter Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash flows used in financing activities | $(910) | $(929) |

Our financing activities primarily include the issuance and repayment of short term and long term debt, payment of dividends and stock repurchases. Net cash used in financing activities decreased $19 million in the quarter end March 31, 2018 compared to the quarter ended March 31, 2017 primarily due to an increase in short term borrowings of $99 million and a decrease in share repurchase activity of $908 million, offset by an increase in long term debt repayments of $954 million and an increase in dividends paid of $30 million.

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 $0.9 billion of outstanding commercial paper at March 31, 2018.

At March 31, 2018, management had remaining authority to repurchase approximately $2.3 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 and as required under our employee savings plan. We made cash payments of approximately $25 million to repurchase approximately 188 thousand shares of our common stock during the quarter ended March 31, 2018. In connection with the merger agreement with Rockwell Collins announced on September 4, 2017, we have suspended share repurchases, excluding activity required under our equity award programs and employee savings plans. As we continue to assess the impacts of the TCJA, future opportunities for repatriation of our non-U.S. earnings, and accelerated de-leveraging, we may consider, in addition to investments in our operations, limited additional share repurchases to offset the effects of dilution related to our stock-based compensation programs.

We paid dividends on common stock of $0.70 per share, totaling approximately $535 million in the aggregate for the quarter ended March 31, 2018. On February 5, 2018, the Board of Directors declared a dividend of $0.70 per share payable March 10, 2018 to shareowners of record at the close of business on February 16, 2018.

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.

### Off-Balance Sheet Arrangements and Contractual Obligations

In our 2017 Annual Report, incorporated by reference in our 2017 Form 10-K, we disclosed our off-balance sheet arrangements and contractual obligations. As of March 31, 2018, 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, 277 characters.

There has been no significant change in our exposure to market risk during the quarter ended March 31, 2018. For discussion of our exposure to market risk, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," contained in our 2017 Form 10-K.

## Controls and procedures

As filed, 10,008 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 March 31, 2018. 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 March 31, 2018, 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 quarter ended March 31, 2018, 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," "outlook", "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, tax rates and other measures of financial performance or potential future plans, strategies or transactions of United Technologies or the combined company following United Technologies’ pending acquisition of Rockwell Collins, the anticipated benefits of the pending acquisition, including estimated synergies, the expected timing of financing and completion of the transaction and other statements that are not historical facts. 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 and Rockwell Collins 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;
- the scope, nature, impact or timing of acquisition and divestiture or restructuring activity, including the pending acquisition of Rockwell Collins, including among other things integration of acquired businesses into UTC's existing businesses and realization of synergies and opportunities for growth and innovation;
- future timing and levels of indebtedness, including indebtedness expected to be incurred by UTC in connection with the pending Rockwell Collins acquisition, and capital spending and research and development spending, including in connection with the pending Rockwell Collins acquisition;
- 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;
- 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 and Rockwell Collins 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 (including the U.S. tax reform enacted on December 22, 2017, which is commonly referred to as the Tax Cuts and Jobs Act of 2017), environmental, regulatory (including among other things import/export) and other laws and regulations in the U.S. and other countries in which we and Rockwell Collins operate;
- the ability of UTC and Rockwell Collins to receive the required regulatory approvals (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the merger) and to satisfy the other conditions to the closing of the pending acquisition on a timely basis or at all;
- the occurrence of events that may give rise to a right of one or both of UTC or Rockwell Collins to terminate the merger agreement, including in circumstances that might require Rockwell Collins to pay a termination fee of $695 million to UTC or $50 million of expense reimbursement;
- negative effects of the announcement or the completion of the merger on the market price of UTC’s and/or Rockwell Collins’ common stock and/or on their respective financial performance;
- risks related to Rockwell Collins and UTC being restricted in their operation of their businesses while the merger agreement is in effect;
- risks relating to the value of the UTC’s shares to be issued in connection with the pending Rockwell acquisition, significant merger costs and/or unknown liabilities;
- risks associated with third-party contracts containing consent and/or other provisions that may be triggered by the Rockwell merger agreement;
- risks associated with merger-related litigation or appraisal proceedings; and
- the ability of UTC and Rockwell Collins, or the combined company, to retain and hire key personnel.

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 2017 Annual Report and 2017 Form 10-K. Additional important information as to these factors is included in our 2017 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", in our 2017 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" and in our Form S-4 Registration Statement (Registration No. 333-220883) under the heading "Risk Factors". 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 2017 Form 10-K.

Filed Apr 27, 2018.
Source: SEC EDGAR, the filing index for accession 0000101829-18-000009. Last ingested by Listed: Nov 3, 2026, 21:25 ET. No prices; not investment advice.