# RTX Corp: Form 10-Q for the period ended Sep 30, 2019

- Company: [RTX Corp](/companies/rtx.md) (CIK 101829)
- Form: 10-Q
- Filed: 2019-10-25
- Accepted by EDGAR: Oct 24, 2019, 21:23 ET
- Period: 2019-09-30
- Accession: 0000101829-19-000047
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/101829/000010182919000047/a2019-09x3010xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/101829/000010182919000047/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-30 | $19.50bn | us-gaap:Revenues |
| Revenue | 9 months, 2019-01-01 to 2019-09-30 | $57.49bn | us-gaap:Revenues |
| Research and development | 3 months, 2019-07-01 to 2019-09-30 | $732.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2019-01-01 to 2019-09-30 | $2.20bn | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2019-07-01 to 2019-09-30 | $2.10bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2019-01-01 to 2019-09-30 | $6.21bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-07-01 to 2019-09-30 | $2.49bn | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-01-01 to 2019-09-30 | $7.12bn | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-07-01 to 2019-09-30 | $401.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-01-01 to 2019-09-30 | $1.19bn | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-07-01 to 2019-09-30 | $1.13bn | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-01-01 to 2019-09-30 | $1.97bn | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-30 | $1.15bn | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-01-01 to 2019-09-30 | $4.39bn | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-30 | $1.33 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-01-01 to 2019-09-30 | $5.09 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-30 | $1.34 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-01-01 to 2019-09-30 | $5.14 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-30 | 864,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-01-01 to 2019-09-30 | 862,900,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-01-01 to 2019-09-30 | $6.10bn | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2019-01-01 to 2019-09-30 | $1.36bn | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2019-01-01 to 2019-09-30 | $1.83bn | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2019-01-01 to 2019-09-30 | $111.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-09-30 | $7.34bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-09-30 | $37.82bn | us-gaap:AssetsCurrent |
| Total assets | at 2019-09-30 | $139.01bn | us-gaap:Assets |
| Current liabilities | at 2019-09-30 | $35.57bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-09-30 | $96.08bn | us-gaap:Liabilities |
| Short-term borrowings | at 2019-09-30 | $1.33bn | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2019-09-30 | $40.47bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2019-09-30 | 863,268,940 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 64,564 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, Carrier, Pratt & Whitney, and Collins Aerospace Systems. Otis and Carrier are referred to as the "commercial businesses," while Pratt & Whitney and Collins Aerospace Systems are referred to as the "aerospace businesses."

The current status of significant factors affecting our business environment in 2019 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 2018 Annual Report, which is incorporated by reference in our 2018 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 Carrier 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, changes in market demand and the global political environment. Total sales to the U.S. Government were $2.7 billion and $1.9 billion for the quarters ended September 30, 2019 and 2018, 14% and 11% of total UTC sales for those periods, respectively. 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 2019.

As has been previously disclosed, on November 26, 2018, the Company announced its intention to separate into three independent companies. Following the separations, the Company will operate as an aerospace company comprised of the Collins Aerospace Systems and Pratt & Whitney businesses, and Otis and Carrier will become independent companies. The proposed separations are expected to be effected through spin-offs of Otis and Carrier that are intended to be tax-free for the Company’s shareowners for U.S. federal income tax purposes, and are expected to be completed in the first half of 2020. Separation of Otis and Carrier from UTC via spin-off transactions will be subject to the satisfaction of customary conditions, including, among others, final approval by the Company’s Board of Directors, receipt of tax rulings in certain jurisdictions and/or a tax opinion from external counsel (as applicable), the filing with the Securities and Exchange Commission (SEC) and effectiveness of Form 10 registration statements, and satisfactory completion of financing (subject to UTC’s agreement to consummate the distributions pursuant to, and subject to the terms and conditions of, the Raytheon merger agreement). See Notes To Condensed Consolidated Financial Statements, Note 1 for additional information regarding the Raytheon transaction.

On June 9, 2019, UTC entered into a merger agreement with Raytheon Company (“Raytheon”) providing for an all-stock merger of equals transaction. The Raytheon merger agreement provides, among other things, that each share of Raytheon common stock issued and outstanding immediately prior to the closing of the Raytheon merger (except for shares held by Raytheon as treasury stock) will be converted into the right to receive 2.3348 shares of UTC common stock. Upon the closing of the Raytheon merger, Raytheon will become a wholly-owned subsidiary of UTC, and UTC will change its name to Raytheon Technologies Corporation. On October 11, 2019, the shareowners of UTC and Raytheon approved the proposals necessary to complete the Raytheon merger. The Raytheon merger is expected to close in the first half of 2020 and is subject to customary closing conditions, including receipt of required regulatory approvals, as well as the completion of UTC's previously announced separation of its Otis and Carrier businesses.

### 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, 2019, our investment in business acquisitions was $39 million, which consisted of small acquisitions at Otis.

### 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 2019. With regard to political conditions, the U.S. Government suspended Turkey’s participation in the F-35 Joint Strike Fighter program because Turkey accepted delivery of the Russian-built S-400 air and missile defense system. The U.S. has imposed, and may impose additional, sanctions on Turkey as a result of this or other political disputes. Turkish companies supply components, some of which are sole-sourced, to our aerospace businesses for commercial and military engines and aerospace products. Depending upon the scope and timing of U.S. sanctions on Turkey and potential reciprocal actions, if any, such sanctions or actions could impact our aerospace businesses’ sources of supply and could have a material adverse effect on our results of operations, cash flows or financial condition. See Part I, Item 1A, "Risk Factors" in our 2018 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 2018 Annual Report, incorporated by reference in our 2018 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2019.

### RESULTS OF OPERATIONS

### Net Sales

*(dollars in millions)*

|  | Quarter Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | $19,496 | $16,510 | $57,495 | $48,457 |

The factors contributing to the total percentage change year-over-year in total net sales for the quarter and nine months ended September 30, 2019 are as follows:

|  | Quarter Ended September 30, 2019 | Nine Months Ended September 30, 2019 |
| --- | ---: | ---: |
| Organic change | 5% | 6% |
| Foreign currency translation | (1)% | (1)% |
| Acquisitions and divestitures, net | 14% | 14% |
| Total % change | 18% | 19% |

Net sales grew 5% organically during the quarter ended September 30, 2019. This increase reflects organic sales growth of 11% at Pratt & Whitney driven by higher sales across all channels; 7% organic sales growth at Collins Aerospace Systems, primarily driven by higher commercial aftermarket and military sales; and organic sales growth of 4% at Otis reflecting higher service sales across all regions and higher new equipment sales driven by growth in Asia. Carrier organic sales were consistent with the prior year as growth in commercial HVAC and Fire & Security products was offset by declines in both transport and commercial refrigeration. The 14% increase in Acquisitions and divestitures, net for the quarter ended September 30, 2019 primarily reflects the impact of the November 26, 2018 acquisition of Rockwell Collins.

All four segments experienced organic sales growth for the nine months ended September 30, 2019. Pratt & Whitney sales grew 11% organically, reflecting higher sales across all channels. Collins Aerospace Systems sales grew 9% organically, reflecting higher commercial and military sales. Organic sales growth of 5% at Otis reflects higher service sales across all regions and higher new equipment sales driven by growth in Asia. Organic sales growth of 2% at Carrier was driven by growth in global HVAC, Fire & Security, and transport refrigeration. The 14% increase in Acquisitions and divestitures, net for the nine months ended September 30, 2019 primarily reflects the impact of the November 26, 2018 acquisition of Rockwell Collins.

### Cost of Products and Services Sold

*(dollars in millions)*

|  | Quarter Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Total cost of products and services sold | $14,211 | $12,536 | $42,331 | $36,238 |
| Percentage of net sales | 72.9% | 75.9% | 73.6% | 74.8% |

The factors contributing to the percentage change year-over-year for the quarter and nine months ended September 30, 2019 in total cost of products and services sold are as follows:

|  | Quarter Ended September 30, 2019 | Nine Months Ended September 30, 2019 |
| --- | ---: | ---: |
| Organic change | 5% | 6% |
| Foreign currency translation | (1)% | (1)% |
| Acquisitions and divestitures, net | 12% | 13% |
| Other | (3)% | (1)% |
| Total % change | 13% | 17% |

The organic increase in total cost of products and services sold for the quarter and nine months ended September 30, 2019 was primarily driven by the organic sales increases noted above. The increase in Acquisitions and divestitures, net of 12% and 13% for the quarter and nine months ended September 30, 2019 respectively, primarily reflects the impact of the acquisition of Rockwell Collins. The decline in Other of 3% and 1% for the quarter and nine months ended September 30, 2019 respectively, reflects the absence of a prior year customer contract settlement at Pratt & Whitney.

### Gross Margin

*(dollars in millions)*

|  | Quarter Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Gross margin | $5,285 | $3,974 | $15,164 | $12,219 |
| Percentage of net sales | 27.1% | 24.1% | 26.4% | 25.2% |

The increase in gross margin as a percentage of sales for the quarter ended September 30, 2019 reflects a 640 basis point improvement at Pratt & Whitney driven by the absence of a prior year customer contract settlement and favorable mix on large commercial engine shipments. Collins Aerospace Systems gross margin increased 340 basis points primarily driven by higher commercial aftermarket sales, the impact of the Rockwell Acquisition including the resulting synergies achieved, and cost reduction initiatives. Otis gross margin increased 60 basis points primarily driven by favorable pricing and mix in the Americas and China. Gross margin at Carrier was consistent with the prior year.

The increase in gross margin as a percentage of sales for the nine months ended September 30, 2019 was primarily driven by a 210 basis point increase at Pratt & Whitney driven by the absence of a prior year customer contract settlement and favorable mix on large commercial engine shipments. Collins Aerospace Systems gross margin increased 170 basis points primarily driven by the impact of the Rockwell Acquisition including the resulting synergies achieved, and an increase in commercial aftermarket sales and cost reduction initiatives. Otis gross margin increased 10 basis points primarily driven by favorable pricing and mix in the Americas and China. Gross margin at Carrier was down 20 basis points primarily driven by unfavorable mix and higher commodities, tariffs, and logistics costs.

### Research and Development

*(dollars in millions)*

|  | Quarter Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Company-funded | $732 | $586 | $2,203 | $1,729 |
| Percentage of net sales | 3.8% | 3.5% | 3.8% | 3.6% |
| Customer-funded | $582 | $356 | $1,706 | $1,044 |
| Percentage of net sales | 3.0% | 2.2% | 3.0% | 2.2% |

Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year fluctuations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses. The year-over-year increase (25%) in company-funded research and development for the quarter ended September 30, 2019 was primarily driven by the impact of the Rockwell Acquisition (22%). The remaining increase primarily reflects higher expenses across various programs at Pratt & Whitney (3%) and Collins Aerospace Systems (2%), partially offset by lower expenses at Otis (2%). For the nine months ended September 30, 2019 company-funded research and development increased 27%, driven by the impact of the Rockwell Collins acquisition (22%). The remaining increase primarily reflects higher expenses across various programs at Pratt & Whitney (5%) and Collins Aerospace Systems (2%) partially offset by lower expenses at Otis (2%).

The increase (63%) in customer-funded research and development for the quarter ended September 30, 2019 was primarily driven by the impact of the Rockwell Acquisition (62%). The remaining increase was driven by higher military development program expenses at Collins Aerospace Systems (3%), partially offset by lower research and development expenses on military development programs at Pratt & Whitney (2%). The increase (63%) in customer-funded research and development for the nine months ended September 30, 2019 was also driven by the impact of the Rockwell Collins acquisition (63%). Lower research and development expenses on military development programs at Pratt & Whitney (3%), were offset by higher expenses at Collins Aerospace Systems (3%).

### Selling, General and Administrative

*(dollars in millions)*

|  | Quarter Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative expenses | $2,104 | $1,681 | $6,207 | $5,151 |
| Percentage of net sales | 10.8% | 10.2% | 10.8% | 10.6% |

Selling, general and administrative expenses increased 25% in the quarter ended September 30, 2019. The increase in expenses includes the impact of the Rockwell Collins acquisition (11%), costs associated with the Company's intention to separate its commercial businesses (6%), costs associated with the Raytheon merger (1%), and higher restructuring costs (1%). The growth in Selling, general and administrative expenses also includes higher expenses at Carrier (2%) primarily driven by the unfavorable impact of a contract termination, and increases at Collins Aerospace Systems (2%), Otis (2%) and Pratt & Whitney (1%) driven primarily by increased employee compensation related expenses and headcount.

Selling, general and administrative expenses increased 21% in the nine months ended September 30, 2019, primarily driven by the impact of the Rockwell Collins acquisition (10%), costs associated with the Company's intention to separate its commercial businesses (6%), costs associated with the Raytheon merger (1%) and higher restructuring costs (1%). The growth in Selling, general and administrative expenses also includes higher expenses at Collins Aerospace Systems (1%), Pratt & Whitney (1%) and Otis (1%) driven primarily by increased employee compensation related expenses and headcount.

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 this 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, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Other income, net | $37 | $131 | $361 | $1,303 |

40

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 (72%) for the quarter ended September 30, 2019 primarily reflects the impairment of an investment at Carrier (82%), partially offset by the net favorable year-over-year impact of foreign exchange gains and losses (11%).

The year-over-year decrease in Other income, net (72%) for the nine months ended September 30, 2019 primarily reflects the absence of the prior year gain on the sale of Taylor Company (61%), the impairment of an investment at Carrier (8%) and the net unfavorable year-over-year impact of foreign exchange gains and losses (3%).

### Interest Expense, Net

*(dollars in millions)*

|  | Quarter Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Interest expense | $435 | $323 | $1,323 | $837 |
| Interest income | (34) | (65) | (131) | (116) |
| Interest expense, net | $401 | $258 | $1,192 | $721 |
| Average interest expense rate | 3.7% | 3.6% | 3.7% | 3.5% |

Interest expense, net increased 55% and 65% for the quarter and nine months ended September 30, 2019, respectively. The increase in interest expense primarily reflects interest on debt acquired from the Rockwell Collins acquisition and the impact of the August 16, 2018 issuance of notes representing $11 billion in aggregate principal. The average maturity of our long-term debt at September 30, 2019 is approximately 10 years. The decrease in interest income for the quarter ended September 30, 2019 primarily reflects prior year interest earned on higher cash balances accumulated in anticipation of the Rockwell Collins acquisition. The increase in interest income for the nine months ended September 30, 2019 was primarily driven by interest income related to tax settlements.

### Income Taxes

|  | Quarter Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Effective tax rate | 47.3% | 23.7% | 29.6% | 25.2% |

The increase in the effective tax rate for the quarter ended September 30, 2019 is primarily the result of tax charges connected to the Company’s portfolio separation transactions and the non-deductible impact related to the impairment of an investment at Carrier.

The increase in the effective tax rate for the nine months ended September 30, 2019 is principally related to the items described above offset in part by gains associated with the conclusion of the audit by the Examination Division of the Internal Revenue Service for the UTC 2014, 2015, and 2016 tax years and the filing by a subsidiary of the Company to participate in an amnesty program offered by the Italian Tax Authority in the second quarter of 2019.

The Company will continue to review and incorporate as necessary TCJA changes related to forthcoming U.S. Treasury Regulations, other updates, and the finalization of the deemed inclusions to be reported on the Company’s 2018 U.S. federal income tax return.

As shown in the table above, the effective tax rate for the nine months ended September 30, 2019 is 29.6%; the effective income tax rate for the same period, excluding restructuring, non-operational nonrecurring items is 23.5%. The full year rate is still subject to change as guidance and interpretations related to the TCJA continue to be finalized. The Company expects to continue to incur tax costs associated with the ongoing separation of its commercial businesses which is expected to be complete in the first half of 2020.

### Net Income Attributable to Common Shareowners

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

|  | Quarter Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net income attributable to common shareowners | $1,148 | $1,238 | $4,394 | $4,583 |
| Diluted earnings per share from operations | $1.33 | $1.54 | $5.09 | $5.72 |

41

Net income attributable to common shareowners for the quarter ended September 30, 2019 includes restructuring charges, net of tax benefit, of $48 million, as well as a net charge for significant non-operational and/or nonrecurring items, including the impact of taxes, of $712 million. The effect of restructuring charges and significant non-operational and/or nonrecurring items was a charge of $0.88 per diluted share for the quarter ended September 30, 2019. The effect of foreign currency translation and Pratt &Whitney Canada hedging generated an unfavorable impact of $0.02 on diluted earnings per share.

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 diluted share while the effect of foreign currency translation and Pratt &Whitney Canada hedging had no impact on diluted earnings per share.

Net income attributable to common shareowners for the nine months ended September 30, 2019 includes restructuring charges, net of tax benefit, of $179 million as well as a net charge for significant non-operational and/or nonrecurring items, including the impact of taxes, of $880 million. The effect of restructuring charges and nonrecurring items on diluted earnings per diluted share for the nine months ended September 30, 2019 was a charge of $1.23 per diluted share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated an unfavorable impact of $0.06 on diluted earnings per 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 diluted share while the effect of foreign currency translation and Pratt &Whitney Canada hedging generated a favorable impact of $0.05 on diluted earnings per share.

### Restructuring Costs

*(dollars in millions)*

|  | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Restructuring costs | $244 | $186 |

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 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.

**2019 Actions.** During the nine months ended September 30, 2019, we recorded net pre-tax restructuring charges of $158 million relating to ongoing cost reduction actions initiated in 2019. We expect to incur additional restructuring charges of $266 million to complete these actions. We are targeting to complete in 2019 and 2020 the majority of the remaining workforce and facility related cost reduction actions initiated in 2019. We expect recurring pre-tax savings in continuing operations to increase to approximately $358 million annually over the two-year period subsequent to initiating the actions. Approximately 93% 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, 2019, we had cash outflows of approximately $89 million related to the 2019 actions.

**2018 Actions.** During the nine months ended September 30, 2019 and 2018, we recorded net pre-tax restructuring charges of $44 million and $97 million, respectively, for actions initiated in 2018. We expect to incur additional restructuring charges of $8 million to complete these actions. We are targeting to complete in 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 over the two-year period subsequent to initiating the actions to approximately $260 million annually, of which, approximately $140 million was realized during the nine months ended September 30, 2019. Approximately 93% 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, 2019, we had cash outflows of approximately $126 million related to the 2018 actions.

In addition, during the nine months ended September 30, 2019, we recorded net pre-tax restructuring costs totaling $42 million for restructuring actions initiated in 2017 and prior. For additional discussion of restructuring, see Note 8 to the Condensed Consolidated Financial Statements.

### Segment Review

Segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. Adjustments to reconcile segment reporting to the consolidated results for the quarters and nine months ended September 30, 2019 and 2018 are included in "Eliminations and other", which also includes certain smaller subsidiaries. We attempt to quantify material 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 Carrier 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. Carrier'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, Carrier customarily offers its customers incentives to purchase products. The principal incentive program provides reimbursements to distributors for offering promotional pricing on Carrier products. We account for incentive payments made as a reduction to sales.

At constant currency and excluding the effect of acquisitions and divestitures, Carrier equipment orders in the quarter ended September 30, 2019 decreased 11% in comparison to the same period of the prior year, driven by decreases in transport refrigeration (68%), commercial refrigeration (5%), and Fire and Security products (2%), partially offset by increased commercial HVAC (6%) and North America residential HVAC equipment (4%) orders. At constant currency, Otis new equipment orders in the quarter increased 6% in comparison to the prior year led by increases in the Americas (10%), Asia excluding China (6%) and China (5%).

Summary performance for each of the commercial businesses for the quarters ended September 30, 2019 and 2018 was as follows:

*(dollars in millions)*

|  | Otis 2019 | 2018 | Change | Carrier 2019 | 2018 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $3,307 | $3,223 | 3% | $4,822 | $4,880 | (1)% |
| Cost of Sales | 2,332 | 2,291 | 2% | 3,376 | 3,421 | (1)% |
|  | 975 | 932 | 5% | 1,446 | 1,459 | (1)% |
| Operating Expenses and Other | 467 | 446 | 5% | 761 | 615 | 24% |
| Operating Profits | $508 | $486 | 5% | $685 | $844 | (19)% |

Operating Profit Margins 15.4 % 15.1 % 14.2 % 17.3 %

Summary performance for each of the commercial businesses for the nine months ended September 30, 2019 and 2018 was as follows:

*(dollars in millions)*

|  | Otis 2019 | 2018 | Change | Carrier 2019 | 2018 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $9,751 | $9,604 | 2% | $14,107 | $14,291 | (1)% |
| Cost of Sales | 6,901 | 6,814 | 1% | 9,951 | 10,046 | (1)% |
|  | 2,850 | 2,790 | 2% | 4,156 | 4,245 | (2)% |
| Operating Expenses and Other | 1,401 | 1,366 | 3% | 2,106 | 1,164 | 81% |
| Operating Profits | $1,449 | $1,424 | 2% | $2,050 | $3,081 | (33)% |

Operating Profit Margins 14.9 % 14.8 % 14.5 % 21.6 %

### Otis –

### Quarter Ended September 30, 2019 Compared with Quarter Ended September 30, 2018

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

The organic sales increase of 4% primarily reflects higher service sales (3%), driven by broad-based growth across geographies; and higher new equipment sales (1%) driven by growth in Asia (2%), partially offset by declines in other regions (combined, 1%).

The operational profit increase of 6% was driven by:

- favorable price and mix (8%)
- margin contribution from the higher sales volumes noted above (5%)

These increases were partially offset by:

- higher selling, general and administrative expenses (5%)

### Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 5% | (3)% | —% | —% | —% |
| Cost of Sales | 6% | (4)% | —% | —% | (1)% |
| Operating Profits | 4% | (4)% | —% | 1% | 1% |

The organic sales increase of 5% primarily reflects higher service sales (3%), driven by broad-based growth across geographies, and higher new equipment sales (2%) driven by growth in Asia.

The operational profit increase of 4% was driven by:

- margin contribution from the higher sales volumes noted above (7%)
- favorable price and mix (3%)

These increases were partially offset by:

- higher selling, general and administrative expenses (4%)
- unfavorable transactional foreign exchange gains and losses from mark-to-market adjustments and embedded foreign currency derivatives within certain new equipment contracts (2%)

### Carrier –

### Quarter Ended September 30, 2019 Compared with Quarter Ended September 30, 2018

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | —% | (2)% | 1% | —% | —% |
| Cost of Sales | —% | (1)% | —% | —% | —% |
| Operating Profits | 1% | (2)% | 1% | (2)% | (17)% |

Organic sales were consistent with the prior year as growth in commercial HVAC and Fire & Security products (1%, combined) was offset by declines in both transport and commercial refrigeration (1%, combined).

Operational profit increased 1% as the impact of favorable pricing (5%), lower selling, general and administrative expenses and research and development costs (2%, combined), favorable material productivity, net of the impact of tariffs (1%) and higher joint venture income (1%) were largely offset by lower volume and unfavorable mix (6%) and the absence of a favorable prior year contract adjustment related to a large commercial project (3%).

The 17% decrease in "Other" primarily reflects the impairment of an investment (13%) and the unfavorable impact of a contract termination (4%).

### Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018

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

The organic sales increase of 2% was primarily driven by growth in commercial and residential HVAC (1%, combined), and increases in global Fire & Security and transport refrigeration (1%, combined).

Operational profit decreased 1% in comparison to the prior year as favorable pricing (5%) was more than offset by unfavorable commodities, tariffs and labor productivity (3%, combined), unfavorable mix, net of higher volume (2%), and the absence of a favorable prior year contract adjustment related to a large commercial project (1%).

The 29% decrease in "Other" primarily reflects the absence of the prior year gain on the sale of Taylor Company (26%) and a current-year impairment of an investment (4%).

### 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 lower fuel costs. Airline traffic, as measured by RPMs, grew approximately 5% in the first eight months of 2019.

Our commercial aftermarket businesses continue to evolve as a significant portion of our aerospace businesses' customers are covered under long-term aftermarket service agreements at Pratt & Whitney and Collins Aerospace Systems. These agreements are comprehensive long-term spare part and service agreements with our customers. We expect a continued shift to long-term aftermarket service agreements in lieu of transactional spare part sales as new aerospace products enter our customers' fleets under long-term service agreements and legacy fleets are retired. For the first nine months of 2019, as compared with 2018, total commercial aerospace aftermarket sales increased 72% at Collins Aerospace Systems (up 15% excluding the impact of the Rockwell Collins acquisition) and 3% at Pratt & Whitney.

Operating profit in the quarter and nine months ended September 30, 2019 included net unfavorable changes in aerospace contract estimates totaling $2 million and $82 million, respectively, primarily reflecting net unfavorable contract adjustments at Pratt & Whitney. 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 Collins Aerospace Systems and Pratt & Whitney.

Summary performance for each of the aerospace businesses for the quarters ended September 30, 2019 and 2018 was as follows:

*(dollars in millions)*

|  | Pratt & Whitney 2019 | 2018 | Change | Collins Aerospace Systems 2019 | 2018 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $5,283 | $4,789 | 10% | $6,495 | $3,955 | 64% |
| Cost of Sales | 4,311 | 4,215 | 2% | 4,554 | 2,909 | 57% |
|  | 972 | 574 | 69% | 1,941 | 1,046 | 86% |
| Operating Expenses and Other | 501 | 465 | 8% | 774 | 436 | 78% |
| Operating Profits | $471 | $109 | 332% | $1,167 | $610 | 91% |

Operating Profit Margins 8.9 % 2.3 % 18.0 % 15.4 %

Summary performance for each of the aerospace businesses for the nine months ended September 30, 2019 and 2018 was as follows:

*(dollars in millions)*

|  | Pratt & Whitney 2019 | 2018 | Change | Collins Aerospace Systems 2019 | 2018 | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net Sales | $15,250 | $13,854 | 10% | $19,584 | $11,734 | 67% |
| Cost of Sales | 12,479 | 11,629 | 7% | 14,038 | 8,614 | 63% |
|  | 2,771 | 2,225 | 25% | 5,546 | 3,120 | 78% |
| Operating Expenses and Other | 1,443 | 1,306 | 10% | 2,351 | 1,353 | 74% |
| Operating Profits | $1,328 | $919 | 45% | $3,195 | $1,767 | 81% |

Operating Profit Margins 8.7 % 6.6 % 16.3 % 15.1 %

### Pratt & Whitney –

### Quarter Ended September 30, 2019 Compared with Quarter Ended September 30, 2018

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation\* | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 11% | (1)% | —% | —% | —% |
| Cost of Sales | 10% | (1)% | —% | —% | (7)% |
| Operating Profits | 60% | (9)% | (2)% | —% | 283% |

\* *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 growth of 11% primarily reflects higher military sales (4%), higher commercial OEM sales (3%), and higher commercial aftermarket sales (3%).

The operational profit increase of 60% was primarily driven by:

- higher commercial OEM margin contribution (118%) primarily driven by favorable mix on large commercial engine shipments and continued year-over-year cost reduction
- higher military margin contribution (17%) driven by the sales increase noted above

These increases were partially offset by:

- lower commercial aftermarket margin contribution (31%) as unfavorable mix and net unfavorable contract adjustments more than offset margin contribution from the higher volumes noted above
- higher selling, general and administrative expenses and other ramp-related costs (25%)
- higher research and development costs (18%)

The 283% increase in "Other" primarily reflects the absence of a prior year customer contract settlement.

### Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation\* | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 11% | (1)% | —% | —% | —% |
| Cost of Sales | 10% | —% | —% | —% | (3)% |
| Operating Profits | 13% | (2)% | —% | (2)% | 36% |

The organic sales growth of 11% primarily reflects higher commercial OEM sales (4%), higher military sales (4%), and higher commercial aftermarket sales of (2%).

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

- higher OEM margin contribution (20%) primarily driven by continued year-over-year cost reduction, favorable mix on large commercial engine shipments, and lower customer support costs
- higher military profit contribution (11%), driven by the sales increase noted above

These increases were partially offset by:

- higher research and development costs (9%)
- lower commercial aftermarket margin contribution (4%) as unfavorable mix and net unfavorable contract adjustments more than offset margin contribution from the higher volumes noted above
- higher selling, general and administrative expenses and other ramp-related costs (5%)

The 36% increase in "Other" primarily reflects the absence of a prior year customer contract settlement (33%) and favorable year-over-year licensing income (2%).

### Collins Aerospace Systems –

### Quarter Ended September 30, 2019 Compared with Quarter Ended September 30, 2018

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 7% | (1)% | 58% | —% | —% |
| Cost of Sales | 5% | —% | 52% | —% | —% |
| Operating Profits | 13% | 1% | 78% | (2)% | 1% |

The organic sales growth of 7% primarily reflects higher commercial aerospace aftermarket sales (7%), and higher military sales (3%), partially offset by lower commercial aerospace OEM sales (3%).

The increase in operational profit of 13% primarily reflects:

- higher commercial aerospace margins (8%) driven by the commercial aftermarket sales growth noted above, partially offset by lower commercial aerospace OEM margin contribution
- lower year-over-year warranty expense (7%)
- higher military margin contribution (3%) driven by the sales growth noted above

These increases were partially offset by:

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

### Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018

|  | Factors Contributing to Total % Change Organic / Operational | FX Translation | Acquisitions / Divestitures, net | Restructuring Costs | Other |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Sales | 9% | (1)% | 59% | —% | —% |
| Cost of Sales | 8% | (1)% | 56% | —% | —% |
| Operating Profits | 12% | 2% | 67% | —% | —% |

The organic sales increase of 9% primarily reflects higher commercial aerospace aftermarket sales (6%), higher military sales (2%), and higher commercial OEM sales (1%).

The operational profit increase of 12% primarily reflects:

- higher commercial aerospace margin contribution (16%) driven by the commercial aftermarket sales growth noted above, partially offset by lower commercial aerospace OEM margin contribution
- higher military margin contribution (1%) driven by the sales growth noted above

This increase was partially offset by:

- higher selling, general and administrative expenses (3%)
- higher research and development costs (2%)

### Eliminations and other –

*(dollars in millions)*

|  | Net Sales Quarter Ended September 30, 2019 | 2018 | Operating Profits Quarter Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Eliminations and other | $(411) | $(337) | $(232) | $(102) |
| General corporate expenses | — | — | (113) | (109) |

*(dollars in millions)*

|  | Net Sales Nine Months Ended September 30, 2019 | 2018 | Operating Profits Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Eliminations and other | $(1,197) | $(1,026) | $(572) | $(210) |
| General corporate expenses | — | — | (335) | (339) |

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, 2019, as compared to the same periods of 2018, reflects an increase in the amount of inter-segment eliminations, principally between our aerospace businesses. The decrease in operating profits related to Eliminations and other for the quarter ended September 30, 2019 is primarily driven by costs associated with the Company's intention to separate its commercial businesses as well as costs associated with the Raytheon merger. The decrease in operating profits related to Eliminations and other for the nine months ended September 30, 2019 is primarily driven by costs associated with the Company's intention to separate its commercial businesses, costs associated with the Raytheon merger, and the absence of the favorable impact of prior year insurance settlements.

### LIQUIDITY AND FINANCIAL CONDITION

*(dollars in millions)*

|  | September 30, 2019 | December 31, 2018 | September 30, 2018 |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $7,341 | $6,152 | $13,799 |
| Total debt | 44,604 | 45,537 | 39,943 |
| Net debt (total debt less cash and cash equivalents) | 37,263 | 39,385 | 26,144 |
| Total equity | 42,819 | 40,610 | 34,250 |
| Total capitalization (total debt plus total equity) | 87,423 | 86,147 | 74,193 |
| Net capitalization (total debt plus total equity less cash and cash equivalents) | 80,082 | 79,995 | 60,394 |

|  |  |  |  |
| --- | ---: | ---: | ---: |
| Total debt to total capitalization | 51% | 53% | 54% |
| Net debt to net capitalization | 47% | 49% | 43% |

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. For 2019, we expect cash flows from operations, net of capital expenditures, to approximate $5.3 billion to $5.7 billion, including $1.0 billion of one-time cash payments related to the portfolio separation. 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, 2019, we had cash and cash equivalents of $7.3 billion, of which approximately 80% 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. The Company no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. As such, in the fourth quarter of 2018, it has recorded the taxes therewith. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, UTC will continue to permanently reinvest these earnings. We have repatriated approximately $1.2 billion of cash for the nine months ended September 30, 2019.

On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions, divestitures or other legal obligations. As of September 30, 2019 and December 31, 2018, the amount of such restricted cash was approximately $40 million and $60 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 increased in 2018 which reflected additional borrowings used to finance the acquisition of Rockwell Collins as well as the acquisition of Rockwell Collins' outstanding debt. Our debt-to-total-capitalization of 51% at September 30, 2019 is down 200 basis points from December 31, 2018 and down 300 basis points from September 30, 2018.

At September 30, 2019, we had credit agreements with various banks permitting aggregate borrowings of up to $10.35 billion, including: a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement, both of which expire in August 2021; and a $2.0 billion revolving credit agreement and a $4.0 billion term credit agreement, both of which we entered into on March 15, 2019 and which will expire on March 15, 2021 or, if earlier, the date that is 180 days after the date on which each of the separations of Otis and Carrier have been consummated. As of September 30, 2019, there were no borrowings under any of these 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, 2019, our maximum commercial paper borrowing limit was $6.35 billion. Commercial paper borrowings at September 30, 2019 include approximately €750 million ($824 million) of euro-denominated commercial paper. 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 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.

We had no debt issuances during the nine months ended September 30, 2019 and had the following issuances of debt in 2018:

*(dollars and Euro in millions)*

| Issuance Date | Description of Notes | Aggregate Principal Balance |
| --- | --- | ---: |
| August 16, 2018: | 3.350% notes due 20211 | $1,000 |
|  | 3.650% notes due 20231 | 2,250 |
|  | 3.950% notes due 20251 | 1,500 |
|  | 4.125% notes due 20281 | 3,000 |
|  | 4.450% notes due 20381 | 750 |
|  | 4.625% notes due 20482 | 1,750 |
|  | LIBOR plus 0.65% floating rate notes due 20211 | 750 |
| May 18, 2018: | 1.150% notes due 20243 | €750 |
|  | 2.150% notes due 20303 | 500 |
|  | EURIBOR plus 0.20% floating rate notes due 20203 | 750 |

1 The net proceeds received from these debt issuances were used to partially finance the cash consideration portion of the purchase price for Rockwell Collins and fees, expenses and other amounts related to the acquisition of Rockwell Collins.

2 The net proceeds from these debt issuances were used to fund the repayment of commercial paper and for other general corporate purposes.

3 The net proceeds received from these debt issuances were used for general corporate purposes.

We had the following repayments of debt during the nine months ended September 30, 2019 and the year-ended December, 31, 2018:

*(dollars and Euro in millions)*

| Repayment Date | Description of Notes | Aggregate Principal Balance |
| --- | --- | ---: |
| July 15, 2019 | 1.950% notes1 | $300 |
| July 15, 2019 | 5.250% notes1 | $300 |
| December 14, 2018 | Variable-rate term loan due 2020 (1 month LIBOR plus 1.25%)1 | $482 |
| May 4, 2018 | 1.778% junior subordinated notes | $1,100 |
| February 22, 2018 | EURIBOR plus 0.80% floating rate notes | €750 |
| February 1, 2018 | 6.80% notes | $99 |

1 The notes and term loan were acquired in connection with the Rockwell Collins acquisition and have been subsequently repaid.

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, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash flows provided by operating activities | $6,101 | $4,317 |

Cash generated from operating activities in the nine months ended September 30, 2019 was $1,784 million higher than the same period in 2018. Net income from operations, when adjusted for the non-operating gain on the sale of Taylor Company in the prior year ($799 million) and the current year non-cash tax charges associated with the Company’s portfolio separation transactions ($618 million), drove an increase of $1.4 billion. Cash outflows from working capital improved $72 million in the nine months ended September 30, 2019 over the prior period. Reduced factoring activity resulted in a decrease of approximately $1.2 billion in cash flows from operating activities during the nine months ended September 30, 2019, as compared to the prior year. This decline in factoring activity was primarily driven by Pratt & Whitney partially offset by increased factoring a t Collins Aerospace Systems. Factoring activity does not reflect the factoring of certain receivables performed at customer request for which we are compensated by the customer for the extended collection cycle.

In the nine months ended September 30, 2019, cash outflows from working capital were $571 million. Inventory increased $1.5 billion to support higher sales volume at Collins Aerospace Systems, the Geared Turbo Fan at Pratt & Whitney, and build in HVAC at Carrier. Contract assets, current increased $499 million due to work performed in excess of billings at Pratt & Whitney and Collins Aerospace. Other current assets increased $111 million due to increases in prepaid expenses at Pratt & Whitney. These outflows were partially offset by increases in Accounts payable and accrued liabilities of $1.1 billion, Contract liabilities, current of $394 million and decreases in Accounts receivable of $59 million. Accounts payable increased at Pratt & Whitney and Collins Aerospace Systems primarily as a result of inventory build. The increase in Accrued liabilities was driven by an increase in accrued interest on debt and various accruals at Collins Aerospace Systems and Pratt & Whitney. The increase in Contract liabilities, current was driven by timing of billings at Otis and higher advanced billings at Collins Aerospace Systems.

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 progress on major projects, and at Carrier. 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 Carrier, and increases at Collins 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 Collins 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 advanced billings at Otis.

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, 2019 and 2018 were approximately $89 million and $72 million, respectively. Although our domestic pension plans are approximately 97% funded on a projected benefit obligation basis as of September 30, 2019, and we are not required to make additional contributions through the end of 2024, we may elect to make discretionary contributions in 2019. We expect to make total contributions of approximately $125 million to our global defined benefit pension plans in 2019, including $25 million to our domestic pension plans. Contributions to our global defined benefit pension plans in 2019 are expected to meet or exceed the current funding requirements.

### Cash Flow - Investing Activities

*(dollars in millions)*

|  | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash flows used in investing activities | $(1,973) | $(1,019) |

Cash flows used in investing activities for the nine months ended September 30, 2019 and 2018 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 $954 million increase in cash flows used in investing activities in the nine months ended September 30, 2019 compared to September 30, 2018 primarily relates to the absence of $1 billion in proceeds from the sale of Taylor Company in June 2018 by Carrier.

Capital expenditures for the nine months ended September 30, 2019 of $1,359 million primarily relate to several projects at Collins Aerospace Systems and investments in production and aftermarket capacity at Pratt & Whitney.

Cash investments in businesses in the nine months ended September 30, 2019 of $39 million consisted of small acquisitions at Otis. Dispositions of businesses in the nine months ended September 30, 2019 of $134 million primarily consisted of the businesses held for sale associated with the Rockwell Acquisition.

Customer financing activities in the nine months ended September 30, 2019 were a net use of cash of $444 million, primarily driven by additional Geared Turbofan engines to support customer fleets. We may also arrange for third parties to assume a portion of our commitments. We had commercial aerospace financing and other contractual commitments of approximately $15.7 billion at September 30, 2019 related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which up to $0.2 billion may be required to be disbursed during the remainder of 2019.

We had commercial aerospace financing and other contractual commitments of approximately $15.5 billion at December 31, 2018.

During the nine months ended September 30, 2019, our collaboration intangible assets increased by approximately $259 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 $158 million during the nine months ended September 30, 2019 compared to a net cash inflow of $71 million during the nine months ended September 30, 2018.

### Cash Flow - Financing Activities

*(dollars in millions)*

|  | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash flows (used in) provided by financing activities | $(2,894) | $10,839 |

Our financing activities primarily include the issuance and repayment of short-term and long-term debt, payment of dividends and stock repurchases. Financing activities was a cash outflow of $2.9 billion in the nine months ended September 30, 2019 compared to a cash inflow of $10.8 billion in the nine months ended September 30, 2018. This change is driven by the absence of $13.4 billion of long-term debt issuances in the prior year which was primarily utilized to fund the Rockwell Acquisition, a decrease in short-term borrowings of $1.3 billion, and an increase in dividends paid on common stock of $0.2 billion, partially offset by a reduction in long-term debt repayments of $1.4 billion.

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 $984 million of outstanding commercial paper at September 30, 2019.

At September 30, 2019, management had remaining authority to repurchase approximately $1.9 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. Our ability to repurchase shares is subject to applicable law, including restrictions arising from the pending merger transaction with Raytheon. We made cash payments of approximately $111 million to repurchase approximately 857 thousand shares of our common stock during the nine months ended September 30, 2019.

We paid dividends on common stock of $0.735 per share, totaling approximately $1,830 million in the aggregate for the nine months ended September 30, 2019. On October 10, 2019, the Board of Directors declared a dividend of $0.735 per share payable December 10, 2019 to shareowners of record at the close of business on November 15, 2019.

On September 27, 2019 we filed a universal shelf registration statement 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 the shelf registration statement.

### Off-Balance Sheet Arrangements and Contractual Obligations

In our 2018 Annual Report, incorporated by reference in our 2018 Form 10-K, we disclosed our off-balance sheet arrangements and contractual obligations. As of September 30, 2019, 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, 2019. For discussion of our exposure to market risk, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," contained in our 2018 Form 10-K.

## Controls and procedures

As filed, 12,904 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, 2019. 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, 2019, 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, 2019, 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,” “on track” and other words of similar meaning. 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, R&D spend, other measures of financial performance, potential future plans, strategies or transactions, credit ratings and net indebtedness, other anticipated benefits of the Rockwell Acquisition, the proposed merger with Raytheon or the spin-offs by UTC of Otis and Carrier into separate independent companies (the “separation transactions”), including estimated synergies and customer cost savings resulting from the proposed merger, the expected timing of completion of the proposed merger and the separation transactions, estimated costs associated with such transactions 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 Raytheon 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, the financial condition of our customers and suppliers, and the risks associated with U.S. government sales (including changes or shifts in defense spending due to budgetary constraints, spending cuts resulting from sequestration, a government shutdown, or otherwise, and uncertain funding of programs);
- challenges in the development, production, delivery, support, performance and realization of the anticipated benefits (including our expected returns under customer contracts) of advanced technologies and new products and services;
- the scope, nature, impact or timing of the proposed merger with Raytheon and the separation transactions and other merger, acquisition and divestiture activity, including among other things the integration of or with other businesses and realization of synergies and opportunities for growth and innovation and incurrence of related costs and expenses;
- future levels of indebtedness, including indebtedness that may be incurred in connection with the proposed merger with Raytheon and the separation transactions, and capital spending and research and development spending;
- future availability of credit and factors that may affect such availability, including credit market conditions and our capital structure;
- the timing and scope of future repurchases of our common stock, which may be suspended at any time due to various factors, including market conditions and the level of other investing activities and uses of cash, including in connection with the proposed merger with Raytheon;
- 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 (including the potential termination of U.S. government contracts and performance under undefinitized contract awards and the potential inability to recover termination costs);
- new business and investment opportunities;
- the 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 Raytheon and our businesses each operate, including the effect of changes in U.S. trade policies or the U.K.’s pending withdrawal from the European Union, on general market conditions, global trade policies and currency exchange rates in the near term and beyond;
- the effect of changes in tax (including 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 and other laws and regulations (including, among other things, export and import requirements such as the International Traffic in Arms Regulations and the Export Administration Regulations, anti-bribery and anti-corruption requirements, including the Foreign Corrupt Practices

Act, industrial cooperation agreement obligations, and procurement and other regulations) in the U.S. and other countries in which we, Raytheon and our businesses each operate;

- negative effects of the announcement or pendency of the proposed merger with Raytheon or the separation transactions on the market price of our and/or Raytheon’s respective common stock and/or on our respective financial performance;
- the ability of UTC and Raytheon to receive the required regulatory approvals for the proposed merger (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 transaction) and to satisfy the other conditions to the closing of the merger 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 Raytheon to terminate the merger agreement;
- risks relating to the value of our shares to be issued in the proposed merger with Raytheon, significant transaction costs and/or unknown liabilities;
- the possibility that the anticipated benefits from the proposed merger with Raytheon cannot be realized in full or at all or may take longer to realize than expected, including risks associated with third party contracts containing consent and/or other provisions that may be triggered by the proposed transaction;
- risks associated with merger-related litigation;
- the possibility that costs or difficulties related to the integration of UTC’s and Raytheon’s operations will be greater than expected;
- risks relating to completed merger, acquisition and divestiture activity, including UTC’s integration of Rockwell Collins, including the risk that the integration may be more difficult, time-consuming or costly than expected or may not result in the achievement of estimated synergies within the contemplated time frame or at all;
- the ability of each of UTC, Raytheon, the companies resulting from the separation transactions and the combined company to retain and hire key personnel;
- the expected benefits and timing of the separation transactions, and the risk that conditions to the separation transactions will not be satisfied and/or that the separation transactions will not be completed within the expected time frame, on the expected terms or at all;
- the intended qualification of (i) the merger as a tax-free reorganization and (ii) the separation transactions as tax-free to UTC and UTC’s shareowners, in each case, for U.S. federal income tax purposes;
- the possibility that any opinions, consents, approvals or rulings required in connection with the separation transactions will not be received or obtained within the expected time frame, on the expected terms or at all;
- expected financing transactions undertaken in connection with the proposed merger with Raytheon and the separation transactions and risks associated with additional indebtedness;
- the risk that dissynergy costs, costs of restructuring transactions and other costs incurred in connection with the separation transactions will exceed our estimates; and
- the impact of the proposed merger and the separation transactions on the respective businesses of UTC and Raytheon and the risk that the separation transactions may be more difficult, time-consuming or costly than expected, including the impact on UTC’s resources, systems, procedures and controls and the impact on relationships with customers, suppliers, employees and other business counterparties.

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," "Critical Accounting Estimates," "Results of Operations," and "Liquidity and Financial Condition," and the sections titled "Legal Proceedings" and "Risk Factors" in this Form 10-Q and in our 2018 Annual Report and 2018 Form 10-K. Additional important information as to these factors is included in our 2018 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 2018 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 Statements (Registration No. 333-220883) and (Registrations No. 333-232696) 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, 239 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 2018 Form 10-K and in Part II, Item 1A, Risk Factors in our 2019 Form 10-Q for the quarter ended June 30, 2019.

Filed Oct 25, 2019.
Source: SEC EDGAR, the filing index for accession 0000101829-19-000047. Last ingested by Listed: Nov 3, 2026, 21:25 ET. No prices; not investment advice.