# RTX Corp: Form 10-Q for the period ended Sep 30, 2018

- Company: [RTX Corp](/companies/rtx.md) (CIK 101829)
- Form: 10-Q
- Filed: 2018-10-26
- Accepted by EDGAR: Oct 26, 2018, 08:51 ET
- Period: 2018-09-30
- Accession: 0000101829-18-000043
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/101829/000010182918000043/a2018-09x3010xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/101829/000010182918000043/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $16.51bn | us-gaap:Revenues |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $48.46bn | us-gaap:Revenues |
| Research and development | 3 months, 2018-07-01 to 2018-09-30 | $586.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2018-01-01 to 2018-09-30 | $1.73bn | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2018-07-01 to 2018-09-30 | $1.68bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-01-01 to 2018-09-30 | $5.15bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $1.84bn | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $6.64bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-07-01 to 2018-09-30 | $258.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-01-01 to 2018-09-30 | $721.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | $419.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | $1.64bn | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | $1.24bn | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | $4.58bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | $1.54 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | $5.72 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-01 to 2018-09-30 | $1.56 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-01-01 to 2018-09-30 | $5.80 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 801,800,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 800,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | $4.32bn | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $1.12bn | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2018-01-01 to 2018-09-30 | $1.61bn | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2018-01-01 to 2018-09-30 | $72.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-09-30 | $13.80bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $40.20bn | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $114.94bn | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $26.50bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $80.56bn | us-gaap:Liabilities |
| Short-term borrowings | at 2018-09-30 | $1.58bn | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2018-09-30 | $32.11bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2018-09-30 | 800,984,201 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 73,242 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. 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 $1.9 billion and $1.4 billion for the quarters ended September 30, 2018 and 2017, 11% 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, development and sustainment programs for the U.S. Government has and is expected to contribute positively to our results in 2018.

As has been previously disclosed, the Company is continuing to undertake a strategic review of its portfolio of businesses. There can be no assurance as to the outcome of any such process or that any such process will result in a transaction, or if a transaction is undertaken, as to its terms or timing.

### 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 nine months ended September 30, 2018, our investment in business acquisitions was $177 million, which primarily reflects an acquisition at Pratt & Whitney. 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. See Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets for additional discussion. We do not expect to have additional significant acquisition spend, other than the pending acquisition of Rockwell Collins. However, actual acquisition spending may vary depending upon the timing, availability and value of acquisition opportunities. To help manage the cash flow and liquidity resulting from the pending acquisition, we have suspended share repurchases, excluding activity relating to our equity award programs and 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. 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 quarter and nine months ended September 30, 2018 and the balance sheet as of September 30, 2018. Under the New Revenue Standard, costs incurred for engineering and development of aerospace products under contracts with customers must be capitalized as contract fulfillment costs, to the extent recoverable from the associated contract margin, and subsequently amortized as the OEM products are delivered to the customer. The estimation of contract margin requires management's judgment. Also as described in Note 2, the New Revenue Standard changed the revenue recognition practices for a number of revenue streams across our businesses. Several of our businesses which previously accounted for revenue on a point in time basis are now required to use an over-time revenue recognition model when their contracts meet one or more of the mandatory criteria established in the New Revenue Standard. Revenue is now recognized on an over-time basis using an input method for repair contracts within Otis and UTC Climate, Controls & Security; certain U.S. Government and commercial aerospace equipment contracts; and aerospace aftermarket service work. We measure progress toward completion for these contracts using costs incurred to date relative to total estimated costs at completion. This over-time basis using an input method requires estimates of future revenues and costs over the full term of product and/or service delivery. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management's judgment.

The long-term nature of these contracts, the complexity of the products, and the strict safety and performance standards under which they are regulated can affect our ability to estimate costs and margin precisely. As a result, we review our cost estimates on significant contracts on a quarterly basis and for others, at least 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. For further discussion of significant judgments and estimates related to long-term contract accounting, see the Critical Accounting Estimates disclosure in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Form 10-K.

### RESULTS OF OPERATIONS

### Net Sales

*(dollars in millions)*

|  | Quarter Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $16,510 | $15,062 | $48,457 | $44,157 |

The factors contributing to the total percentage change year-over-year in total net sales for the quarter and nine months ended September 30, 2018 are as follows:

|  | Quarter Ended September 30, 2018 | Nine Months Ended September 30, 2018 |
| --- | ---: | ---: |
| Organic change | 8% | 7% |
| Foreign currency translation | (1)% | 1% |
| Other | 3% | 2% |
| Total % change | 10% | 10% |

All four segments experienced organic sales growth for both the quarter and nine months ended September 30, 2018. During the quarter ended September 30, 2018, Pratt & Whitney sales grew 13% organically, driven by higher commercial aftermarket, commercial OEM, and military sales. UTC Aerospace Systems grew 9% organically primarily driven by higher commercial aerospace OEM and aftermarket sales, and higher military sales. Organic sales growth of 7% at Climate, Controls & Security was driven by growth in global commercial HVAC, North America residential HVAC, and transport refrigeration. Otis sales grew 4% organically, reflecting higher new equipment sales, driven by growth in Europe and North America, and higher service sales, driven by growth in North America and Asia.

During the nine months ended September 30, 2018, Pratt & Whitney sales grew 11% organically, reflecting higher commercial aftermarket, military, and commercial OEM sales. UTC Aerospace Systems grew 7% organically, driven by higher commercial aftermarket, commercial OEM, and military sales. Organic sales growth of 6% at Climate, Controls & Security was driven by growth in North America residential HVAC, global commercial HVAC, and transport refrigeration. Otis sales grew 2% organically, reflecting higher service sales, driven by growth in North America and Asia. Otis new equipment sales were up slightly as growth in Europe and North America was partially offset by a decline in China.

### Cost of Products and Services Sold

*(dollars in millions)*

|  | Quarter Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Total cost of products and services sold | $12,536 | $11,106 | $36,238 | $32,406 |
| Percentage of net sales | 75.9% | 73.7% | 74.8% | 73.4% |

The factors contributing to the percentage change year-over-year for the quarter and nine months ended September 30, 2018 in total cost of products and services sold are as follows:

|  | Quarter Ended September 30, 2018 | Nine Months Ended September 30, 2018 |
| --- | ---: | ---: |
| Organic change | 10% | 8% |
| Foreign currency translation | (1)% | 1% |
| Other | 4% | 3% |
| Total % change | 13% | 12% |

The organic increase in total cost of products and services sold for the quarter and nine months ended September 30, 2018 was primarily driven by the organic sales increases noted above. The 4% increase in Other for the quarter ended September 30, 2018 primarily reflects an increase in cost of sales related to a current year customer contract settlement (3%) and the absence of a prior year decrease to cost of sales related to a prior year customer contract matter (2%) at Pratt & Whitney. The 3% increase in Other for the nine months ended September 30, 2018 primarily reflects the impact of the adoption of the New Revenue Standard (1%), a current year customer contract settlement at Pratt & Whitney (1%) and the absence of a prior year customer contract matter at Pratt & Whitney (1%).

### Gross Margin

*(dollars in millions)*

|  | Quarter Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Gross margin | $3,974 | $3,956 | $12,219 | $11,751 |
| Percentage of net sales | 24.1% | 26.3% | 25.2% | 26.6% |

The decrease in gross margin as a percentage of sales for the quarter ended September 30, 2018 was driven by a 520 basis point decline in Pratt & Whitney's gross margin driven by the unfavorable year-over-year impact of customer contract matters and higher negative engine margin. Otis gross margin declined 220 basis points driven by unfavorable price and mix. Gross margin at UTC Aerospace Systems declined 20 basis points as the benefit of higher commercial aftermarket volumes and cost reduction was more than offset by adverse commercial OEM mix and higher warranty expense. Gross margin at UTC Climate, Controls & Security was up slightly as favorable pricing and the favorable year-over-year impact of contract adjustments related to a large commercial project were largely offset by increased commodities and logistics costs.

The decrease in gross margin as a percentage of sales for the nine months ended September 30, 2018 includes a 300 basis point decline in Pratt & Whitney's gross margin driven by the unfavorable year-over-year impact of customer contract matters and higher negative engine margin. Gross margin at Otis declined 170 basis points driven by unfavorable price and mix, primarily in China. Gross margin at UTC Climate, Controls & Security was consistent with the prior year as favorable pricing and the favorable year-over-year impact of contract adjustments related to a large commercial project were largely offset by increased commodities and logistics costs. UTC Aerospace Systems gross margin improved 30 basis points as the benefit of higher commercial aftermarket volumes and cost reduction more than offset adverse commercial OEM mix and higher warranty expense.

### Research and Development

*(dollars in millions)*

|  | Quarter Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Company-funded | $586 | $592 | $1,729 | $1,797 |
| Percentage of net sales | 3.5% | 3.9% | 3.6% | 4.1% |
| Customer-funded | $356 | $359 | $1,044 | $1,094 |
| Percentage of net sales | 2.2% | 2.4% | 2.2% | 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 (1%) in company-funded research and development for the quarter ended September 30, 2018 was driven by a decline at Pratt & Whitney (3%) reflecting lower expenses across various commercial programs partially offset by an increase at UTC Climate, Controls & Security (2%) to support the continued investment in new products. Company-funded research and development at UTC Aerospace Systems was consistent with the prior year as increased spend across various commercial programs was offset by the deferral of certain development costs in accordance with the New Revenue Standard. For the nine months ended September 30, 2018 company-funded research and development decreased 4% driven by lower spending at Pratt & Whitney (3%) and UTC Aerospace Systems (3%) reflecting lower expenses across various commercial programs and the deferral of certain development costs in accordance with the New Revenue Standard, partially offset by an increase in spending at UTC Climate, Controls & Security (2%) to support the continued investment in new products.

The decrease (1%) in customer-funded research and development for the quarter ended September 30, 2018 reflects a decline at UTC Aerospace Systems (3%) primarily driven by the deferral of certain development costs in accordance with the New Revenue Standard and lower expenses across various programs, partially offset by an increase at Pratt & Whitney (3%), primarily driven by higher research and development expenses on military development programs. The decline (5%) in customer-funded research and development for the nine months ended September 30, 2018 reflects a decrease at UTC Aerospace Systems (5%), primarily driven by the deferral of certain development costs in accordance with the New Revenue Standard, partially offset by an increase at Pratt & Whitney (3%), primarily driven by higher research and development expenses on military development programs.

### Selling, General and Administrative

*(dollars in millions)*

|  | Quarter Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expenses | $1,681 | $1,582 | $5,151 | $4,709 |
| Percentage of net sales | 10.2% | 10.5% | 10.6% | 10.7% |

Selling, general and administrative expenses increased 6% in the quarter ended September 30, 2018, but decreased 30 basis points as a percentage of net sales. The increase reflects higher expenses at UTC Aerospace Systems (3%) primarily driven by increased headcount and employee compensation related expenses; an increase at UTC Climate, Controls & Security (2%) primarily driven by employee compensation related expenses; and higher expenses at Otis (1%) resulting from higher labor and information technology costs. The increase also reflects transaction costs related to the merger agreement with Rockwell Collins (1%), and costs associated with a strategic review of the Company's portfolio of businesses (1%), which were offset by the impact of lower restructuring expenses (1%), and a decrease resulting from the impact of foreign exchange (1%).

Selling, general and administrative expenses increased 9% in the nine months ended September 30, 2018, but decreased 10 basis points as a percentage of net sales. The increase reflects higher expenses at UTC Aerospace Systems (3%) primarily driven by increased headcount and employee compensation related expenses; an increase at UTC Climate, Controls & Security (2%) primarily driven by employee compensation related expenses; higher expenses at Pratt & Whitney (1%) driven by increased headcount and employee compensation related expenses and costs to support higher volumes; and higher expenses at Otis (1%) resulting from higher labor and information technology costs; the unfavorable impact of foreign exchange (2%) and transaction costs related to the merger agreement with Rockwell Collins (1%).

We are continuously evaluating our cost structure and have implemented restructuring actions as a method of keeping our cost structure competitive. As appropriate, the amounts reflected above include the beneficial impact of restructuring actions on Selling, general and administrative expenses. See Note 8: Restructuring Costs and the Restructuring Costs section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

### Other Income, Net

*(dollars in millions)*

|  | Quarter Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Other income, net | $131 | $250 | $1,303 | $1,095 |

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 (48%) for the quarter ended September 30, 2018 was primarily driven by the absence of prior year gains on the sale of securities (48%).

The year-over-year increase in Other income, net (19%) for the nine months ended September 30, 2018 primarily reflects the gain on the sale of Taylor Company ($799 million, 73%) and a gain on a divestiture at Pratt & Whitney (2%), partially offset by the absence of a prior year gain from the sale of UTC Climate, Controls & Security's investments in Watsco, Inc (35%), the absence of prior year gains on the sale of securities (13%), an impairment of assets related to a previously acquired UTC Aerospace Systems business (4%) and the absence of a prior year gain on the sale of an investment in a UTC Climate, Controls & Security joint venture (2%).

### Interest Expense, Net

*(dollars in millions)*

|  | Quarter Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Interest expense | $323 | $258 | $837 | $745 |
| Interest income | (65) | (35) | (116) | (83) |
| Interest expense, net | $258 | $223 | $721 | $662 |
| Average interest expense rate | 3.6% | 3.6% | 3.5% | 3.6% |

Interest expense, net increased 16% and 9% for the quarter and nine months ended September 30, 2018, respectively. The increase in interest expense reflects the impact of the August 16, 2018 issuance of notes representing $11 billion in aggregate principal; the May 4, 2017 issuance of notes representing $4 billion in aggregate principal; and the May 18, 2018 issuance of Euro-denominated notes representing €2 billion in aggregate principal. These increases were partially offset by the favorable impact of the repayment at maturity of the following: 1.8% notes in June 2017 representing $1.5 billion in aggregate principal; the 6.8% notes in February 2018 representing $99 million of aggregate principal; the Euro-denominated floating rate notes in February 2018 representing €750 million in aggregate principal; and the 1.778% notes in May 2018 representing $1.1 billion of aggregate principal. The average maturity of our long-term debt at September 30, 2018 is approximately 11 years.

$9.2 billion of the $11 billion in aggregate principal amount of notes issued on August 16, 2018 is specifically designated to fund the cash consideration in the acquisition of Rockwell Collins and related fees, expenses and other amounts. Therefore, $9.2 billion of the net proceeds from the issuance have been classified as restricted cash as of September 30, 2018. We expect to use the remaining proceeds for general corporate purposes which may include the repayment of debt, including outstanding commercial paper. The increase in interest income for the quarter and nine months ended September 30, 2018 primarily reflects interest earned on higher cash balances.

### Income Taxes

|  | Quarter Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Effective tax rate | 23.7% | 26.1% | 25.2% | 26.8% |

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 and nine months ended September 30, 2018 is primarily due to a decrease in the estimated full year forecasted effective tax rate as a result of the enactment of TCJA. This is partially offset by the absence of non-cash tax gains associated with certain federal, state and non-US tax year closures due to audit resolutions and the expiration of applicable statutes of limitations in the third quarter of 2017.

As shown in the table above, the effective tax rate for the nine months ended September 30, 2018 is 25.2%; the effective income tax rate for the same period, excluding restructuring, non-operational nonrecurring items, is 24.1%. We expect some variability in our full year annual effective income tax rate excluding restructuring, non-operational nonrecurring items and any provisional adjustments related to the TCJA.

### Net Income Attributable to Common Shareowners

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

|  | Quarter Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net income attributable to common shareowners | $1,238 | $1,330 | $4,583 | $4,155 |
| Diluted earnings per share from operations | $1.54 | $1.67 | $5.72 | $5.20 |

Net income attributable to common shareowners for the quarter ended September 30, 2018 includes restructuring charges, net of tax benefit, of $28 million as well as a net charge for significant non-operational and/or nonrecurring items, net of tax, of $281 million. The effect of restructuring charges and significant non-operational and/or nonrecurring items on diluted earnings per share for the quarter ended September 30, 2018 was a charge of $0.39 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging had no impact on diluted earnings per diluted share.

Net income from continuing operations attributable to common shareowners for the quarter ended September 30, 2017 includes restructuring charges, net of tax benefit, of $45 million as well as a net charge for significant non-operational and/or nonrecurring items, net of tax, of $5 million. The effect of restructuring charges and significant non-operational and/or nonrecurring items on diluted earnings per share for the quarter ended September 30, 2017 was a charge of $0.06 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 nine months ended September 30, 2018 includes restructuring charges, net of tax benefit, of $139 million as well as a net gain for significant non-operational and/or nonrecurring items, including the impact of taxes, of $179 million. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the nine months ended September 30, 2018 was a gain of $0.05 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated a favorable impact of $0.05 per diluted share.

Net income from continuing operations attributable to common shareowners for the nine months ended September 30, 2017 includes restructuring charges, net of tax benefit, of $119 million as well as the net favorable impact of significant non-operational and/or nonrecurring items, net of tax, of $233 million. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the nine months ended September 30, 2017 was a gain of $0.14 per share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated a favorable impact of $0.11 per diluted share.

### Restructuring Costs

*(dollars in millions)*

|  | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Restructuring costs | $186 | $177 |

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 nine months ended September 30, 2018, we recorded net pre-tax restructuring charges of $97 million relating to ongoing cost reduction actions initiated in 2018. We expect to incur additional restructuring charges of $83 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 $110 million annually over the two-year period subsequent to initiating the actions. Approximately 81% 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 nine months ended September 30, 2018, we had cash outflows of approximately $48 million related to the 2018 actions.

**2017 Actions.** During the nine months ended September 30, 2018 and 2017, we recorded net pre-tax restructuring charges of $76 million and $114 million, respectively, for actions initiated in 2017. We expect to incur additional restructuring charges of $116 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 $250 million annually, of which, approximately $139 million was realized during the nine months ended September 30, 2018. Approximately 77% 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 nine months ended September 30, 2018, we had cash outflows of approximately $86 million related to the 2017 actions.

In addition, during the nine months ended September 30, 2018, we recorded net pre-tax restructuring costs totaling $13 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 quarter and nine months ended September 30, 2018 and 2017 are included in "Eliminations and other", 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 September 30, 2018 increased 13% in comparison to the same period of the prior year, driven by increases in transport refrigeration (91%), fire and security products (8%), residential equipment (2%) and commercial HVAC (2%). At constant currency, and excluding the impact of the New Revenue Standard, Otis new equipment orders in the quarter increased 9% in comparison to the prior year, driven by increased orders in North America (30%) and China (14%), partially offset by a decline in Europe (10%).

Summary performance for each of the commercial businesses for the quarters ended September 30, 2018 and 2017 was as follows:

*(dollars in millions)*

|  | Otis 2018 | 2017 | Change | UTC Climate, Controls & Security 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $3,223 | $3,156 | 2% | $4,880 | $4,688 | 4% |
| Cost of Sales | 2,291 | 2,175 | 5% | 3,421 | 3,292 | 4% |
|  | 932 | 981 | (5)% | 1,459 | 1,396 | 5% |
| Operating Expenses and Other | 446 | 431 | 3% | 615 | 602 | 2% |
| Operating Profits | $486 | $550 | (12)% | $844 | $794 | 6% |

Operating Profit Margins 15.1 % 17.4 % 17.3 % 16.9 %

Summary performance for each of the commercial businesses for the nine months ended September 30, 2018 and 2017 was as follows:

*(dollars in millions)*

|  | Otis 2018 | 2017 | Change | UTC Climate, Controls & Security 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $9,604 | $9,091 | 6% | $14,291 | $13,292 | 8% |
| Cost of Sales | 6,814 | 6,293 | 8% | 10,046 | 9,343 | 8% |
|  | 2,790 | 2,798 | —% | 4,245 | 3,949 | 7% |
| Operating Expenses and Other | 1,366 | 1,262 | 8% | 1,164 | 1,387 | (16)% |
| Operating Profits | $1,424 | $1,536 | (7)% | $3,081 | $2,562 | 20% |

Operating Profit Margins 14.8 % 16.9 % 21.6 % 19.3 %

### Otis –

### Quarter Ended September 30, 2018 Compared with Quarter Ended September 30, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 4% | (2)% | —% | —% | —% |
| Cost of Sales | 7% | (2)% | —% | —% | —% |
| Operating Profits | (11)% | (2)% | —% | —% | 1% |

The organic sales increase of 4% reflects higher new equipment sales (2%), driven by growth in Europe and North America, and higher service sales (2%), driven by growth in North America and Asia.

The operational profit decrease of 11% was driven by:

- unfavorable price and mix (8%)
- unfavorable year-over-year transactional foreign exchange from mark-to-market adjustments (4%)
- higher selling, general and administrative expenses and research and development costs (4%)
- unfavorable commodity costs (2%)

These decreases were partially offset by:

- profit contribution from the higher sales volumes noted above (7%)

### Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 2% | 3% | —% | —% | 1% |
| Cost of Sales | 4% | 3% | —% | —% | 1% |
| Operating Profits | (8)% | 3% | —% | (2)% | —% |

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

The operational profit decrease of 8% was driven by:

- unfavorable price and mix (9%), primarily in China
- higher selling, general and administrative expenses and research and development costs (3%)
- unfavorable commodity costs (2%)
- unfavorable transactional foreign exchange from mark-to-market adjustments (1%)

These decreases were partially offset by:

- profit contribution from the higher sales volumes noted above (7%)

### UTC Climate, Controls & Security –

### Quarter Ended September 30, 2018 Compared with Quarter Ended September 30, 2017

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

The organic sales increase of 7% was driven by growth in global commercial HVAC (3%), North America residential HVAC (2%), and transport refrigeration (2%), which was 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 mix (8%)
- the year-over-year impact of contract adjustments related to a large commercial project (4%)
- favorable pricing net of commodities (4%)

These increases were partially offset by:

- increased logistics costs (5%)
- increased selling, general and administrative costs, net of restructuring savings (2%)
- increased research and development costs (1%)

The 2% decrease in Other primarily reflects the absence of a prior year gain on the sale of an investment.

### Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 6% | 3% | (1)% | —% | —% |
| Cost of Sales | 6% | 3% | (1)% | —% | —% |
| Operating Profits | 6% | 1% | —% | 1% | 12% |

The organic sales increase of 6% was driven primarily by growth in North America residential HVAC (2%), global commercial HVAC (2%), and transport refrigeration (2%) which was primarily driven by strong performance in the container division.

The operational profit increase of 6% was driven by:

- profit contribution from the higher sales volumes noted above, net of mix (6%)
- the year-over-year impact of contract adjustments related to a large commercial project (4%)

These increases were partially offset by:

- increased logistics costs (2%)
- increased research and development costs (1%)

The impact of pricing, net of commodities, was consistent with the prior year.

The 12% increase in Other primarily reflects the year-over-year impact of gains on sale of investments (14%), primarily driven by the sale of Taylor Company in 2018, partially offset by the absence of the prior year sale of 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 and stronger economic conditions. Airline traffic, as measured by RPMs, grew approximately 7% in the first eight months of 2018.

Our commercial aftermarket businesses continue to evolve as a significant portion 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 nine months of 2018, as compared with 2017, total commercial aerospace aftermarket sales increased 13% at Pratt & Whitney and 13% at UTC Aerospace Systems.

Operating profit in the quarter ended September 30, 2018 included significant net favorable changes in aerospace contract estimates totaling $55 million, primarily reflecting favorable net contract adjustments at Pratt & Whitney. Operating profit for the nine months ended September 30, 2018 included significant net unfavorable changes in aerospace contract estimates totaling $28 million, reflecting unfavorable net contract adjustments recorded at both UTC Aerospace Systems and Pratt & Whitney. Operating profit in the quarter and nine months ended September 30, 2017 included significant net unfavorable changes in aerospace contract estimates totaling $21 million and $50 million, respectively, primarily reflecting unfavorable net contract adjustments recorded at Pratt & Whitney.

Summary performance for each of the aerospace businesses for the quarters ended September 30, 2018 and 2017 was as follows:

*(dollars in millions)*

|  | Pratt & Whitney 2018 | 2017 | Change | UTC Aerospace Systems 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $4,789 | $3,871 | 24% | $3,955 | $3,637 | 9% |
| Cost of Sales | 4,215 | 3,207 | 31% | 2,909 | 2,667 | 9% |
|  | 574 | 664 | (14)% | 1,046 | 970 | 8% |
| Operating Expenses and Other | 465 | 476 | (2)% | 436 | 398 | 10% |
| Operating Profits | $109 | $188 | (42)% | $610 | $572 | 7% |

Operating Profit Margins 2.3 % 4.9 % 15.4 % 15.7 %

Summary performance for each of the aerospace businesses for the nine months ended September 30, 2018 and 2017 was as follows:

*(dollars in millions)*

|  | Pratt & Whitney 2018 | 2017 | Change | UTC Aerospace Systems 2018 | 2017 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $13,854 | $11,699 | 18% | $11,734 | $10,888 | 8% |
| Cost of Sales | 11,629 | 9,460 | 23% | 8,614 | 8,024 | 7% |
|  | 2,225 | 2,239 | (1)% | 3,120 | 2,864 | 9% |
| Operating Expenses and Other | 1,306 | 1,331 | (2)% | 1,353 | 1,227 | 10% |
| Operating Profits | $919 | $908 | 1% | $1,767 | $1,637 | 8% |

Operating Profit Margins 6.6 % 7.8 % 15.1 % 15.0 %

### Pratt & Whitney –

### Quarter Ended September 30, 2018 Compared with Quarter Ended September 30, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation\* | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 13% | —% | —% | —% | 11% |
| Cost of Sales | 18% | (1)% | —% | —% | 14% |
| Operating Profits | (36)% | 4% | —% | (1)% | (9)% |

\* *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 table above. 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 13% primarily reflects higher commercial aftermarket sales of (5%), increased commercial OEM sales of (4%) and growth in military sales of (4%). The 11% increase in Other reflects the absence of a prior year customer contract matter (10%) and the impact of the adoption the New Revenue Standard (1%).

The operational profit decrease of 36% was primarily driven by:

- lower commercial OEM profit contribution (73%), reflecting higher negative engine margin and other ramp-related costs, as well as increased selling, general and administrative expenses

This decrease was partially offset by:

- higher commercial aftermarket profit contribution (33%), driven by the sales increase noted above
- higher military profit contribution (3%), driven by the sales increase noted above, partially offset by the impact of adverse mix on military development programs

The 9% decrease in Other primarily reflects a customer contract settlement (159%), partially offset by the impact of the absence of a prior year customer contract matter (104%) and the adoption of the New Revenue Standard (46%).

### Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation\* | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 11% | 1% | —% | —% | 6% |
| Cost of Sales | 14% | —% | —% | —% | 9% |
| Operating Profits | 2% | 3% | —% | —% | (4)% |

The organic sales increase of 11% primarily reflects higher commercial aftermarket sales (6%), higher military sales (3%) and an increase in commercial OEM sales (2%). The 6% increase in Other primarily reflects the impact of the adoption of the New Revenue Standard (4%) and the absence of a prior year customer contract matter (3%).

The operational profit increase of 2% was primarily driven by:

- higher commercial aftermarket profit contribution (23%), driven by the sales increase noted above
- higher military profit contribution (3%), driven by the sales increase noted above

These increases were partially offset by:

- lower commercial OEM profit contribution (24%) primarily driven by higher negative engine margin

The 4% decrease in Other primarily reflects the unfavorable year-over-year impact of contract settlements (12%), and the absence of prior year licensing income (2%), partially offset by the adoption of the New Revenue Standard (8%), and the favorable year-over-year impact of divestitures (2%).

### UTC Aerospace Systems –

### Quarter Ended September 30, 2018 Compared with Quarter Ended September 30, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 9% | —% | —% | —% | —% |
| Cost of Sales | 9% | —% | —% | —% | —% |
| Operating Profits | 3% | 1% | —% | —% | 3% |

The organic sales growth of 9% primarily reflects higher commercial aftermarket and military sales (combined 6%), and higher commercial aerospace OEM sales (3%).

The increase in operational profit of 3% primarily reflects:

- higher commercial aftermarket and military profit contribution (21%) driven by the sales growth noted above
- higher commercial aerospace OEM profit contribution (6%) driven by the sales growth noted above

These increases were partially offset by:

- higher warranty costs (11%)
- higher selling, general and administrative expenses (9%)
- higher research and development spending (2%)

The 3% increase in Other reflects the operating profit impact of adopting the New Revenue Standard.

### Nine Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 7% | 1% | —% | —% | —% |
| Cost of Sales | 6% | 1% | —% | —% | —% |
| Operating Profits | 12% | (2)% | —% | (1)% | (1)% |

The organic sales growth of 7% primarily reflects higher commercial aftermarket and military sales (combined 6%), and higher commercial aerospace OEM sales (1%).

The increase in operational profit of 12% primarily reflects:

- higher commercial aftermarket and military profit contribution (22%) driven by the sales growth noted above
- higher commercial aerospace OEM profit contribution (2%) driven by the sales growth noted above

These increases were partially offset by:

- higher selling, general and administrative expenses (8%)
- higher warranty costs (4%)

The 1% decrease in Other primarily reflects the impairment of long lived assets related to a previously acquired business (3%), partially offset by the operating profit impact of adopting the New Revenue Standard (2%).

### Eliminations and other –

*(dollars in millions)*

|  | Net Sales Quarter Ended September 30, 2018 | 2017 | Operating Profits Quarter Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Eliminations and other | $(337) | $(290) | $(102) | $32 |
| General corporate expenses | — | — | (109) | (104) |

*(dollars in millions)*

|  | Net Sales Nine Months Ended September 30, 2018 | 2017 | Operating Profits Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Eliminations and other | $(1,026) | $(813) | $(210) | $9 |
| General corporate expenses | — | — | (339) | (312) |

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 increase in sales eliminations for the quarter and nine months ended September 30, 2018, as compared to the same periods of 2017, reflects an increase in the amount of inter-segment eliminations, principally between our aerospace businesses. The decrease in operating profits for the quarter and nine months ended September 30, 2018, is driven by higher inter-segment profit eliminations resulting from increased inter-segment activity amongst our aerospace businesses, transaction costs related to the pending acquisition of Rockwell Collins and a strategic review of the Company's portfolio of businesses, and lower year-over-year gains on sales of securities.

### LIQUIDITY AND FINANCIAL CONDITION

*(dollars in millions)*

|  | September 30, 2018 | December 31, 2017 | September 30, 2017 |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $13,799 | $8,985 | $8,523 |
| Restricted cash designated for the acquisition of Rockwell Collins, Inc. | 9,201 | — | — |
| Total debt | 39,943 | 27,485 | 27,260 |
| Net debt (total debt less cash and cash equivalents and restricted cash) | 16,943 | 18,500 | 18,737 |
| Total equity | 34,250 | 31,421 | 31,691 |
| Total capitalization (total debt plus total equity) | 74,193 | 58,906 | 58,951 |
| Net capitalization (total debt plus total equity less cash and cash equivalents and restricted cash) | 51,193 | 49,921 | 50,428 |

|  |  |  |  |
| --- | ---: | ---: | ---: |
| Total debt to total capitalization | 54% | 47% | 46% |
| Net debt to net capitalization | 33% | 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 September 30, 2018, we had cash and cash equivalents of $13,799 million, of which approximately 31% 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 as provided for by 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 September 30, 2018 and December 31, 2017, the amount of such restricted cash was approximately $9.2 billion and $33 million, respectively. Restricted cash increased by $9.2 billion in the quarter ended September 30, 2018 due to the $11 billion of aggregate notes issued during the quarter of which $9.2 billion of net proceeds were specifically designated for the pending acquisition of Rockwell Collins, Inc.

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 54% at September 30, 2018, increased 700 basis points from December 31, 2017 primarily due to the issuance of $11 billion of aggregate notes for the pending Rockwell acquisition. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, pension contributions, debt refinancing, dividend payments and repurchases of our common stock. The need for commercial paper borrowing 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 September 30, 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 September 30, 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 September 30, 2018, our maximum commercial paper borrowing limit was $4.35 billion.

Commercial paper borrowings at September 30, 2018 include approximately €750 million ($881 million) of euro-denominated commercial paper.

On August 16, 2018, we issued $1.0 billion aggregate principal amount of 3.350% notes due 2021, $2.25 billion aggregate principal amount of 3.650% notes due 2023, $1.5 billion aggregate principle amount of 3.950% notes due 2025, $3.0 billion aggregate principal amount of 4.125% notes due 2028, $750 million aggregate principal amount of 4.450% notes due 2038, $1.75 billion aggregate principal amount of 4.625% notes due 2048, and $750 million aggregate principal amount of floating rate notes due 2021. We expect to use the net proceeds received from the issuance of the notes due 2021, notes due 2023, notes due 2025, notes due 2028, notes due 2038 and the floating rate notes due 2021 to partially finance payment obligations with respect to the cash consideration and related fees, expenses and other amounts in connection with the acquisition of Rockwell Collins, Inc. We expect to use the proceeds of the notes due 2048 for general corporate purposes and/or the repayment of debt, including outstanding commercial paper.

On May 18, 2018, we issued €750 million aggregate principal amount of 1.150% notes due 2024, €500 million aggregate principal amount of 2.150% notes maturing 2030 and €750 million aggregate principal amount of floating rate notes maturing 2020. The net proceeds received from these debt issuances were used for general corporate purposes.

On May 4, 2018, we repaid at maturity approximately $1.1 billion aggregate principal amount of 1.778% junior subordinated notes.

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

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 which will be funded by cash on hand. We expect to assume approximately $7 billion of Rockwell Collins’ outstanding debt. To help manage the cash flow and liquidity impact resulting from the pending acquisition, we have suspended share repurchases, excluding activity relating to 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 have repatriated to the U.S. $5.2 billion of overseas cash during the nine months ended September 30, 2018.

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)*

|  | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash flows provided by operating activities | $4,317 | $3,110 |

Cash generated from operating activities in the nine months ended September 30, 2018 was $1,207 million higher than the same period in 2017. Cash outflows for working capital increased $285 million in the nine months ended September 30, 2018 over the prior period to support higher top line organic growth. Factoring activity provided an increase in cash generated from operating activities of approximately $168 million in the nine months ended September 30, 2018, as compared to the prior year. This increase in factoring was driven largely by Pratt & Whitney's temporary extension of contractual payment terms with certain commercial aerospace customers. This increase 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 nine months ended September 30, 2018, cash outflows from working capital were $643 million, excluding the adoption impact of the New Revenue Standard. Accounts receivable increased $2.4 billion due to an increase in sales volume. Contract assets, current increased $892 million due to costs in excess of billings primarily at Pratt & Whitney driven by military engines, at Otis due to progression on major projects, and at UTC Climate, Controls & Security at Building Solution Systems. Inventory increased $991 million primarily driven by an increase in production work in process for the Geared Turbo Fan at Pratt & Whitney, seasonal build in the Residential & Commercial HVAC businesses at UTC Climate, Controls & Security, and increases at UTC Aerospace Systems. These increases were partially offset by decreases in Other assets of $262 million primarily driven by a reduction in prepaid taxes, increases in Accounts payable and accrued liabilities of approximately $3.0 billion, driven by higher inventory purchasing activity and customer advances at Pratt & Whitney, higher direct material purchases at UTC Aerospace Systems, and an increase in accrued interest, as well as an increase in Contract liabilities, current of $313 million driven by progress payments on major contracts and seasonal advanced billings at Otis.

As part of our long-term strategy to de-risk our defined benefit pension plans, we made discretionary contributions of approximately $1.9 billion to our domestic defined benefit pension plans in the quarter ended September 30, 2017. Including the effects of this contribution, cash generated from operating activities of continuing operations in the nine months ended September 30, 2017 was $1,457 million lower than the same period in 2016. Cash outflows for working capital improved by $341 million in the nine months ended September 30, 2017 over the prior year period. In the nine months ended September 30, 2017, inventories increased approximately $1.2 billion, primarily in our aerospace businesses supporting an increase in forecasted OEM deliveries and related aftermarket demand, and at UTC Climate, Controls & Security driven primarily by seasonal demand in our North American HVAC business and installation projects in process in our refrigeration businesses. These increases were more than offset by increases in accounts payable and accrued liabilities, primarily in the commercial engine business at Pratt & Whitney. 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 nine months ended September 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.

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 nine months ended September 30, 2018 and 2017 were approximately $72 million and $2,008 million, respectively. Although our domestic pension plans are approximately 104% funded on a projected benefit obligation basis as of September 30, 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)*

|  | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash flows used in investing activities | $(1,019) | $(1,658) |

Cash flows used in investing activities of continuing operations for the nine months ended September 30, 2018 and 2017 primarily reflect capital expenditures, cash investments in customer financing assets, investments/dispositions of businesses, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms, and settlements of derivative contracts. The $639 million decrease in cash flows used in investing activities in the nine months ended September 30, 2018 compared to September 30, 2017 primarily relates to the $1 billion in proceeds from the sale of Taylor Company in June 2018 by UTC Climate, Controls & Security and $254 million in receipts from settlements of derivative contracts, partially offset by the absence of $136 million of proceeds for the sale of available for sale securities as of September 30, 2017 and $596 million in net proceeds received from UTC Climate, Controls & Security's sale of investments in Watsco, Inc. in the quarter ended March 31, 2017.

Capital expenditures for the nine months ended September 30, 2018 ($1,122 million) primarily relate to investments in production capacity at Pratt & Whitney, several small projects at UTC Aerospace Systems, and new facilities and investments in products and information technology at UTC Climate, Controls & Security.

Cash investments in businesses in the nine months ended September 30, 2018 ($177 million) primarily consisted of an acquisition at Pratt & Whitney. We do not expect to have additional significant acquisition spend, other than the pending acquisition of Rockwell Collins. However, actual acquisition spending may vary depending upon the timing, availability and appropriate value of acquisition opportunities. Dispositions of businesses in the nine months ended September 30, 2018 of $1.1 billion primarily relate to the sale of Taylor Company.

Customer financing activities in the nine months ended September 30, 2018 were a net use of cash of $453 million, primarily driven by additional Geared Turbofan engines to support customer fleets. 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 September 30, 2018 related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which up to $300 million 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 nine months ended September 30, 2018, our collaboration intangible assets increased by approximately $302 million, which primarily relates to 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 inflow of approximately $71 million during the nine months ended September 30, 2018 and a net cash outflow of $183 million during the nine months ended September 30, 2017.

### Cash Flow - Financing Activities

*(dollars in millions)*

|  | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash flows provided by (used in) financing activities | $10,839 | $(293) |

Our financing activities primarily include the issuance and repayment of short term and long term debt, payment of dividends and stock repurchases. Net cash provided by financing activities increased $11,132 million in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarily due to an increase in debt of $9.4 billion for the funding of the pending Rockwell Collins acquisition, an increase in short term borrowings of $828 million, and a reduction in common stock repurchases of $1.4 billion, partially offset by an increase in repayments of long-term debt of $506 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 $1.4 billion of outstanding commercial paper at September 30, 2018.

At September 30, 2018, management had remaining authority to repurchase approximately $2.2 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 $72 million to repurchase approximately 574 thousand shares of our common stock during the nine months ended September 30, 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 in the first, second and third quarter of 2018, totaling approximately $1,606 million in the aggregate for the nine months ended September 30, 2018. On October 10, 2018, the Board of Directors declared a dividend of $0.735 per share payable December 10, 2018 to shareowners of record at the close of business on November 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 September 30, 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, 285 characters.

There has been no significant change in our exposure to market risk during the nine months ended September 30, 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, 9,900 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 September 30, 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 September 30, 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 nine months ended September 30, 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 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 the pending Rockwell Collins acquisition and other acquisition and divestiture or restructuring activity, 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 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, including in connection with the pending acquisition of Rockwell Collins;
- 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;
- 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;
- 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 Collins 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 Collins merger agreement;
- risks associated with merger-related litigation; 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 Oct 26, 2018.
Source: SEC EDGAR, the filing index for accession 0000101829-18-000043. Last ingested by Listed: Nov 3, 2026, 21:25 ET. No prices; not investment advice.