News Column

UNITED TECHNOLOGIES CORP /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 25, 2014

BUSINESS OVERVIEW We are a global provider of high technology products and services to the building systems and aerospace industries. Our operations are classified into five principal business segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace Systems and Sikorsky. Otis and UTC Climate, Controls & Security are referred to as the "commercial businesses," while Pratt & Whitney, UTC Aerospace Systems and Sikorsky are collectively referred to as the "aerospace businesses." On September 23, 2013, we announced the formation of UTC Building and Industrial Systems, a new organizational structure consisting of Otis and UTC Climate, Controls & Security. This new organizational structure is expected to enhance our ability to deliver more integrated solutions to our customers and accelerate innovation in smart building technologies and sustainable designs. Otis and UTC Climate, Controls & Security each continue to report their financial and operational results as separate segments, which is consistent with how we allocate resources and measure the financial performance of these businesses. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The current status of significant factors affecting our business environment in 2014 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 2013 Annual Report, which is incorporated by reference in our 2013 Form 10-K. General Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. To limit the impact of any one industry, or the economy of any single country on our consolidated operating results, our strategy has been, and continues to be, the maintenance of a balanced and diversified portfolio of businesses. Our operations include original equipment manufacturing (OEM) and extensive related aftermarket parts and services in both our commercial and aerospace businesses. Our business mix also reflects the combination of shorter cycles at UTC Climate, Controls & Security and in our commercial aerospace aftermarket businesses, and longer cycles at Otis and in our aerospace OEM businesses. Our customers include companies in the private sector and governments, and our businesses reflect an extensive geographic diversification that has evolved with the continued globalization of world economies. Growth in emerging markets continues to be led by China, where our sales for the quarter ended June 30, 2014 grew 11% over the same quarter of the prior year. Growth in China, along with U.S. economic expansion, is expected to drive global growth throughout 2014. Consumer confidence in the U.S. reached a six-year high in June 2014, while consumer confidence and commercial construction in the U.S. remain strong. During the first six months of 2014, organic sales in Europe grew 3%. Despite elevated political tensions in Eastern Europe and the Middle East, Europe continues a slow economic recovery which we expect will accelerate modestly in the second half of the year. U.S. Government deficit reduction measures continue to pressure U.S. Department of Defense spending and adversely affect our military businesses. Total sales to the U.S. Government were $2.2 billion and $2.4 billion, or 13% and 15% of total UTC sales in the quarters ended June 30, 2014 and 2013, respectively. The defense portion of our aerospace business is affected by changes in market demand and the global political environment. Our participation in long-term production and development programs for the U.S. Government has, and is expected to contribute positively to our results in 2014. Disposition Activity As previously disclosed, we disposed of a number of businesses in 2013. On February 12, 2013, we completed the disposition of UTC Power to ClearEdge Power, and on June 14, 2013, we completed the sale of substantially all operations of Pratt & Whitney Rocketdyne (Rocketdyne) to GenCorp Inc. The results from these businesses were reclassified to Discontinued Operations in our Condensed Consolidated Statements of Operations and Cash Flows. On May 17, 2013, we completed the sale of the Pratt & Whitney Power Systems business to Mitsubishi Heavy Industries (MHI) and entered into a long-term engineering and manufacturing agreement with MHI. Pratt & Whitney Power Systems was not reclassified to Discontinued Operations due to our level of continuing involvement in the business post-sale. In connection with regulatory approval of the Goodrich acquisition, regulatory authorities required UTC to dispose of the Goodrich electric power systems and the pumps and engine controls businesses. Pursuant to these regulatory obligations, these businesses had been held separately from UTC's and Goodrich's ongoing businesses since the acquisition of Goodrich by UTC. On March 18, 2013, we completed the sale of the Goodrich pumps and engine controls business to Triumph Group, Inc., and on March 26, 2013, we completed the sale of the Goodrich electric power systems business to Safran S.A. Combined proceeds from the sales of the two businesses were approximately $600 million. 27



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Acquisition Activity Our growth strategy contemplates acquisitions. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated, and anticipated synergies or cost savings are achieved. During the six months ended June 30, 2014, our cash investment in business acquisitions was approximately $84 million and consisted of a number of small acquisitions primarily in our commercial businesses. We expect cash investment in businesses to be less than $1 billion in 2014. However, actual acquisition spending may vary depending upon the timing, availability and value of acquisition opportunities. Other Government legislation, policies and regulations can have a negative impact on our worldwide operations. Government regulation of refrigerants and energy efficiency standards, elevator safety codes and fire protection regulations are important to our commercial businesses. Government and market-driven safety and performance regulations, restrictions on aircraft engine noise and emissions, and government procurement practices can impact our aerospace and defense businesses. Commercial airline financial distress and consolidation, global economic and political conditions, changes in raw material and commodity prices, interest rates, foreign currency exchange rates, energy costs, and the impact from natural disasters and weather conditions create uncertainties that could impact our earnings outlook for the remainder of 2014. See Part I, Item 1A, "Risk Factors" in our 2013 Form 10-K for further discussion. As previously reported, Sikorsky is developing the CH-148 derivative of the H-92 helicopter (the "Cyclone"), a military variant of the S-92 helicopter, for the Canadian Government. The Cyclone is being developed under a fixed-price acquisition contract (the "Acquisition Contract") that provides for a program to develop and produce 28 helicopters, and a related contract to provide in-service support (collectively, the "Arrangements"). Delivery of the final configuration aircraft, which was scheduled to begin in 2012, has not occurred due to a number of disputes between the Canadian Government and Sikorsky related to contractual requirements and contract performance. On June 18, 2014, Sikorsky and the Canadian Government signed amendments to the Arrangements (the "Amended Arrangements"). The Amended Arrangements finalize the scope of the aircraft, change the governance of the program, and establish a phased approach to the delivery of interim and final configuration helicopters starting in 2015. The Amended Arrangements also extend the in-service support contract through approximately 2038. The contract value of the Amended Arrangements is estimated to be approximately $6.4 billion. Prior to the amendments, sales and losses under the Acquisition Contract were recognized using an output-based method, consistent with the practices and policies the Company applies to other comparable production contracts. In light of the significant changes in program scope, governance and delivery, we have re-assessed the method we utilize in estimating the extent of progress under the Acquisition Contract. The Acquisition Contract, as amended, now reflects the significant developmental nature of the contract that has evolved over time. Under the Company's practices and policies, contracts that are comparable to the Amended Arrangements are accounted for utilizing a cost-to-cost percentage of completion method, as this best reflects the efforts expended and more appropriately aligns the sales and loss recognition with these efforts. Employing the cost-to-cost percentage of completion method, we recorded a cumulative adjustment to reflect the percentage of completion under the Amended Arrangements in the second quarter of 2014 as a change in estimate. This adjustment along with changes in the in-service support contract have resulted in the recognition in the second quarter of 2014 of $830 million in sales and $438 million in losses. Remaining losses under the Amended Arrangements of approximately $300 million will be recognized as the costs are incurred. These losses will be partially offset by the in-service support aftermarket contract with the expectation of generating positive annual margin beginning in 2018. 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 2013 Annual Report, incorporated by reference in our 2013 Form 10-K, describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. There have been no significant changes in our critical accounting estimates during the six months ended June 30, 2014. 28



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Table of Contents RESULTS OF OPERATIONS Net Sales Quarter Ended June 30, Six Months Ended June 30, (Dollars in millions) 2014 2013 2014 2013 Net Sales $ 17,191$ 16,006$ 31,936$ 30,405 The factors contributing to the total percentage change year-over-year in total net sales for the quarter and six months ended June 30, 2014 are as follows: Quarter Ended Six Months Ended June 30, 2014 June 30, 2014 Organic change 3 % 4 % Foreign currency translation - - Acquisitions and divestitures, net (1 )% (1 )% Other 5 % 2 % Total % Change 7 % 5 % During the quarter ended June 30, 2014, organic sales growth at UTC Aerospace Systems (9%) and Otis (7%), was partially offset by organic sales contraction at UTC Climate, Controls, & Security (1%) and Sikorsky (1%). Organic sales growth at UTC Aerospace Systems was driven by higher commercial aerospace OEM and aftermarket sales volumes, while organic growth at Otis was primarily due to higher new equipment sales volume in the U.S. and China. During the six months ended June 30, 2014, all five business segments experienced organic sales growth, led by UTC Aerospace Systems (7%), Otis (6%), and Sikorsky (4%). Organic sales growth at UTC Aerospace Systems was driven by higher commercial aerospace OEM and aftermarket sales volumes. Organic growth at Otis was primarily due to higher new equipment sales volume in the U.S. and China, while organic growth at Sikorsky was led by higher international military and commercial aircraft sales volumes. Organic sales growth was also driven by Pratt & Whitney (2%) and UTC Climate, Controls & Security (1%). See the Segment Review section of Management's Discussion and Analysis for further discussion of segment performance. The sales decrease from net acquisitions and divestitures for the quarter and six months ended June 30, 2014 was primarily a result of the disposition of the Pratt & Whitney Power Systems business and portfolio transformation initiatives at UTC Climate, Controls & Security in 2013. The increase in "Other" in the quarter and six months ended June 30, 2014 is attributable to the cumulative adjustment to record sales of $830 million based upon the change in estimate arising out of the Amended Arrangements signed with the Canadian Government for the Cyclone helicopter program. Cost of Products and Services Sold Quarter Ended June 30, Six Months Ended June 30, (Dollars in millions) 2014 2013 2014 2013 Cost of products sold $ 10,182$ 8,712$ 18,263$ 16,560 Percentage of product sales 78.2 % 74.7 % 77.0 % 75.6 % Cost of services sold $ 2,749$ 2,840$ 5,358$ 5,457 Percentage of service sales 65.9 % 65.4 % 65.1 % 64.3 %



Total cost of products and services sold $ 12,931$ 11,552 $

23,621 $ 22,017 29



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The factors contributing to the percentage change year-over-year for the quarter and six months ended June 30, 2014 in total cost of products and services sold are as follows: Quarter Ended Six Months Ended June 30, 2014 June 30, 2014 Organic change 2 % 3 % Foreign currency translation - - Acquisitions and divestitures, net (1 )% (2 )% Restructuring - - Other 11 % 6 % Total % Change 12 % 7 % The organic increase in total cost of products and services sold in the quarter and six months ended June 30, 2014 was driven by the organic sales increase noted above, partially offset by the benefits of previous restructuring actions and lower commodity costs, particularly within UTC Climate, Controls & Security. The decrease in "Acquisitions and divestitures, net" in the quarter and six months ended June 30, 2014 is attributable to the disposition of the Pratt & Whitney Power Systems business and portfolio transformation initiatives at UTC Climate, Controls & Security in 2013. The increase in "Other" in the quarter and six months ended June 30, 2014 is attributable to the cumulative adjustment to record costs of $1,268 million based upon the change in estimate arising out of the Amended Arrangements signed with the Canadian Government for the Cyclone helicopter program. Gross Margin Quarter Ended June 30, Six Months Ended June 30, (Dollars in millions) 2014 2013 2014 2013 Gross margin $ 4,260$ 4,454$ 8,315$ 8,388 Percentage of net sales 24.8 % 27.8 % 26.0 % 27.6 % The 300 basis point decline in gross margin as a percentage of sales for the quarter ended June 30, 2014 is primarily due to the cumulative adjustment to record $830 million in sales and $1,268 million in cost of sales based upon the change in estimate arising out of the Amended Arrangements signed with the Canadian Government for the Cyclone helicopter program (390 basis points). This was partially offset by lower restructuring costs (40 basis points) and the benefits of previous restructuring actions and lower commodity costs and productivity gains at UTC Climate, Controls & Security (30 basis points). The 160 basis point decline in gross margin as a percentage of sales for the six months ended June 30, 2014 is primarily due to the previously noted cumulative adjustment to record $830 million in sales and $1,268 million in cost of sales on the Cyclone helicopter program (210 basis points). This was partially offset by the benefits of previous restructuring actions and lower commodity costs and productivity gains at UTC Climate, Controls & Security (30 basis points). Research and Development Quarter Ended June 30, Six Months Ended June 30, (Dollars in millions) 2014 2013 2014 2013 Company-funded $ 666$ 631$ 1,290$ 1,241 Percentage of net sales 3.9 % 3.9 % 4.0 % 4.1 % Customer-funded $ 641$ 550$ 1,164$ 1,093 Percentage of net sales 3.7 % 3.4 % 3.6 % 3.6 % Research and development spending is subject to the variable nature of program development schedules, and, therefore, year-over-year fluctuations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses. The year-over-year increase in company-funded research and development (6%) for the quarter ended June 30, 2014 is primarily related to higher research and development within the UTC Aerospace Systems segment related to several commercial aerospace programs. Customer-funded research and development increased (17%) primarily due to higher customer-funded spending at Pratt & Whitney on military (11%) and commercial (6%) programs. 30



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The year-over-year increase in company-funded research and development (4%) for the six months ended June 30, 2014 is primarily related to higher research and development within the UTC Aerospace Systems segment related to several commercial aerospace programs. Customer-funded research and development increased (6%) primarily due to higher customer-funded spending at Pratt & Whitney on military (8%) and commercial (6%) programs, partially offset by lower customer-funded spending at UTC Aerospace Systems, primarily on U.S. military and space programs (3%) and within U.S. Government programs at Sikorsky (5%). We expect company-funded research and development for the full year 2014 to remain consistent with 2013 levels. Selling, General and Administrative Quarter Ended June 30, Six Months Ended June 30, (Dollars in millions) 2014 2013 2014 2013 Selling, general and administrative expenses $ 1,623$ 1,737$ 3,219$ 3,364 Percentage of net sales 9.4 % 10.9 % 10.1 % 11.1 % Selling, general and administrative expenses declined 7% in the quarter ended June 30, 2014 due to lower restructuring costs (5%) and lower divestiture costs (1%). The benefit from savings from previous restructuring actions was partially offset by an increase in overhead expenses at Otis due primarily to continued investment in emerging markets. The 150 basis point year-over-year decrease as a percentage of sales reflects higher sales volume, lower restructuring costs and benefits from previous restructuring actions. Selling, general and administrative expenses declined 4% in the six months ended June 30, 2014 due to lower restructuring costs (2%) and lower divestiture costs (1%). The benefit from savings from previous restructuring actions was partially offset by higher overhead expenses at Otis. Other Income, Net Quarter Ended June 30, Six Months Ended June 30, (Dollars in millions) 2014 2013 2014 2013 Other income, net $ 384$ 421 $ 647 $ 730 Other income, net includes equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses as well as other ongoing and non-recurring items. The year-over-year decrease in other income, net in the quarter ended June 30, 2014 (9%) is a result of a charge to adjust the fair value of a Pratt & Whitney joint venture (14%), an impairment loss on a Sikorsky joint venture investment (6%) and the absence of a gain on the sale of Pratt & Whitney Power Systems (46%) recognized in the second quarter of 2013. These factors were partially offset by a gain on an agreement with a state taxing authority for the monetization of tax credits (53%), a gain on the sale of a Pratt & Whitney product line (4%), and by normal recurring operational activity. The year-over-year decrease in other income, net in the six months ended June 30, 2014 (11%) is a result of a charge to adjust the fair value of a Pratt & Whitney joint venture (8%); an impairment loss on a Sikorsky joint venture investment (4%); and the absence of: the gain on the sale of Pratt & Whitney Power Systems (26%) recognized in the second quarter of 2013, a gain on a settlement with an engine program partner (5%) recognized in the first quarter of 2013, and net gains related to the UTC Climate, Controls & Security portfolio transformation (5%). These factors were partially offset by a gain on an agreement with a state taxing authority for the monetization of tax credits (30%), higher licensing income (5%), a gain on the sale of a Pratt & Whitney product line (2%), and other normal recurring operational activity. Interest Expense, Net Quarter Ended June 30, Six Months Ended June 30, (Dollars in millions) 2014 2013 2014 2013 Interest expense $ 245$ 272$ 488$ 527 Interest income (39 ) (55 ) (57 ) (74 ) Interest expense, net $ 206$ 217$ 431$ 453 Average interest expense rate 4.3 % 4.5 % 4.3 % 4.2 % 31



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The decrease in interest expense in the quarter and six months ended June 30, 2014 is a result of lower average debt balances as a result of debt repayments made since June 30, 2013. The decrease in interest income in the quarter and six months ended June 30, 2014 reflects the absence of $36 million of favorable pre-tax interest adjustments related to settlements of the company's tax years prior to 2006 as well as the conclusion of certain IRS examinations of the 2009 and 2010 tax years that were recorded during the second quarter of 2013, which were partially offset by $21 million of favorable pre-tax interest adjustments, primarily related to the conclusion of the IRS's examination of the Company's 2009 and 2010 tax years recorded during the quarter ended June 30, 2014. Income Taxes Quarter Ended June 30, Six Months Ended June



30,

2014 2013 2014 2013 Effective tax rate 16.7 % 28.2 % 23.0 %



26.2 %

The decrease in the effective tax rate for the quarter ended June 30, 2014, primarily reflects the favorable non-cash income tax impact of $253 million related to the conclusion of the IRS's examination of the Company's 2009 - 2010 tax years, as well as the conclusion of the State of Connecticut's examination of the Company's 2010 - 2012 tax years, both of which were recorded in the second quarter of 2014. The decrease in the effective tax rate for the six months ended June 30, 2014 includes the items noted above, and is partially offset by the absence of the favorable tax impact of $95 million recorded in the first quarter of 2013, associated with the legislative corporate tax extenders enacted in January 2013, as part of the American Taxpayer Relief Act of 2012. We estimate our full year annual effective income tax rate in 2014 to be approximately 30%, absent one-time adjustments. We anticipate some variability in the tax rate for the remainder of 2014.



Net Income Attributable to Common Shareowners from Continuing Operations

Quarter Ended June 30, Six Months Ended June 30, (Dollars in millions, except per share amounts) 2014 2013 2014 2013 Income from continuing operations attributable to common shareowners $ 1,680$ 1,552$ 2,893$ 2,822 Diluted earnings per share from continuing operations attributable to common shareowners $ 1.84$ 1.70 $



3.16 $ 3.09

Net income attributable to common shareowners from continuing operations for the quarter ended June 30, 2014 includes restructuring charges, net of tax benefit, of $38 million as well as a net benefit from non-recurring items, net of tax expense of $37 million. The effect on diluted earnings per share for the quarter ended June 30, 2014 of restructuring charges was $0.04 per share, offset by a net $0.04 benefit from non-recurring items. The impact of foreign currency translation and hedging generated a favorable effect of $0.03 per diluted share on our operational performance in the quarter ended June 30, 2014. Net income attributable to common shareowners from continuing operations for the six months ended June 30, 2014 includes restructuring charges, net of tax benefit, of $121 million as well as a net benefit from non-recurring items, net of tax expense of $37 million. The effect on diluted earnings per share for the six months ended June 30, 2014 of restructuring charges was $0.13 per share, offset by a net $0.04 benefit from non-recurring items. The impact of foreign currency translation and hedging generated a favorable effect of $0.03 per diluted share on our operational performance in the six months ended June 30, 2014. Restructuring Costs Six Months Ended June 30, (Dollars in millions) 2014 2013 Restructuring costs $ 180 $ 240 Restructuring actions are an essential component of our operating margin improvement efforts and relate to both existing operations and those recently acquired. We expect to incur restructuring costs in 2014 of approximately $375 million, including trailing costs related to prior actions associated with our continuing cost reduction efforts and the integration of acquisitions. The expected adverse impact on earnings in 2014 from anticipated additional restructuring costs is expected to be offset by the beneficial impact from gains and other items that are outside the normal operating activities of the Company. Although no 32



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specific plans for significant other actions have been finalized at this time, 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. As described below, the charges incurred in the six months ended June 30, 2014 primarily relate to actions initiated during 2014 and 2013, while the charges incurred in the six months ended June 30, 2013 primarily relate to actions initiated during 2013 and 2012. 2014 Actions. During the six months ended June 30, 2014, we recorded net pre-tax restructuring charges of $151 million relating to ongoing cost reduction actions initiated in 2014. The charges include severance related to workforce reductions and asset write-downs and facility exit and lease termination costs related to the consolidation of field and manufacturing operations. We are targeting the majority of the remaining workforce and facility related cost reduction actions for completion during 2014. Approximately 60% of the total pre-tax charge will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the six months ended June 30, 2014, we had cash outflows of approximately $32 million related to the 2014 actions. We expect to incur additional restructuring and other charges of $88 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $180 million annually, of which, approximately $9 million was realized during the six months ended June 30, 2014. 2013 Actions. During the quarters and six months ended June 30, 2014 and 2013, we recorded net pre-tax restructuring charges of $33 million and $202 million, respectively, for actions initiated in 2013. The 2013 actions relate to ongoing cost reduction efforts, including severance related to workforce reductions and asset write-downs and facility exit and lease termination costs related to the consolidation of field and manufacturing operations. We are targeting to complete in 2014 the majority of the remaining workforce and all facility related cost reduction actions initiated in 2013. Approximately 80% of the total pre-tax charge will require cash payments, which we have and expect to continue to fund with cash generated from operations. During the six months ended June 30, 2014, we had cash outflows of approximately $87 million related to the 2013 actions. We expect to incur additional restructuring charges of $25 million to complete these actions. We expect recurring pre-tax savings to increase over the two-year period subsequent to initiating the actions to approximately $425 million annually, of which, approximately $189 million was realized during the six months ended June 30, 2014. For additional discussion of restructuring, see Note 8 to the Condensed Consolidated Financial Statements. Segment Review Segments are generally based on the management structure of the businesses and the grouping of similar operating companies, where each management organization has general operating autonomy over diversified products and services. Adjustments to reconcile segment reporting to the consolidated results for the quarters and six months ended June 30, 2014 and 2013 are included in "Eliminations and other" below, which also includes certain smaller subsidiaries. We attempt to quantify material cited factors within our discussion of the results of each segment whenever those factors are determinable. However, in some instances, the factors we cite within our segment discussion are based upon input measures or qualitative information that does not lend itself to quantification when discussed in the context of the financial results measured on an output basis and are not, therefore, quantified in the below discussions. Commercial Businesses Our commercial businesses generally serve customers in the worldwide commercial and residential property industries, and UTC Climate, Controls & Security also serves customers in the commercial and transport refrigeration industries. Sales in the commercial businesses are influenced by a number of external factors, including fluctuations in residential and commercial construction activity, regulatory changes, interest rates, labor costs, foreign currency exchange rates, customer attrition, raw material and energy costs, credit markets and other global and political factors. UTC Climate, Controls & Security's financial performance can also be influenced by production and utilization of transport equipment, and, in the case of its residential business, weather conditions. To ensure adequate supply of products in the distribution channel, UTC Climate, Controls & Security customarily offers its customers incentives to purchase products. The principal incentive program provides reimbursements to distributors for offering promotional pricing on UTC Climate, Controls & Security products. We account for incentive payments made as a reduction to sales. Within the UTC Climate, Controls & Security segment, North American residential heating, ventilation, and air conditioning (HVAC) orders declined 2% in the quarter ended June 30, 2014 after increasing 19% in the first quarter of 2014 33



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when distributors ordered ahead of the summer cooling season. Global commercial HVAC orders increased 3% with increases in Asia (4%), North America (3%) and Europe (2%). Within the Otis segment, new equipment orders increased 1% in the quarter ended June 30, 2014 with growth in North America (43%) and Europe (9%). New equipment orders in China were consistent with the prior year, after increasing 39% in the quarter ended June 30, 2013. Order growth rates in China are moderating to levels consistent with our expectations for the year. Summary performance for each of the commercial businesses for the quarters ended June 30, 2014 and 2013 was as follows: Otis UTC Climate, Controls & Security (Dollars in millions) 2014 2013 Change 2014 2013 Change Net Sales $ 3,365$ 3,138 7 % $ 4,429$ 4,543 (3 )% Cost of Sales 2,248 2,102 7 % 3,041 3,206 (5 )% 1,117 1,036 8 % 1,388 1,337 4 % Operating Expenses and Other 424 386 10 % 573 585 (2 )% Operating Profits $ 693$ 650 7 % $ 815$ 752 8 % Operating Profit Margins 20.6 % 20.7 % 18.4 % 16.6 %



Summary performance for each of the commercial businesses for the six months ended June 30, 2014 and 2013 was as follows:

Otis UTC Climate, Controls & Security (Dollars in millions) 2014 2013 Change 2014 2013 Change Net Sales $ 6,320$ 5,952 6 % $ 8,280$ 8,380 (1 )% Cost of Sales 4,256 3,974 7 % 5,767 5,960 (3 )% 2,064 1,978 4 % 2,513 2,420 4 % Operating Expenses and Other 801 753 6 % 1,161 1,148 1 % Operating Profits $ 1,263$ 1,225 3 % $ 1,352$ 1,272 6 % Operating Profit Margins 20.0 % 20.6 % 16.3 % 15.2 % Otis - Quarter Ended June 30, 2014 Compared with Quarter Ended June 30, 2013 Factors contributing to total % Change Organic / FX Acquisitions / Restructuring Operational Translation Divestitures, net Costs Other Net Sales 7 % - - - - Cost of Sales 8 % (1 )% - - - Operating Profits 4 % 1 % - 3 % (1 )% Organic sales increased in the quarter (7%) due to higher new equipment sales primarily in China (3%), the Americas (3%) and the Middle East (1%). The operational profit increase in the quarter (4%) was due to an increase in new equipment contribution (8%) partially offset by a decrease in service contribution (1%) due primarily to continued pricing pressures and higher overhead expenses (2%) due primarily to continued investment in emerging markets. Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013 Factors contributing to total % Change Organic / FX Acquisitions / Restructuring Operational Translation Divestitures, net Costs Other Net Sales 6 % (1 )% 1 % - - Cost of Sales 8 % (1 )% - - - Operating Profits 3 % - - 1 % (1 )% 34



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Organic sales increased (6%) due to higher new equipment sales primarily in China (2%), the Americas (2%) and the Middle East (1%). Operational profit increased (3%) due primarily to an increase in new equipment contribution (5%) partially offset by higher overhead expenses (2%) due primarily to continued investment in emerging markets, and continued pricing pressures. UTC Climate, Controls & Security - Quarter Ended June 30, 2014 Compared with Quarter Ended June 30, 2013 Factors contributing to total % Change Organic / FX Acquisitions / Restructuring Operational Translation Divestitures, net Costs Other Net Sales (1 )% - (2 )% - - Cost of Sales (3 )% 1 % (3 )% - - Operating Profits 8 % - - (1 )% 1 % Organic sales decreased by 1% primarily driven by decreases in Americas and Asia (combined 1%) as a result of slower backlog conversion for commercial projects. The decrease in "Acquisitions and divestitures, net" (2%) reflects the year over year impact of divestitures completed in the preceding twelve months associated with UTC Climate, Controls & Security's ongoing portfolio transformation. The 8% operational profit increase was driven largely by the benefits of restructuring actions and cost productivity (combined 5%), favorable commodity costs (2%) and higher equity income (2%) partially offset by the volume decreases noted above (1%). Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013 Factors contributing to total % Change Organic / FX Acquisitions / Restructuring Operational Translation Divestitures, net Costs Other Net Sales 1 % - (2 )% - - Cost of Sales (1 )% - (3 )% 1 % - Operating Profits 11 % - - (2 )% (3 )% Organic sales increased by 1% primarily reflecting growth in Americas (1%) driven by the U.S. residential HVAC business. The decrease in "Acquisitions and divestitures, net" (2%) reflects the year over year impact of divestitures completed in the preceding twelve months associated with UTC Climate, Controls & Security's ongoing portfolio transformation. The 11% operational profit increase was driven largely by the benefits of restructuring actions and cost productivity (combined 4%), positive net volume, mix and price (combined 3%), favorable commodity costs (2%) and higher equity income (2%). The 3% decrease in "Other" primarily reflects net year-over-year impact from UTC Climate, Controls & Security's portfolio transformation. Aerospace Businesses The aerospace businesses serve both commercial and government aerospace customers. In addition, Pratt & Whitney also serves customers in the industrial markets. 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. Airline traffic, as measured by RPMs, grew over 6% in the first five months of 2014. We continue to benefit from a strong airline industry with airlines' profitability forecasted by third party analysts to be almost $18 billion in 2014. Commercial aerospace spares orders at UTC Aerospace Systems increased 28% in the second quarter of 2014 as compared to the same period of 2013 on higher provisioning orders. Spares orders within Pratt & Whitney's large commercial engine business declined 6% in the second quarter of 2014 after increasing 18% in the second quarter of the prior year. Lower U.S. 35



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Government defense spending levels have constrained military sales growth, and we expect U.S. Government deficit reduction measures to continue to adversely affect our military aerospace businesses in 2014. We record changes in contract estimates using the cumulative catch-up method in accordance with the Revenue Recognition Topic of the FASB ASC. Partially offsetting the unfavorable impact of the revision in estimate on the Cyclone helicopter program discussed above in the Business Overview, operating profit included significant net favorable changes in aerospace contract estimates of $9 million and $64 million in the quarter and six months ended June 30, 2014, respectively. Favorable contract adjustments recorded at Pratt & Whitney were offset by unfavorable adjustments at Sikorsky. Summary performance for each of the aerospace businesses for the quarters ended June 30, 2014 and 2013 was as follows: Pratt & Whitney UTC Aerospace Systems Sikorsky (Dollars in millions) 2014 2013 Change 2014 2013 Change 2014 2013 Change Net Sales $ 3,592$ 3,624 (1 )% $ 3,636$ 3,321 9 % $ 2,384$ 1,566 52 % Cost of Sales 2,717 2,798 (3 )% 2,585 2,362



9 % 2,560 1,274 101 %

875 826 6 % 1,051 959 10 % (176 ) 292 (160 )% Operating Expenses & Other 443 259 71 % 449 460 (2 )% 141 136 4 % Operating Profits $ 432$ 567 (24 )% $ 602$ 499 21 % $ (317 )$ 156 (303 )% Operating Profit Margins 12.0 % 15.6 % 16.6 % 15.0 % (13.3 )% 10.0 %



Summary performance for each of the aerospace businesses for the six months ended June 30, 2014 and 2013 was as follows:

Pratt & Whitney UTC Aerospace Systems Sikorsky (Dollars in millions) 2014 2013 Change 2014 2013 Change 2014 2013 Change Net Sales $ 6,921$ 7,026 (1 )% $ 7,086$ 6,584 8 % $ 3,745$ 2,815 33 % Cost of Sales 5,263 5,434 (3 )% 5,049 4,694



8 % 3,715 2,313 61 %

1,658 1,592 4 % 2,037 1,890 8 % 30 502 (94 )% Operating Expenses & Other 838 619 35 % 845 890 (5 )% 261 256 2 % Operating Profits $ 820$ 973 (16 )% $ 1,192$ 1,000 19 % $ (231 )$ 246 (194 )% Operating Profit Margins 11.8 % 13.8 % 16.8 % 15.2 % (6.2 )% 8.7 % Pratt & Whitney - Quarter Ended June 30, 2014 Compared with Quarter Ended June 30, 2013 Factors contributing



to total % Change

Organic / FX



Acquisitions / Restructuring

Operational Translation* Divestitures, net Costs Other Net Sales - - (1 )% - - Cost of Sales (1 )% (1 )% (1 )% (1 )% 1 % Operating Profits 2 % 3 % (1 )% 16 % (44 )% Organic sales remain unchanged during the second quarter of 2014 as higher commercial aftermarket sales (6%) were offset by lower military business (4%) and commercial engine sales (2%). The decrease in "Acquisitions and divestitures, net" (1%) reflects the divestiture of Pratt & Whitney Power Systems in the second quarter of 2013. Pratt & Whitney's operating profit benefited from lower pension costs and restructuring savings across its businesses. The operating profit increase (2%) was due to the net volume increase (6%), mentioned above, and favorable contract performance (3%), partially offset by the absence of a benefit from a commercial contract closeout (7%) that was recorded in the second quarter of 2013. The decrease in "Acquisitions and divestitures, net" (1%) reflects the divestiture of Pratt & Whitney Power Systems in the second quarter of 2013. "Other" reflects a loss to adjust the fair value of a joint venture investment (11%), the impairment of assets related to a joint venture (4%), and the absence of the gain on the sale of Pratt & Whitney Power Systems (34%), partially offset by a gain on the sale of a product line (3%). 36



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Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013

Factors contributing to total % Change Organic / FX Acquisitions / Restructuring Operational Translation* Divestitures, net Costs Other Net Sales 2 % - (3 )% - - Cost of Sales 1 % (1 )% (4 )% - 1 % Operating Profits 3 % 3 % (2 )% 5 % (25 )% * For Pratt & Whitney only, the transactional impact of foreign exchange hedging at Pratt & Whitney Canada has been netted against the translational foreign exchange impact for presentation purposes in the above tables. For all other segments, these foreign exchange transactional impacts are included within the organic/operational caption in their respective tables. Due to its potential significance to Pratt & Whitney's overall operating results, we believe it is useful to segregate the foreign exchange transactional impact in order to clearly identify the underlying financial performance. The organic sales increase (2%) primarily reflects higher commercial aftermarket sales (5%) offset by lower military sales (3%). The decrease in "Acquisitions and divestitures, net" (3%) reflects the divestiture of Pratt & Whitney Power Systems in the second quarter of 2013. Pratt & Whitney's operating profit benefited from lower pension costs and restructuring savings across its businesses. The operating profit increase (3%) was due to the net volume increase (8%), mentioned above, and favorable contract performance (5%), partially offset by the absence of a settlement with an engine program partner (4%), and a commercial contract closeout (4%), each of which was recorded in the six months ended June 30, 2013, and a decline in contract termination benefits (2%). The decrease in "Acquisitions and divestitures, net" (2%) reflects the divestiture of Pratt & Whitney Power Systems in the second quarter of 2013. "Other" reflects a loss to adjust the fair value of a joint venture investment (6%), the impairment of assets related to a joint venture (2%), and the absence of the gain on the sale of Pratt & Whitney Power Systems (20%), partially offset by a gain on the sale of a product line (2%). UTC Aerospace Systems - Quarter Ended June 30, 2014 Compared with Quarter Ended June 30, 2013 Factors contributing to total % Change Organic / FX Acquisitions / Restructuring Operational Translation Divestitures, net Costs Other Net Sales 9 % - - - - Cost of Sales 9 % - - - - Operating Profits 13 % 2 % - 6 % - The organic sales growth (9%) primarily reflects an increase in commercial aerospace OEM and commercial aftermarket sales volumes (7%) and the favorable sales impact of a customer contract settlement (2%), partially offset by lower military OEM and aftermarket volume (1%). The increase in operational profit (13%) primarily reflects the profit contribution from the volume changes noted above (9%) and the favorable impact of a customer contract settlement (8%), partially offset by higher research and development costs (7%), and lower income from licensing agreements (5%). The remainder of the increase in operational profit is primarily due to lower selling, general and administrative expenses including lower pension expense. Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013 Factors contributing to total % Change Organic / FX Acquisitions / Restructuring Operational Translation Divestitures, net Costs Other Net Sales 7 % 1 % - - - Cost of Sales 7 % 1 % - - - Operating Profits 15 % 1 % - 3 % - The organic sales growth (7%) primarily reflects an increase in commercial aerospace OEM and commercial aftermarket sales volumes (7%) and the favorable sales impact of a customer contract settlement (1%), partially offset by lower military OEM and aftermarket volume (1%). 37



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The increase in operational profit (15%) primarily reflects the profit contribution from the volume changes noted above (9%) and the favorable impact of a customer contract settlement (4%), partially offset by higher research and development costs (5%). The remainder of the increase in operational profit is primarily due to lower selling, general and administrative expenses including lower pension expense. Sikorsky - Quarter Ended June 30, 2014 Compared with Quarter Ended June 30, 2013 Factors contributing to total % Change Organic / FX Acquisitions / Restructuring Operational Translation Divestitures, net Costs Other Net Sales (1 )% - - - 53 % Cost of Sales 1 % - - - 100 % Operating Profits (10 )% - - 6 % (299 )% The organic sales decrease (1%) reflects lower sales volume to the U.S. Government (9%), lower volume on customer funded development programs (2%) and lower military and commercial aftermarket sales (2%). These decreases were partially offset by an increase in both international military sales volume (11%) and commercial aircraft sales volume (2%). "Other" reflects a cumulative adjustment to record $830 million in sales and $1,268 million in cost of sales based upon the change in estimate for the Amended Arrangements signed with the Canadian Government for the Cyclone Helicopter program. Sikorsky's operating profit benefited from lower pension costs and restructuring savings across its businesses. The operational profit decrease (10%) was driven by lower profitability from U.S. Government contracts (22%) due to unfavorable contract performance, lower profits from customer funded development programs (16%) and lower commercial aftermarket profitability (8%). These decreases were partially offset by higher international military profitability (16%), lower research and development expense (6%), and higher profitability in commercial aircraft (3%) and military aftermarket (12%). "Other" reflects a cumulative adjustment to record losses of $438 million based upon the change in estimate for the Amended Arrangements signed with the Canadian Government for the Cyclone Helicopter program and an approximately $28 million charge for the impairment of a Sikorsky joint venture investment. Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013 Factors contributing to total % Change Organic / FX Acquisitions / Restructuring Operational Translation Divestitures, net Costs Other Net Sales 4 % - - - 29 % Cost of Sales 5 % - - 1 % 55 % Operating Profits (3 )% - - (1 )% (190 )% The organic sales increase (4%) reflects higher international sales volume (9%), higher commercial sales (3%), and higher military aftermarket sales (1%). These increases were offset partially by lower sales volume to the U.S. Government (6%) and lower volume on customer funded development programs (3%). "Other" reflects a cumulative adjustment to record $830 million in sales and $1,268 million in cost of sales based upon the change in estimate for the Amended Arrangements signed with the Canadian Government for the Cyclone Helicopter program. Sikorsky's operating profit benefited from lower pension costs and restructuring savings across its businesses. The operational profit decrease (3%) was driven by lower profitability from U.S. Government contracts (15%), lower profits from customer funded development programs (15%) and lower commercial aftermarket profitability (7%). These decreases were partially offset by higher profitability of international military (10%) and military aftermarket (17%) and lower research and development costs (8%). "Other" reflects a cumulative adjustment to record $438 million in losses based upon the change in estimate for the Amended Arrangements signed with the Canadian Government for the Cyclone Helicopter program and an approximately $28 million charge for the impairment of a Sikorsky joint venture investment. 38



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Table of Contents Eliminations and other - Net Sales Operating Profits Quarter Ended June 30, Quarter Ended June 30, (Dollars in millions) 2014 2013 2014 2013 Eliminations and other $ (215 )$ (186 )$ 249$ 4 General corporate expenses - - (119 ) (121 ) Net Sales Operating Profits Six Months Ended June 30, Six Months Ended June 30, (Dollars in millions) 2014 2013 2014 2013 Eliminations and other $ (416 )$ (352 ) $ 288 $ 25 General corporate expenses - - (231 ) (228 ) 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 changes in sales for the quarter and six months ended June 30, 2014, as compared with the same periods of 2013, reflect an increase in the amount of inter-segment sales eliminations. The year-over-year increases in operating profit for the quarter and six months ended June 30, 2014, as compared with the same periods of 2013, reflect lower divestiture costs in 2014 and an approximately $220 million gain on an agreement with a state taxing authority for the monetization tax credits. LIQUIDITY AND FINANCIAL CONDITION

December 31, June 30, (Dollars in millions) June 30, 2014 2013 2013 Cash and cash equivalents $ 4,962$ 4,619$ 4,909 Total debt 20,072 20,241 21,656 Net debt (total debt less cash and cash equivalents) 15,110 15,622 16,747 Total equity 35,193 33,219 28,369 Total capitalization (debt plus equity) 55,265 53,460 50,025 Net capitalization (debt plus equity less cash and cash equivalents) 50,303 48,841 45,116 Debt to total capitalization 36 % 38 % 43 % Net debt to net capitalization 30 % 32 % 37 % We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows of continuing operations, which, after netting out capital expenditures, we are targeting to be between 90% and 100% of net income attributable to common shareowners from continuing operations. 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. The global economic outlook remains positive, with expected 2014 global GDP growth of approximately 2.5% to 3.0% led by the U.S. and China, with Europe, the United Kingdom and India strengthening, partially offset by some slowing in Japan, Brazil and Russia. In the U.S., consumer confidence and commercial construction have shown continued growth, while commercial construction in Europe has returned to modest growth and China has shown solid but slowing growth. Strengthening air traffic and airline profitability have offset continued weakness in defense spending. In light of these circumstances, we continue to assess our current business and closely monitor the impact on our customers and suppliers, and have determined that overall there was not a significant adverse impact on our financial position, results of operations or liquidity during the first six months of 2014. Our domestic pension funds experienced a positive return on assets of 8.54% during the first six months of 2014. Approximately 89% of these domestic pension plans' funds are invested in readily-liquid investments, including equity, fixed income, asset-backed receivables and structured products. The balance of these domestic pension plans' funds (11%) is invested in less-liquid but market-valued investments, including real estate and private equity. Across our global pension plans, the absence of prior pension investment losses, impact of a higher discount rate, and the positive returns experienced during 2013 are expected to result in decreased pension expense in 2014 of approximately $500 million as compared to 2013. 39



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Our strong debt ratings and financial position have historically 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. On April 1, 2014, we redeemed all remaining outstanding 2016 Goodrich 6.290% notes, representing approximately $188 million in aggregate principal, under our redemption notice issued on February 28, 2014. We expect full year 2014 debt repayments to be approximately $1 billion. On September 27, 2013, we redeemed all remaining outstanding 2021 Goodrich 3.600% notes, representing $294 million in aggregate principal, under our redemption notice issued on August 28, 2013. On August 23, 2013, we redeemed all remaining outstanding 2019 Goodrich 6.125% notes, representing $202 million in aggregate principal, under our redemption notice issued on July 24, 2013. On June 24, 2013 we redeemed all remaining outstanding 2015 UTC 1.200% Senior Notes, representing $327 million in aggregate principal, under our redemption notice issued on May 24, 2013. On May 7, 2013, we commenced cash tender offers for two series of outstanding notes issued by Goodrich and the 2015 UTC 1.200% Senior Notes. A total of $874 million principal amount of all notes subject to the tender offers, and $36 million of the fair value adjustment related to the notes assumed in the Goodrich acquisition, were repaid, including approximately $103 million principal amount of the 2016 Goodrich 6.290% notes, approximately $98 million principal amount of the 2019 Goodrich 6.125% notes, and approximately $674 million principal amount of the 2015 UTC 1.200% Senior Notes. Total payments under these tender offers were approximately $935 million including principal, premium and interest. Tax payments related to discontinued operations, primarily the December 2012 sale of the legacy Hamilton Sundstrand Industrial businesses, were approximately $715 million for the six months ended June 30, 2013. We do not expect tax payments in 2014 related to these discontinued operations to be significant. At June 30, 2014, 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 May 2019. As of June 30, 2014, there were no borrowings under either of these revolving credit agreements. The undrawn portions of our revolving credit agreements are also available to serve as backup facilities for the issuance of commercial paper. As of June 30, 2014, our maximum commercial paper borrowing authority was $4 billion. We use our commercial paper borrowings for general corporate purposes, including the funding of acquisitions and repurchases of our common stock. We continue to have access to the commercial paper markets and our existing credit facilities, and continue to expect strong generation of operating cash flows. While the impact of market volatility cannot be predicted, we believe we have sufficient operating flexibility, cash reserves and funding sources to maintain adequate amounts of liquidity and to meet our future operating cash needs. Given our extensive international operations, most of our cash is denominated in foreign currencies and held outside of the U.S. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to capital controls; however, those balances are generally available without legal restrictions to fund ordinary business operations. With few exceptions, U.S. income taxes have not been provided on undistributed earnings of our international subsidiaries. Our intention is to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so. On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions or divestitures or other legal obligations. As of June 30, 2014 and December 31, 2013, the amount of such restricted cash was approximately $61 million and $47 million, respectively. We believe our future operating cash flows will be sufficient to meet our future operating cash needs. Further, our ability to obtain debt or equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate. Cash Flow - Operating Activities of Continuing Operations


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