United Technologies Corporation
UNITED TECHNOLOGIES CORP /DE/ (Form: 10-Q, Received: 07/28/2017 07:00:53)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
  ____________________________________ 
FORM 10-Q
____________________________________ 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission file number 1-812
____________________________________ 
UNITED TECHNOLOGIES CORPORATION
____________________________________ 
DELAWARE
 
06-0570975
10 Farm Springs Road, Farmington, Connecticut 06032
(860) 728-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý .    No   ¨ .
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý .    No   ¨ .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨ .    No   ý .
At June 30, 2017 there were 798,772,783 shares of Common Stock outstanding.


Table of Contents

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
Quarter Ended June 30, 2017
 
 
Page
 
 
 
 
 
 
Condensed Consolidated Statement of Operations for the quarters ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

United Technologies Corporation and its subsidiaries' names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or tradenames of United Technologies Corporation and its subsidiaries. Names, abbreviations of names, logos, and products and service designators of other companies are either the registered or unregistered trademarks or tradenames of their respective owners. As used herein, the terms "we," "us," "our," "the Company," or "UTC," unless the context otherwise requires, mean United Technologies Corporation and its subsidiaries. References to internet web sites in this Form 10-Q are provided for convenience only. Information available through these web sites is not incorporated by reference into this Form 10-Q.

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 
 
Quarter Ended June 30,
(Dollars in millions, except per share amounts)
2017
 
2016
Net Sales:
 
 
 
Product sales
$
10,661

 
$
10,634

Service sales
4,619

 
4,240

 
15,280

 
14,874

Costs and Expenses:
 
 
 
Cost of products sold
7,907

 
7,933

Cost of services sold
3,193

 
2,808

Research and development
609

 
588

Selling, general and administrative
1,538

 
1,451

 
13,247

 
12,780

Other income, net
257

 
243

Operating profit
2,290

 
2,337

Interest expense, net
226

 
225

Income from continuing operations before income taxes
2,064

 
2,112

Income tax expense
532

 
587

Net income from continuing operations
1,532

 
1,525

Less: Noncontrolling interest in subsidiaries' earnings from continuing operations
93

 
99

Income from continuing operations attributable to common shareowners
1,439

 
1,426

Discontinued operations (Note 2):
 
 
 
Income from operations

 
1

Loss on disposal

 
(3
)
Income tax expense

 
(45
)
Loss from discontinued operations attributable to common shareowners

 
(47
)
Net income attributable to common shareowners
$
1,439

 
$
1,379

Earnings Per Share of Common Stock - Basic:
 
 
 
Income from continuing operations attributable to common shareowners
$
1.83

 
$
1.73

Net income attributable to common shareowners
$
1.83

 
$
1.67

Earnings Per Share of Common Stock - Diluted:
 
 
 
Income from continuing operations attributable to common shareowners
$
1.80

 
$
1.71

Net income attributable to common shareowners
$
1.80

 
$
1.65

See accompanying Notes to Condensed Consolidated Financial Statements

3

Table of Contents

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
 
 
Six Months Ended June 30,
(Dollars in millions, except per share amounts)
2017
 
2016
Net Sales:
 
 
 
Product sales
$
20,298

 
$
20,053

Service sales
8,797

 
8,178

 
29,095

 
28,231

Costs and Expenses:
 
 
 
Cost of products sold
15,170

 
15,020

Cost of services sold
6,007

 
5,375

Research and development
1,186

 
1,129

Selling, general and administrative
3,020

 
2,814

 
25,383

 
24,338

Other income, net
845

 
389

Operating profit
4,557

 
4,282

Interest expense, net
439

 
448

Income from continuing operations before income taxes
4,118

 
3,834

Income tax expense
1,118

 
1,056

Net income from continuing operations
3,000

 
2,778

Less: Noncontrolling interest in subsidiaries' earnings from continuing operations
175

 
180

Income from continuing operations attributable to common shareowners
2,825

 
2,598

Discontinued operations (Note 2):
 
 
 
Income from operations

 
1

Gain on disposal

 
15

Income tax expense

 
(52
)
Loss from discontinued operations attributable to common shareowners

 
(36
)
Net income attributable to common shareowners
$
2,825

 
$
2,562

Earnings Per Share of Common Stock - Basic:
 
 
 
Income from continuing operations attributable to common shareowners
$
3.57

 
$
3.15

Net income attributable to common shareowners
$
3.57

 
$
3.11

Earnings Per Share of Common Stock - Diluted:
 
 
 
Income from continuing operations attributable to common shareowners
$
3.53

 
$
3.12

Net income attributable to common shareowners
$
3.53

 
$
3.08

See accompanying Notes to Condensed Consolidated Financial Statements


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Table of Contents

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)

 
Quarter Ended
June 30,
 
Six Months Ended
June 30,
(Dollars in millions)
2017
 
2016
 
2017
 
2016
Net income from continuing operations
$
1,532

 
$
1,525

 
$
3,000

 
$
2,778

Loss from discontinued operations

 
(47
)
 

 
(36
)
Net income
1,532

 
1,478

 
3,000

 
2,742

Other comprehensive income (loss), net of tax (expense) benefit:
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
Foreign currency translation adjustments arising during period
249

 
(276
)
 
395

 
(237
)
Less: Reclassification adjustments for gain on sale of an investment in a foreign entity recognized in Other income, net

 

 

 
1

 
249

 
(276
)
 
395

 
(236
)
Pension and postretirement benefit plans
 
 
 
 
 
 
 
Pension and postretirement benefit plans adjustments during the period
(5
)
 
(12
)
 
(4
)
 
(37
)
Amortization of actuarial loss, prior service cost and transition obligation
132

 
128

 
263

 
254

 
127

 
116

 
259

 
217

Tax expense
(47
)
 
(43
)
 
(96
)
 
(81
)
 
80

 
73

 
163

 
136

Unrealized gain (loss) on available-for-sale securities
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during period
30

 
21

 
(2
)
 
90

Reclassification adjustments for gain included in Other income, net
(24
)
 
(25
)
 
(407
)
 
(52
)
 
6

 
(4
)
 
(409
)
 
38

Tax (expense) benefit
(2
)
 
5

 
156

 
(14
)
 
4

 
1

 
(253
)
 
24

Change in unrealized cash flow hedging
 
 
 
 
 
 
 
Unrealized cash flow hedging gain arising during period
66

 
36

 
130

 
195

Loss reclassified into Product sales
5

 
45

 
10

 
107

 
71

 
81

 
140

 
302

Tax expense
(17
)
 
(21
)
 
(32
)
 
(80
)
 
54

 
60

 
108

 
222

Other comprehensive income (loss), net of tax
387

 
(142
)
 
413

 
146

Comprehensive income
1,919

 
1,336

 
3,413

 
2,888

Less: Comprehensive income attributable to noncontrolling interest
(111
)
 
(97
)
 
(218
)
 
(191
)
Comprehensive income attributable to common shareowners
$
1,808

 
$
1,239

 
$
3,195

 
$
2,697

See accompanying Notes to Condensed Consolidated Financial Statements

5

Table of Contents

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
 
(Dollars in millions)
June 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and cash equivalents
$
9,345

 
$
7,157

Accounts receivable, net
12,597

 
11,481

Inventories and contracts in progress, net
9,860

 
8,704

Other assets, current
1,027

 
1,208

Total Current Assets
32,829

 
28,550

Customer financing assets
1,701

 
1,398

Future income tax benefits
1,817

 
1,809

Fixed assets
20,309

 
19,469

Less: Accumulated depreciation
(10,834
)
 
(10,311
)
Fixed assets, net
9,475

 
9,158

Goodwill
27,587

 
27,059

Intangible assets, net
15,881

 
15,684

Other assets
5,503

 
6,048

Total Assets
$
94,793

 
$
89,706

Liabilities and Equity
 
 
 
Short-term borrowings
$
682

 
$
601

Accounts payable
8,542

 
7,483

Accrued liabilities
12,634

 
12,219

Long-term debt currently due
2,061

 
1,603

Total Current Liabilities
23,919

 
21,906

Long-term debt
23,883

 
21,697

Future pension and postretirement benefit obligations
5,249

 
5,612

Other long-term liabilities
11,181

 
11,026

Total Liabilities
64,232

 
60,241

Commitments and contingent liabilities (Note 15)

 

Redeemable noncontrolling interest
406

 
296

Shareowners' Equity:
 
 
 
Common Stock
17,372

 
17,285

Treasury Stock
(35,516
)
 
(34,150
)
Retained earnings
54,640

 
52,873

Unearned ESOP shares
(90
)
 
(95
)
Accumulated other comprehensive loss
(7,964
)
 
(8,334
)
Total Shareowners' Equity
28,442

 
27,579

Noncontrolling interest
1,713

 
1,590

Total Equity
30,155

 
29,169

Total Liabilities and Equity
$
94,793

 
$
89,706

See accompanying Notes to Condensed Consolidated Financial Statements

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Table of Contents

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
Six Months Ended June 30,
(Dollars in millions)
2017
 
2016
Operating Activities of Continuing Operations:
 
 
 
Net income from continuing operations
$
3,000

 
$
2,778

Adjustments to reconcile net income from continuing operations to net cash flows provided by operating activities of continuing operations:
 
 
 
Depreciation and amortization
1,039

 
960

Deferred income tax provision
502

 
220

Stock compensation cost
96

 
96

Change in:
 
 
 
Accounts receivable
(951
)
 
(679
)
Inventories and contracts in progress
(1,066
)
 
(466
)
Other current assets
27

 
(23
)
Accounts payable and accrued liabilities
1,436

 
572

Global pension contributions
(79
)
 
(107
)
Canadian government settlement
(246
)
 
(237
)
Other operating activities, net
(619
)
 
(508
)
Net cash flows provided by operating activities of continuing operations
3,139

 
2,606

Investing Activities of Continuing Operations:
 
 
 
Capital expenditures
(771
)
 
(649
)
Investments in businesses
(168
)
 
(538
)
Dispositions of businesses
19

 
50

Proceeds from sale of investments in Watsco, Inc.
596

 

Increase in customer financing assets, net
(240
)
 
(55
)
Increase in collaboration intangible assets
(195
)
 
(199
)
(Payments) receipts from settlements of derivative contracts
(294
)
 
86

Other investing activities, net
63

 
(75
)
Net cash flows used in investing activities of continuing operations
(990
)
 
(1,380
)
Financing Activities of Continuing Operations:
 
 
 
Issuance of long-term debt
4,013

 
2,466

Repayment of long-term debt
(1,611
)
 
(144
)
Increase (decrease) in short-term borrowings, net
32

 
(178
)
Proceeds from Common Stock issued under employee stock plans
22

 
5

Dividends paid on Common Stock
(1,008
)
 
(1,035
)
Repurchase of Common Stock
(1,370
)
 
(36
)
Other financing activities, net
(130
)
 
(164
)
Net cash flows (used in) provided by financing activities of continuing operations
(52
)
 
914

Discontinued Operations:
 
 
 
Net cash used in operating activities

 
(2,463
)
Net cash provided by investing activities

 
6

Net cash flows used in operating activities of discontinued operations

 
(2,457
)
Effect of foreign exchange rate changes on cash and cash equivalents
95

 
10

Net increase (decrease) in cash, cash equivalents and restricted cash
2,192

 
(307
)
Cash, cash equivalents and restricted cash, beginning of year
7,189

 
7,120

Cash, cash equivalents and restricted cash, end of period
9,381

 
6,813

Less: Restricted cash, included in Other assets
36

 
28

Cash and cash equivalents, end of period
$
9,345

 
$
6,785

See accompanying Notes to Condensed Consolidated Financial Statements

7

Table of Contents

UNITED TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements at June 30, 2017 and for the quarters and six months ended June 30, 2017 and 2016 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The results reported in these Condensed Consolidated Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our Annual Report to Shareowners ( 2016 Annual Report) incorporated by reference in our Annual Report on Form 10-K for calendar year 2016 ( 2016 Form 10-K).
Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. As previously disclosed in our 2016 Form 10-K, in 2016 we early adopted Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments and ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash . Amounts previously reported for the quarter and six months ended June 30, 2016 have been restated as required upon adoption of these ASUs. These restatements had an immaterial impact on the Condensed Consolidated Financial Statements as of June 30, 2016, and for the quarter and six months then ended.
Note 1: Acquisitions, Dispositions, Goodwill and Other Intangible Assets
Business Acquisitions and Dispositions. During the six months ended June 30, 2017 , our investment in business acquisitions was $168 million , and consisted of a number of small acquisitions, primarily in our commercial businesses.
Goodwill. Changes in our goodwill balances for the six months ended June 30, 2017 were as follows:
(Dollars in millions)
Balance as of
January 1, 2017
 
Goodwill 
Resulting from Business Combinations
 
Foreign Currency Translation and Other
 
Balance as of
June 30, 2017
Otis
$
1,575

 
$
(1
)
 
$
78

 
$
1,652

UTC Climate, Controls & Security
9,487

 
95

 
256

 
9,838

Pratt & Whitney
1,511

 

 

 
1,511

UTC Aerospace Systems
14,483

 

 
100

 
14,583

Total Segments
27,056

 
94

 
434

 
27,584

Eliminations and other
3

 

 

 
3

Total
$
27,059

 
$
94

 
$
434

 
$
27,587

Intangible Assets. Identifiable intangible assets are comprised of the following:
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
Gross Amount
 
Accumulated
Amortization
 
Gross Amount
 
Accumulated
Amortization
Amortized:
 
 
 
 
 
 
 
Service portfolios
$
2,130

 
$
(1,468
)
 
$
1,995

 
$
(1,344
)
Patents and trademarks
392

 
(218
)
 
378

 
(201
)
Collaboration intangible assets
3,923

 
(299
)
 
3,724

 
(211
)
Customer relationships and other
13,141

 
(3,814
)
 
12,798

 
(3,480
)
 
19,586

 
(5,799
)
 
18,895

 
(5,236
)
Unamortized:
 
 
 
 
 
 
 
Trademarks and other
2,094

 

 
2,025

 

Total
$
21,680

 
$
(5,799
)
 
$
20,920

 
$
(5,236
)
Customer relationship intangible assets include payments made to our customers to secure certain contractual rights. Such payments are capitalized when distinct rights are obtained and sufficient incremental cash flows to support the recoverability of

8


the assets have been established. Otherwise, the applicable portion of the payments are expensed. We amortize these intangible assets based on the underlying pattern of economic benefit, which may result in an amortization method other than straight-line. In the aerospace industry, amortization based on the pattern of economic benefit generally results in lower amortization expense during the development period with amortization expense increasing as programs enter full production and aftermarket cycles. If a pattern of economic benefit cannot be reliably determined, a straight-line amortization method is used. We classify amortization of such payments as a reduction of sales. The collaboration intangible assets are amortized based upon the pattern of economic benefits as represented by the underlying cash flows.
Amortization of intangible assets for the quarter and six months ended June 30, 2017 was $210 million and $415 million , respectively, compared with $194 million and $381 million for the same periods of 2016. The following is the expected amortization of intangible assets for the years 2017 through 2022 , which reflects the pattern of expected economic benefit on certain aerospace intangible assets.  
(Dollars in millions)
 
Remaining 2017
 
2018
 
2019
 
2020
 
2021
 
2022
Amortization expense
 
$
421

 
$
873

 
$
871

 
$
891

 
$
903

 
$
899

Note 2: Discontinued Operations
On November 6, 2015, we completed the sale of Sikorsky to Lockheed Martin Corp. In the six months ended June 30, 2016 , we recognized approximately $15 million of additional gain on the disposal resulting from the settlement of working capital adjustments, and approximately $52 million of additional income tax expense related to the 2015 gain realized on the sale of Sikorsky. Net cash outflows from discontinued operations of approximately $2.5 billion resulted from the payment of taxes related to the 2015 gain realized on the sale of Sikorsky.
Note 3: Earnings Per Share
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except per share amounts; shares in millions)
2017
 
2016
 
2017
 
2016
Net income attributable to common shareowners:
 
 
 
 
 
 
 
Net income from continuing operations
$
1,439

 
$
1,426

 
$
2,825

 
$
2,598

Loss from discontinued operations

 
(47
)
 

 
(36
)
Net income attributable to common shareowners
$
1,439

 
$
1,379

 
$
2,825

 
$
2,562

Basic weighted average number of shares outstanding
788.7

 
825.3

 
791.1

 
825.1

Stock awards and equity units
9.5

 
8.3

 
9.3

 
7.4

Diluted weighted average number of shares outstanding
798.2

 
833.6

 
800.4

 
832.5

Earnings (Loss) Per Share of Common Stock - Basic:
 
 
 
 
 
 
 
Net income from continuing operations
$
1.83

 
$
1.73

 
$
3.57

 
$
3.15

Loss from discontinued operations

 
(0.06
)
 

 
(0.04
)
Net income attributable to common shareowners
1.83

 
1.67

 
3.57

 
3.11

Earnings (Loss) Per Share of Common Stock - Diluted:
 
 
 
 
 
 
 
Net income from continuing operations
$
1.80

 
$
1.71

 
$
3.53

 
$
3.12

Loss from discontinued operations

 
(0.06
)
 

 
(0.04
)
Net income attributable to common shareowners
1.80

 
1.65

 
3.53

 
3.08

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock appreciation rights and stock options, when the average market price of the common stock is lower than the exercise price of the related stock awards during the period because the effect would be anti-dilutive. For the quarter and six months ended June 30, 2017 , the number of stock awards excluded from the computation was approximately 5.8 million and 6.4 million , respectively. For the quarter and six months ended June 30, 2016 , the number of stock awards excluded from the computation was approximately 12.7 million and 14.9 million , respectively.

9


Note 4: Inventories and Contracts in Progress
(Dollars in millions)
June 30, 2017
 
December 31, 2016
Raw materials
$
2,146

 
$
2,040

Work-in-process
3,253

 
2,787

Finished goods
3,753

 
3,305

Contracts in progress
9,814

 
9,395

 
18,966

 
17,527

Less:
 
 
 
Progress payments, secured by lien, on U.S. Government contracts
(175
)
 
(130
)
Billings on contracts in progress
(8,931
)
 
(8,693
)
 
$
9,860

 
$
8,704

Inventories include capitalized contract development costs related to certain aerospace programs at UTC Aerospace Systems. As of June 30, 2017 and December 31, 2016 , these capitalized costs were $126 million and $140 million , respectively, which will be liquidated as production units are delivered to customers. Within commercial aerospace, inventory costs attributable to new engine offerings are recognized based on the average cost per unit expected over the life of each contract using the units-of-delivery method of percentage of completion accounting. Under this method, costs of initial engine deliveries in excess of the projected contract per unit average cost are capitalized, and these capitalized amounts are subsequently expensed as additional engine deliveries occur for engines with costs below the projected contract per unit average cost over the life of the contract. As of June 30, 2017 and December 31, 2016 , inventory included $307 million and $233 million , respectively, of such capitalized amounts.
Note 5: Borrowings and Lines of Credit
(Dollars in millions)
June 30, 2017
 
December 31, 2016
Commercial paper
$
559

 
$
522

Other borrowings
123

 
79

Total short-term borrowings
$
682

 
$
601

At June 30, 2017 , we had revolving credit agreements with various banks permitting aggregate borrowings of up to $4.35 billion , pursuant to a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement, both of which expire in August 2021 . As of June 30, 2017 , there were no borrowings under these revolving credit agreements. The undrawn portions of these revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of June 30, 2017 , our maximum commercial paper borrowing limit was $4.35 billion . Commercial paper borrowings at June 30, 2017 represent approximately €500 million ( $559 million ) of euro-denominated commercial paper. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, debt refinancing, and repurchases of our common stock. The need for commercial paper borrowings arises when the use of domestic cash for acquisitions, dividends, and share repurchases exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.
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; to fund the repayment of commercial paper; and for other general corporate purposes.


10


Long-term debt consisted of the following:
(Dollars in millions)
June 30, 2017
 
December 31, 2016
1.800% notes due 2017 1
$

 
$
1,500

6.800% notes due 2018
99

 
99

EURIBOR plus 0.800% floating rate notes due 2018 (€750 million principal value) 2
838

 
783

1.778% junior subordinated notes due 2018
1,100

 
1,100

LIBOR plus 0.350% floating rate notes due 2019 3
350

 
350

1.500% notes due 2019 1
650

 
650

8.875% notes due 2019
271

 
271

4.875% notes due 2020 1
171

 
171

4.500% notes due 2020 1
1,250

 
1,250

1.900% notes due 2020 1
1,000

 

8.750% notes due 2021
250

 
250

1.950% notes due 2021 1
750

 
750

1.125% notes due 2021 (€950 million principal value) 1
1,062

 
992

2.300% notes due 2022 1
500

 

3.100% notes due 2022 1
2,300

 
2,300

1.250% notes due 2023 (€750 million principal value) 1
838

 
783

2.800% notes due 2024 1
800

 

1.875% notes due 2026 (€500 million principal value) 1
559

 
522

2.650% notes due 2026 1
1,150

 
1,150

3.125% notes due 2027 1
1,100

 

7.100% notes due 2027
141

 
141

6.700% notes due 2028
400

 
400

7.500% notes due 2029 1
550

 
550

5.400% notes due 2035 1
600

 
600

6.050% notes due 2036 1
600

 
600

6.800% notes due 2036 1
134

 
134

7.000% notes due 2038
159

 
159

6.125% notes due 2038 1
1,000

 
1,000

5.700% notes due 2040 1
1,000

 
1,000

4.500% notes due 2042 1
3,500

 
3,500

4.150% notes due 2045 1
850

 
850

3.750% notes due 2046 1
1,100

 
1,100

4.050% notes due 2047 1
600

 

Project financing obligations
107

 
155

Other (including capitalized leases)
190

 
189

Total principal long-term debt
25,969

 
23,299

Other (fair market value adjustments and discounts)
(25
)
 
1

Total long-term debt
25,944

 
23,300

Less: current portion
2,061

 
1,603

Long-term debt, net of current portion
$
23,883

 
$
21,697

1
We may redeem these notes at our option pursuant to their terms.
2
The three-month EURIBOR rate as of June 30, 2017 was approximately -0.331%. The notes may be redeemed at our option in whole, but not in part, at any time in the event of certain developments affecting U.S. taxation.
3
The three-month LIBOR rate as of June 30, 2017 was approximately1.299%.

11


The average maturity of our long-term debt at June 30, 2017 is approximately twelve years . The average interest expense rate on our total borrowings for the quarters and six months ended June 30, 2017 and 2016 was as follows:
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Average interest expense rate
3.6
%
 
4.0
%
 
3.6
%
 
4.1
%
We have an existing universal shelf registration statement filed with the Securities and Exchange Commission (SEC) for an indeterminate amount of equity and debt securities for future issuance, subject to our internal limitations on the amount of equity and debt to be issued under this shelf registration statement.
Note 6: Income Taxes
We conduct business globally and, as a result, UTC or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, Netherlands, Poland, Singapore, South Korea, Spain, Switzerland, the United Kingdom, and the United States. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2005.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. It is reasonably possible that a net reduction within the range of $80 million to $460 million of unrecognized tax benefits may occur within the next 12 months as a result of additional worldwide uncertain tax positions, the revaluation of current uncertain tax positions arising from developments in examinations, in appeals, in the courts, or the closure of tax statutes. See Note 15, Contingent Liabilities, for discussion regarding uncertain tax positions, included in the above range, related to pending litigation with respect to certain deductions claimed in Germany.
During the quarter ended June 30, 2017, the Examination Division of the Internal Revenue Service commenced audit fieldwork for UTC’s 2015 tax year, combining it with the previously commenced audit of our 2014 tax year. The combined audit of UTC tax years 2014 and 2015 is expected to continue beyond the next 12 months.
As a result of federal, state and non-U.S. tax year closures related to audit resolutions and the expiration of applicable statutes of limitation, including expiration of the U.S. federal income tax statute of limitations for UTC’s 2013 tax year, we expect to recognize in the third quarter of 2017 non-cash gains, primarily tax, in the range of $ 50 million to $ 65 million . The tax amounts are included in the above range of reasonably possible changes in unrecognized tax benefits.
Note 7: Employee Benefit Plans
Pension and Postretirement Plans. We sponsor both funded and unfunded domestic and foreign defined pension and other postretirement benefit plans, and defined contribution plans. Contributions to our plans were as follows:
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
2017
 
2016
 
2017
 
2016
Defined benefit plans
$
33

 
$
32

 
$
79

 
$
107

Defined contribution plans
86

 
78

 
176

 
156

There were no contributions to our domestic defined benefit pension plans in the quarters and six months ended June 30, 2017 and 2016 . The following table illustrates the components of net periodic benefit cost for our defined pension and other postretirement benefit plans:

12


 
Pension Benefits
Quarter Ended June 30,
 
Other Postretirement Benefits
Quarter Ended June 30,
(Dollars in millions)
2017
 
2016
 
2017
 
2016
Service cost
$
93

 
$
97

 
$
1

 
$
1

Interest cost
279

 
304

 
6

 
8

Expected return on plan assets
(541
)
 
(559
)
 

 

Amortization of prior service credit
(9
)
 
(7
)
 

 

Recognized actuarial net loss (gain)
143

 
136

 
(2
)
 
(1
)
Net settlement and curtailment (gain) loss
(2
)
 
3

 

 

Total net periodic benefit (income) cost
$
(37
)
 
$
(26
)
 
$
5

 
$
8

 
Pension Benefits
Six Months Ended June 30,
 
Other Postretirement Benefits
Six Months Ended June 30,
(Dollars in millions)
2017
 
2016
 
2017
 
2016
Service cost
$
186

 
$
191

 
$
2

 
$
2

Interest cost
557

 
606

 
13

 
16

Expected return on plan assets
(1,081
)
 
(1,115
)
 

 

Amortization of prior service credit
(18
)
 
(15
)
 

 

Recognized actuarial net loss (gain)
286

 
271

 
(5
)
 
(2
)
Net settlement and curtailment (gain) loss
(1
)
 
15

 

 

Total net periodic benefit (income) cost
$
(71
)
 
$
(47
)
 
$
10

 
$
16

Effective January 1, 2017, a voluntary lump-sum option is available for the frozen final average earnings benefits of certain U.S. salaried employees upon termination of employment after 2016. This option provides participants with the choice of electing to receive a lump-sum payment in lieu of receiving a future monthly pension benefit. This plan change reduced the projected benefit obligation by $170 million .
Note 8: Restructuring Costs
During the six months ended June 30, 2017 , we recorded net pre-tax restructuring costs totaling $112 million for new and ongoing restructuring actions. We recorded charges in the segments as follows:
(Dollars in millions)
 
Otis
$
17

UTC Climate, Controls & Security
41

Pratt & Whitney
6

UTC Aerospace Systems
47

Eliminations and other
1

Total
$
112

Restructuring charges incurred during the six months ended June 30, 2017 primarily relate to actions initiated during 2017 and 2016 , and were recorded as follows:
(Dollars in millions)
 
Cost of sales
$
50

Selling, general and administrative
62

Total
$
112

2017 Actions . During the six months ended June 30, 2017 , we recorded net pre-tax restructuring costs of $63 million , comprised of $21 million in cost of sales and $42 million in selling, general and administrative expenses. The 2017 actions relate to ongoing cost reduction efforts, including workforce reductions and the consolidation of field operations.

13


We are targeting to complete the majority of the remaining workforce and facility related cost reduction actions during 2017 and 2018 . No specific plans for significant other actions have been finalized at this time. The following table summarizes the accrual balance and utilization for the 2017 restructuring actions for the quarter and six months ended June 30, 2017 :
(Dollars in millions)
Severance
 
Facility Exit, Lease Termination and Other Costs
 
Total
Quarter Ended June 30, 2017
 
 
 
 
 
Restructuring accruals at March 31, 2017
$
16

 
$

 
$
16

Net pre-tax restructuring costs
36

 
3

 
39

Utilization and foreign exchange
(9
)
 
(3
)
 
(12
)
Balance at June 30, 2017
$
43

 
$

 
$
43

 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
Net pre-tax restructuring costs
$
57

 
$
6

 
$
63

Utilization and foreign exchange
(14
)
 
(6
)
 
(20
)
Balance at June 30, 2017
$
43

 
$

 
$
43

The following table summarizes expected, incurred and remaining costs for the 2017 restructuring actions by segment:
(Dollars in millions)
Expected
Costs
 
Costs Incurred Quarter Ended
March 31, 2017
 
Costs Incurred Quarter Ended
June 30, 2017
 
Remaining Costs at
June 30, 2017
Otis
$
29

 
$
(2
)
 
$
(12
)
 
$
15

UTC Climate, Controls & Security
37

 
(12
)
 
(11
)
 
14

Pratt & Whitney
6

 

 
(6
)
 

UTC Aerospace Systems
55

 
(9
)
 
(10
)
 
36

Eliminations and other
1

 
(1
)
 

 

Total
$
128

 
$
(24
)
 
$
(39
)
 
$
65

2016 Actions . During the six months ended June 30, 2017 , we recorded net pre-tax restructuring costs totaling $40 million for restructuring actions initiated in 2016 , including $16 million in cost of sales and $24 million in selling, general and administrative expenses. The 2016 actions relate to ongoing cost reduction efforts, including workforce reductions, consolidation of field operations, and costs to exit legacy programs. The following table summarizes the accrual balances and utilization for the 2016 restructuring actions for the quarter and six months ended June 30, 2017 :
(Dollars in millions)
Severance
 
Facility Exit,
Lease
Termination and
Other Costs
 
Total
Quarter Ended June 30, 2017
 
 
 
 
 
Restructuring accruals at March 31, 2017
$
56

 
$
47

 
$
103

Net pre-tax restructuring costs
11

 
7

 
18

Utilization and foreign exchange
(18
)
 
(6
)
 
(24
)
Balance at June 30, 2017
$
49

 
$
48

 
$
97

 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
Restructuring accruals at December 31, 2016
$
63

 
$
46

 
$
109

Net pre-tax restructuring costs
26

 
14

 
40

Utilization and foreign exchange
(40
)
 
(12
)
 
(52
)
Balance at June 30, 2017
$
49

 
$
48

 
$
97


14


The following table summarizes expected, incurred and remaining costs for the 2016 restructuring actions by segment:
(Dollars in millions)
Expected
Costs
 
Costs Incurred in 2016
 
Costs Incurred Quarter Ended
March 31, 2017
 
Costs Incurred Quarter Ended
June 30, 2017
 
Remaining Costs at
June 30, 2017
Otis
$
55

 
$
(48
)
 
$
(3
)
 
$
1

 
$
5

UTC Climate, Controls & Security
83

 
(45
)
 
(6
)
 
(7
)
 
25

Pratt & Whitney
118

 
(118
)
 

 

 

UTC Aerospace Systems
85

 
(31
)
 
(13
)
 
(12
)
 
29

Total
$
341

 
$
(242
)
 
$
(22
)
 
$
(18
)
 
$
59

2015 and Prior Actions. During the six months ended June 30, 2017 , we recorded net pre-tax restructuring costs totaling $9 million for restructuring actions initiated in 2015 and prior. As of June 30, 2017 , we have approximately $69 million of accrual balances remaining related to 2015 and prior actions.
Note 9: Financial Instruments
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 ordinary course of business, we 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 four quarter rolling average of the notional amount of foreign exchange contracts hedging foreign currency transactions was $18.8 billion and $18.3 billion at June 30, 2017 and December 31, 2016 , respectively.
The following table summarizes the fair value of derivative instruments as of June 30, 2017 and December 31, 2016 , which consist solely of foreign exchange contracts:
 
Asset Derivatives
 
Liability Derivatives
(Dollars in millions)
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Derivatives designated as hedging instruments
$
44

 
$
15

 
$
73

 
$
196

Derivatives not designated as hedging instruments
124

 
155

 
69

 
158

As discussed in Note 5, we have issued approximately €2.95 billion of euro-denominated long-term debt and €500 million of outstanding euro-denominated commercial paper borrowings, which qualify as a net investment hedge against our investments in European businesses . As of June 30, 2017, the net investment hedge is deemed to be effective.
The amount of gains and losses related to the Company's derivative financial instruments was as follows:
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
2017
 
2016
 
2017
 
2016
Gain recorded in Accumulated other comprehensive loss
$
66

 
$
36

 
$
130

 
$
195

Loss reclassified from Accumulated other comprehensive loss into Product sales (effective portion)
5

 
45

 
10

 
107

Assuming current market conditions continue, a $3 million pre-tax loss is expected to be reclassified from Accumulated other comprehensive loss into Product sales to reflect the fixed prices obtained from foreign exchange hedging within the next 12 months. At June 30, 2017 , all derivative contracts accounted for as cash flow hedges will mature by November 2022 .
The effect on the Condensed Consolidated Statement of Operations of foreign exchange contracts not designated as hedging instruments was as follows:
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
2017
 
2016
 
2017
 
2016
Gain recognized in Other income, net
$
28

 
$
15

 
$
40

 
$
30

We paid $294 million and received $86 million from settlements of derivative contracts during the six months ended June 30, 2017 and 2016 , respectively.

15


Note 10: Fair Value Measurements
In accordance with the provisions of ASC 820, the following tables provide the valuation hierarchy classification of assets and liabilities that are carried at fair value and measured on a recurring and nonrecurring basis in our Condensed Consolidated Balance Sheet as of June 30, 2017 and December 31, 2016 :  
June 30, 2017 (Dollars in millions)
Total
 
Level 1
 
Level 2
 
Level 3
Recurring fair value measurements:
 
 
 
 
 
 
 
Available-for-sale securities
$
301

 
$
301

 
$

 
$

Derivative assets
168

 

 
168

 

Derivative liabilities
(142
)
 

 
(142
)
 

December 31, 2016 (Dollars in millions)
Total
 
Level 1
 
Level 2
 
Level 3
Recurring fair value measurements:
 
 
 
 
 
 
 
Available-for-sale securities
$
987

 
$
987

 
$

 
$

Derivative assets
170

 

 
170

 

Derivative liabilities
(354
)
 

 
(354
)
 

The reduction in value of available-for-sale securities as of June 30, 2017 , as compared to December 31, 2016 , is primarily the result of the sale of UTC Climate, Controls & Security's investments in Watsco, Inc. during the quarter ended March 31, 2017.
Valuation Techniques. Our available-for-sale securities include equity investments that are traded in active markets, either domestically or internationally, and are measured at fair value using closing stock prices from active markets. Our derivative assets and liabilities include foreign exchange contracts and commodity derivatives that are measured at fair value using internal models based on observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties' credit risks. As of June 30, 2017 , there were no significant transfers in and out of Level 1 and Level 2.
As of June 30, 2017 , there has not been any significant impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties' credit risks.
The following table provides carrying amounts and fair values of financial instruments that are not carried at fair value in our Condensed Consolidated Balance Sheet at June 30, 2017 and December 31, 2016 :
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term receivables
$
149

 
$
137

 
$
127

 
$
121

Customer financing notes receivable
428

 
411

 
437

 
420

Short-term borrowings
(682
)
 
(682
)
 
(601
)
 
(601
)
Long-term debt (excluding capitalized leases)
(25,923
)
 
(28,019
)
 
(23,280
)
 
(25,110
)
Long-term liabilities
(427
)
 
(395
)
 
(457
)
 
(427
)
The following table provides the valuation hierarchy classification of assets and liabilities that are not carried at fair value in our Condensed Consolidated Balance Sheet as of June 30, 2017 :
(Dollars in millions)
Total
 
Level 1
 
Level 2
 
Level 3
Long-term receivables
$
137

 
$

 
$
137

 
$

Customer financing notes receivable
411

 

 
411

 

Short-term borrowings
(682
)
 

 
(559
)
 
(123
)
Long-term debt (excluding capitalized leases)
(28,019
)
 

 
(27,863
)
 
(156
)
Long-term liabilities
(395
)
 

 
(395
)
 

We had commercial aerospace financing and other contractual commitments totaling approximately $13.8 billion and $14.4 billion as of June 30, 2017 and December 31, 2016 , respectively, related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms. Risks associated with changes in interest rates on these commitments are mitigated by the fact that interest rates are variable during the commitment term and are set at the date of funding based on

16


current market conditions, the fair value of the underlying collateral and the credit worthiness of the customers. As a result, the fair value of these financings is expected to equal the amounts funded.
Note 11: Long-Term Financing Receivables
Our long-term financing receivables primarily represent balances related to our aerospace businesses, such as long-term trade accounts receivable, leases receivable, and notes receivable. We also have other long-term receivables related to our commercial businesses; however, both the individual and aggregate amounts of those other receivables are not significant.
Long-term trade accounts receivable, including unbilled receivables related to long-term aftermarket contracts, are principally amounts arising from the sale of goods and the delivery of services with a contractual maturity date or realization period of greater than one year, and are recognized as "Other assets" in our Condensed Consolidated Balance Sheet. Notes and leases receivable represent notes and lease receivables other than receivables related to operating leases, and are recognized as "Customer financing assets" in our Condensed Consolidated Balance Sheet. The following table summarizes the balance by class of aerospace business related long-term receivables as of June 30, 2017 and December 31, 2016 .
(Dollars in millions)
June 30, 2017
 
December 31, 2016
Long-term trade accounts receivable
$
911

 
$
926

Notes and leases receivable
431

 
430

Total long-term receivables
$
1,342

 
$
1,356

Customer credit ratings range from customers with an extremely strong capacity to meet financial obligations to customers whose uncollateralized receivables are in default. There can be no assurance that actual results will not differ from estimates or that consideration of these factors in the future will not result in an increase or decrease to the allowance for credit losses on long-term receivables. Based upon the customer credit ratings, approximately 13% of our total long-term receivables were considered to bear high credit risk as of June 30, 2017 and December 31, 2016 .
For long-term trade accounts receivable, we evaluate credit risk and collectability individually to determine if an allowance is necessary. Our long-term receivables reflected in the table above, which include reserves of $17 million as of June 30, 2017 and December 31, 2016 , are individually evaluated for impairment. At June 30, 2017 and December 31, 2016 , we did not have any significant balances that are considered to be delinquent, on non-accrual status, past due 90 days or more, or considered to be unrecoverable.

17


Note 12: Shareowners' Equity and Noncontrolling Interest
A summary of the changes in shareowners' equity and noncontrolling interest comprising total equity for the quarters and six months ended June 30, 2017 and 2016 is provided below:
 
Quarter Ended June 30,
 
2017
 
2016
(Dollars in millions)
Share-owners'
Equity
 
Non-controlling Interest
 
Total
Equity
 
Share-owners'
Equity
 
Non-controlling Interest
 
Total
Equity
Equity, beginning of period
$
27,594

 
$
1,678

 
$
29,272

 
$
28,353

 
$
1,550

 
$
29,903

Comprehensive income for the period:
 
 
 
 
 
 
 
 
 
 
 
Net income
1,439

 
93

 
1,532

 
1,379

 
99

 
1,478

Total other comprehensive income (loss)
369

 
18

 
387

 
(140
)
 
(2
)
 
(142
)
Total comprehensive income for the period
1,808

 
111

 
1,919

 
1,239

 
97

 
1,336

Common Stock issued under employee plans
91

 

 
91

 
88

 

 
88

Common Stock repurchased
(437
)
 

 
(437
)
 
(36
)
 

 
(36
)
Dividends on Common Stock
(503
)
 

 
(503
)
 
(526
)
 

 
(526
)
Dividends on ESOP Common Stock
(17
)
 

 
(17
)
 
(19
)
 

 
(19
)
Dividends attributable to noncontrolling interest
 
 
(64
)
 
(64
)
 


 
(90
)
 
(90
)
Purchase of subsidiary shares from noncontrolling interest
(1
)
 
(4
)
 
(5
)
 
(6
)
 

 
(6
)
Redeemable noncontrolling interest fair value adjustment
(94
)
 

 
(94
)
 
(3
)
 

 
(3
)
Other
1

 
(8
)
 
(7
)
 

 
1

 
1

Equity, end of period
$
28,442

 
$
1,713

 
$
30,155

 
$
29,090

 
$
1,558

 
$
30,648

 
Six Months Ended June 30,
 
2017
 
2016
(Dollars in millions)
Share-owners'
Equity
 
Non-controlling
Interest
 
Total
Equity
 
Share-owners'
Equity
 
Non-controlling
Interest
 
Total
Equity
Equity, beginning of period
$
27,579

 
$
1,590

 
$
29,169

 
$
27,358

 
$
1,486

 
$
28,844

Comprehensive income for the period:
 
 
 
 
 
 
 
 
 
 
 
Net income
2,825

 
175

 
3,000

 
2,562

 
180

 
2,742

Total other comprehensive income
370

 
43

 
413

 
135

 
11

 
146

Total comprehensive income for the period
3,195

 
218

 
3,413

 
2,697

 
191

 
2,888

Common Stock issued under employee plans
170

 

 
170

 
146

 

 
146

Common Stock repurchased
(1,370
)
 


 
(1,370
)
 
(36
)
 

 
(36
)
Dividends on Common Stock
(1,008
)
 


 
(1,008
)
 
(1,035
)
 

 
(1,035
)
Dividends on ESOP Common Stock
(35
)
 

 
(35
)
 
(37
)
 

 
(37
)
Dividends attributable to noncontrolling interest


 
(69
)
 
(69
)
 

 
(141
)
 
(141
)
Purchase of subsidiary shares from noncontrolling interest
(1
)
 
(5
)
 
(6
)
 
(6
)
 
(1
)
 
(7
)
Acquisition of noncontrolling interest

 

 

 

 
34

 
34

Redeemable noncontrolling interest fair value adjustment