EX-13 11 a2015-12x3110xkexhibit13.htm EXCERPTS FROM UTCS 2015 ANNUAL REPORT TO SHAREOWNERS FOR THE YEAR ENDED DECEMBER Exhibit


Exhibit 13
Five-Year Summary
(dollars in millions, except per share amounts)
2015
 
2014
 
2013
 
2012
 
2011
For The Year
 
 
 
 
 
 
 
 
 
Net sales
$
56,098

 
$
57,900

 
$
56,600

 
$
51,101

 
$
48,526

Research and development
2,279

 
2,475

 
2,342

 
2,193

 
1,782

Restructuring costs
396

 
354

 
431

 
537

 
262

Net income from continuing operations 1
4,356

 
6,468

 
5,655

 
4,692

 
4,651

Net income from continuing operations attributable to common shareowners 1
3,996

 
6,066

 
5,265

 
4,337

 
4,265

 
 
 
 
 
 
 
 
 
 
Basic earnings per share—Net income from continuing operations attributable to common shareowners
4.58

 
6.75

 
5.84

 
4.84

 
4.78

Diluted earnings per share—Net income from continuing operations attributable to common shareowners
4.53

 
6.65

 
5.75

 
4.78

 
4.70

Cash dividends per common share
2.56

 
2.36

 
2.20

 
2.03

 
1.87

 
 
 
 
 
 
 
 
 
 
Average number of shares of Common Stock outstanding:
 
 
 
 
 
 
 
 
 
Basic
873

 
898

 
901

 
895

 
892

Diluted
883

 
912

 
915

 
907

 
907

Cash flows provided by operating activities of continuing operations
6,698

 
6,994

 
7,314

 
5,968

 
6,139

Capital expenditures 2, 3
1,652

 
1,594

 
1,569

 
1,295

 
837

Acquisitions, including debt assumed
556

 
530

 
151

 
18,620

 
372

Repurchases of Common Stock 4
10,000

 
1,500

 
1,200

 

 
2,175

Dividends paid on Common Stock (excluding ESOP)
2,184

 
2,048

 
1,908

 
1,752

 
1,602

 
 
 
 
 
 
 
 
 
 
At Year End
 
 
 
 
 
 
 
 
 
Working capital 3, 5
$
4,088

 
$
5,921

 
$
5,733

 
$
3,948

 
$
6,376

Total assets 3
87,484

 
86,338

 
85,029

 
83,499

 
53,694

Long-term debt, including current portion 3, 6 
19,499

 
19,575

 
19,744

 
22,603

 
9,574

Total debt 3, 6 
20,425

 
19,701

 
20,132

 
23,106

 
10,204

Total debt to total capitalization 6 
41
%
 
38
%
 
38
%
 
46
%
 
31
%
Total equity 6, 7
28,844

 
32,564

 
33,219

 
27,069

 
22,820

Number of employees 8
197,200

 
211,500

 
212,400

 
218,300

 
199,900

Note 1
The decrease in net income from continuing operations and net income from continuing operations attributable to common shareowners reflects a $867 million pretax charge as a result of a settlement with the Canadian government, a $295 million pretax charge from customer contract negotiations at UTC Aerospace Systems, and a $237 million pretax charge related to pending and future asbestos claims.
Note 2
Capital expenditures increased from 2012 through 2015 as we expanded capacity to meet expected demand within our aerospace businesses for the next generation engine platforms.
Note 3
Excludes assets and liabilities of discontinued operations held for sale, for all periods presented.
Note 4
Share repurchases in 2015 include share repurchases under accelerated repurchase agreements of $2.6 billion in the first quarter of 2015 and $6.0 billion in the fourth quarter of 2015. In connection with the acquisition of Goodrich, repurchases of common stock under our share repurchase program were suspended for 2012. We resumed our share repurchase program in 2013.
Note 5
The decline in working capital in 2015, as compared with 2014, reflects the reclassification of current deferred tax assets to non-current assets and current deferred tax liabilities to non-current liabilities in 2015 in connection with the adoption of Accounting Standards update 2015-17.
Note 6
The decrease in the 2013 debt to total capitalization ratio, as compared to 2012, reflects the repayment of approximately $2.9 billion of long-term debt, most of which was used to finance the acquisition of Goodrich. The increase in the 2012 debt to total capitalization ratio, as compared to 2011, reflects the issuance of $9.8 billion in long-term debt, $1.1 billion in equity units and the assumption of approximately $3 billion in long-term debt in connection with the acquisition of Goodrich.
Note 7
The decrease in total equity in 2015, as compared with 2014, reflects the sale of Sikorsky and the share repurchase program. The decrease in total equity in 2014, as compared with 2013, reflects unrealized losses of approximately $2.9 billion, net of taxes, associated with the effect of market conditions on our pension plans.
Note 8
The decrease in employees in 2015, as compared with 2014, primarily reflects the 2015 divestiture of Sikorsky.

1




Management's Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OVERVIEW
We are a global provider of high technology products and services to the building systems and aerospace industries. Our operations for the periods presented herein are classified into four principal business segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, and UTC Aerospace Systems. Otis and UTC Climate, Controls & Security are referred to as the "commercial businesses," while Pratt & Whitney, and UTC Aerospace Systems are referred to as the "aerospace businesses." UTC Building & Industrial Systems was an organizational structure previously formed that combined Otis and UTC Climate, Controls & Security for certain operational purposes. On September 10, 2015, we announced a change in organizational structure and now operate Otis and UTC Climate, Controls & Security as stand-alone businesses that are no longer combined within UTC Building & Industrial Systems. 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. On November 6, 2015, we completed the sale of the Sikorsky Aircraft business (Sikorsky) to Lockheed Martin Corp. for $9,083 million in cash, subject to customary post-closing working capital and net debt adjustments. The results of operations and the related cash flows of Sikorsky have been reclassified to Discontinued Operations in our Consolidated Statements of Operations and Cash Flows for all periods presented. The assets and liabilities of Sikorsky have been reclassified to Assets held for sale and Liabilities held for sale, respectively, in our Consolidated Balance Sheet as of December 31, 2014.
The commercial businesses generally serve customers in the worldwide commercial and residential property industries, with UTC Climate, Controls & Security also serving customers in the commercial and transport refrigeration industries. The aerospace businesses serve commercial and government aerospace customers in both the original equipment and aftermarket parts and services markets. Our consolidated net sales were derived from the commercial and aerospace businesses as follows:
 
2015
 
2014
 
2013
Commercial and industrial
52
%
 
52
%
 
53
%
Military aerospace and space
12
%
 
13
%
 
13
%
Commercial aerospace
36
%
 
35
%
 
34
%
 
100
%
 
100
%
 
100
%
Our consolidated net sales were derived from original equipment manufacturing (OEM) and aftermarket parts and services as follows:
 
2015
 
2014
 
2013
OEM
56
%
 
56
%
 
55
%
Aftermarket parts and services
44
%
 
44
%
 
45
%
 
100
%
 
100
%
 
100
%
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 OEM and extensive related aftermarket parts and services in both our commercial and aerospace businesses. Our business mix also reflects the combination of shorter cycles at UTC Climate, Controls & Security and in our commercial aerospace spares businesses, and longer cycles at Otis and in our aerospace OEM and aftermarket maintenance businesses. Our customers include companies in both the public and private sectors, and our businesses reflect an extensive geographic diversification that has evolved with the continued globalization of world economies. The composition of net sales from outside the U.S., including U.S. export sales, as a percentage of total segment sales, is as follows:
(dollars in millions)
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Europe
$
10,945

 
$
12,587

 
$
12,589

 
19
%
 
22
%
 
22
%
Asia Pacific
8,425

 
8,746

 
8,626

 
15
%
 
15
%
 
15
%
Other Non-U.S.
5,584

 
5,511

 
5,269

 
10
%
 
9
%
 
9
%
U.S. Exports
9,741

 
10,276

 
10,459

 
17
%
 
18
%
 
18
%
International segment sales
$
34,695

 
$
37,120

 
$
36,943

 
61
%
 
64
%
 
64
%
As part of our growth strategy, we invest in businesses in certain countries that carry high levels of currency, political and/or economic risk, such as Argentina, Brazil, China, India, Mexico, Russia, South Africa and countries in the Middle East. As of December 31, 2015, the net assets in any one of these countries did not exceed 7% of consolidated shareowners' equity.

2




U.S. economic expansion continued to drive global growth in 2015 and contributed to UTC's results for the year. Notwithstanding recent volatility in the financial markets, lower gasoline prices and unemployment rates, favorable new construction trends, and strength in the U.S. housing market all provide positive indicators as we enter 2016. Economic recovery in Europe in 2015 was uneven, but we expect the European economic environment to continue to improve slowly during the coming year. Although emerging markets have historically led global growth relative to advanced and developing countries, slowing growth rates in China, and contraction in Russia and Brazil, have tempered growth expectations for emerging markets. UTC's sales to customers in mainland China were $4.8 billion in 2015 and 2014, or 8.6% and 8.3% of total UTC sales, respectively. While we continue to expect overall economic output in China to moderate as it implements reform and rebalances its economy, long-term growth prospects remain strong for China.
Organic sales growth was 1% in 2015 representing sales increases in commercial aerospace aftermarket and in the Americas at our commercial businesses, partially offset by declines in military OEM and aftermarket sales. While we expect foreign currency will continue to have an adverse effect on 2016 results, we expect organic sales growth in 2016 to be 1% to 3%. Although we expect an increase in organic growth and operating profit growth, we also continue to invest in new platforms and new markets to position the Company for long-term growth, while remaining focused on structural cost reduction, operational improvements and disciplined capital redeployment. These actions position us for future earnings growth as the global economy continues to strengthen.
As discussed below in "Results of Operations," operating profit in both 2015 and 2014 includes the impact from activities that are not expected to recur often or that are not otherwise reflective of the underlying operations, such as the adverse impact of asset impairment charges, unfavorable impact of contract negotiations with customers, the beneficial impact of net gains from business divestiture activities, and other significant non-recurring and non-operational items discussed within the Other Income section of Results of Operations, below. Our earnings growth strategy contemplates earnings from organic sales growth, including growth from new product development and product improvements, structural cost reductions, operational improvements, and incremental earnings from our investments in acquisitions. Our investments in businesses in 2015 and 2014 totaled $556 million (including debt assumed of $18 million) and $530 million (including debt assumed of $128 million), respectively. Acquisitions completed in 2015 consisted principally of the acquisition of majority interests in UTC Climate, Controls & Security businesses, the acquisition of an imaging technology company by UTC Aerospace Systems, and a number of small acquisitions primarily in our commercial businesses. Our investment in businesses in 2014 consisted principally of the acquisition of a majority interest in a Pratt & Whitney joint venture and a number of smaller acquisitions in our commercial businesses.
Both acquisition and restructuring costs associated with business combinations are expensed as incurred. Depending on the nature and level of acquisition activity, earnings could be adversely impacted due to acquisition and restructuring actions initiated in connection with the integration of businesses acquired. For additional discussion of acquisitions and restructuring, see "Liquidity and Financial Condition," "Restructuring Costs" and Notes 2 and 13 to the Consolidated Financial Statements.
Discontinued Operations
On November 6, 2015, we completed the sale of Sikorsky to Lockheed Martin Corp. for $9,083 million in cash, subject to customary post-closing working capital and net debt adjustments. As noted above, the results of operations and the related cash flows of Sikorsky have been reclassified to Discontinued Operations in our Consolidated Statements of Operations, Comprehensive Income and Cash Flows for all periods presented, and the assets and liabilities of Sikorsky have been reclassified to Assets held for sale and Liabilities held for sale, respectively, in our Consolidated Balance Sheet as of December 31, 2014. Proceeds from the sale were used to fund $6.0 billion of share repurchases through accelerated share repurchase (ASR) agreements entered into on November 11, 2015. In connection with the sale of Sikorsky, we expect to make tax payments of approximately $2.4 billion, primarily during the first quarter of 2016.
Net income from discontinued operations attributable to common shareowners for the year ended December 31, 2015 includes the gain on the sale of Sikorsky, net of tax expense, of $3.4 billion and includes $122 million of costs incurred in connection with the sale. Net income from discontinued operations attributable to common shareowners also includes income from Sikorsky's operations, net of tax expense, of $169 million, including pension curtailment charges associated with our domestic pension plans. Net income from discontinued operations attributable to common shareowners for 2014 includes a previously disclosed cumulative adjustment related to a contract with the Canadian government for the development by Sikorsky of the CH-148 derivative of the H-92 helicopter, a military variant of the S-92 helicopter. The cumulative adjustment resulted in the recognition of losses, net of tax benefit, of $277 million in 2014.


3




RESULTS OF OPERATIONS
Net Sales
(dollars in millions)
2015
 
2014
 
2013
Net sales
$
56,098

 
$
57,900

 
$
56,600

Percentage change year-over-year
(3.1
)%
 
2.3
%
 
10.8
%
The factors contributing to the total percentage change year-over-year in total net sales are as follows:
 
2015
 
2014
Organic volume
1
 %
 
4
 %
Foreign currency translation
(4
)%
 
(1
)%
Acquisitions and divestitures, net
1
 %
 
(1
)%
Other
(1
)%
 

Total % Change
(3
)%
 
2
 %
Three of our four segments experienced organic sales growth during 2015, led by UTC Climate, Controls & Security (3%), UTC Aerospace Systems (3%), and Otis (1%). Pratt & Whitney experienced an organic sales decline (1%) during 2015. Organic sales growth at UTC Climate, Controls & Security was driven by the U.S. commercial and residential heating, ventilation and air conditioning (HVAC) and transport refrigeration businesses. Organic sales growth at UTC Aerospace Systems was primarily due to growth in commercial aerospace OEM sales, while the organic sales growth at Otis was primarily due to higher new equipment sales in North America and Asia outside of China. The decline in sales at Pratt & Whitney was due to lower commercial and military engine sales. The sales increase from net acquisitions and divestitures was primarily a result of sales from newly acquired businesses at UTC Climate, Controls & Security, while the decrease in sales from Other is due to the unfavorable impact of significant customer contract negotiations at UTC Aerospace Systems.
All four segments experienced organic sales growth during 2014, led by Otis and UTC Aerospace Systems, each at 6%, along with organic sales growth at UTC Climate, Controls & Security (3%) and Pratt & Whitney (2%). The organic sales growth at Otis was primarily due to higher new equipment sales in China, the U.S., Europe and the Middle East. Organic sales growth at UTC Aerospace Systems was primarily attributable to higher commercial aerospace OEM and aftermarket volume. Organic growth also reflected strong demand for residential HVAC equipment in North America at UTC Climate, Controls & Security and growth in commercial aftermarket volume at Pratt & Whitney. The sales decrease from net acquisitions and divestitures was primarily a result of the disposition in 2013 of the Pratt & Whitney Power Systems business and the portfolio transformation initiatives at UTC Climate, Controls & Security. See the Segment Review section of Management's Discussion and Analysis for further discussion of segment organic sales.
Cost of Products and Services Sold 
(dollars in millions)
2015
 
2014
 
2013
Cost of products sold
$
29,771

 
$
30,367

 
$
30,051

Percentage of product sales
74.8
 %
 
73.1
%
 
74.2
%
Cost of services sold
$
10,660

 
$
10,531

 
$
10,417

Percentage of service sales
65.4
 %
 
64.4
%
 
64.7
%
Total cost of products and services sold
$
40,431

 
$
40,898

 
$
40,468

Percentage change year-over-year
(1.1
)%
 
1.1
%
 
10.2
%
The factors contributing to the total percentage change year-over-year in total cost of products and services sold are as follows:
 
2015
 
2014
Organic volume
3
 %
 
3
 %
Foreign currency translation
(5
)%
 
(1
)%
Acquisitions and divestitures, net
1
 %
 
(1
)%
Total % Change
(1
)%
 
1
 %

4




The organic increase in total cost of products and services sold (3%) is attributable to the 2015 organic sales increase noted above (1%) and unfavorable OEM sales mix and the related losses on OEM engine shipments, within Pratt & Whitney. Foreign exchange fluctuations provided a benefit through lower cost of sales of approximately 5% driven by Otis and UTC Climate, Controls & Security.
The organic increase in total cost of products and services sold in 2014, as compared to 2013 (3%), is attributable to the 2014 organic sales increase noted above (4%). The decrease in cost of products and services sold from net acquisitions and divestitures was primarily a result of the disposition in 2013 of the Pratt & Whitney Power Systems business and the portfolio transformation initiatives at UTC Climate, Controls & Security.
Gross Margin
(dollars in millions)
2015
 
2014
 
2013
Gross margin
$
15,667

 
$
17,002

 
$
16,132

Percentage of net sales
27.9
%
 
29.4
%
 
28.5
%
Gross margin as a percentage of sales declined 150 basis points in 2015, as compared with 2014, driven by lower gross margin at Pratt & Whitney related to a decline in the amount of favorable contract performance adjustments (20 basis points) and an increase in unfavorable OEM sales mix and the related losses on OEM engine sales (40 basis points), along with the unfavorable impact of significant customer contract negotiations at UTC Aerospace Systems (40 basis points). The remaining decline is primarily driven by higher pension expense in 2015.
Gross margin as a percentage of sales increased 90 basis points, in 2014 as compared with 2013, driven by gross margin increases at Pratt & Whitney due to favorable government contract performance and higher Pratt & Whitney Canada (P&WC) and commercial aftermarket volume and to lower commodity costs and productivity gains at UTC Climate, Controls & Security (30 basis points).
Research and Development
(dollars in millions)
2015
 
2014
 
2013
Company-funded
$
2,279

 
$
2,475

 
$
2,342

Percentage of net sales
4.1
%
 
4.3
%
 
4.1
%
Customer-funded
$
1,589

 
$
1,997

 
$
1,800

Percentage of net sales
2.8
%
 
3.4
%
 
3.2
%
Research and development spending is subject to the variable nature of program development schedules and, therefore, year-over-year variations in spending levels are expected. The majority of the company-funded spending is incurred by the aerospace businesses and relates largely to the next generation engine product family at Pratt & Whitney and the CSeries, Airbus A320neo and Embraer E-Jet E2 programs at UTC Aerospace Systems. The year-over-year decrease in company-funded research and development (8%) in 2015, compared with 2014, reflects lower research and development within Pratt & Whitney (5%) primarily related to lower development costs of multiple geared turbofan platforms as development is completed and certain of these engines enter into service and within UTC Aerospace Systems related to several commercial aerospace programs (3%). Customer-funded research and development declined (20%) due to lower spending on U.S. Government and commercial engine programs at Pratt & Whitney.
The year-over-year increase in company-funded research and development (6%) in 2014, compared with 2013, primarily reflects increases at Pratt & Whitney (3%) related to the development of multiple geared turbofan platforms and at UTC Aerospace Systems (2%) related to several commercial aerospace programs. The increase in customer-funded research and development (11%) in 2014, as compared with 2013, is primarily due to higher customer-funded development at Pratt & Whitney related to military (7%) and commercial (1%) programs.
Company-funded research and development spending in 2016 is expected to decline approximately $75 million to $100 million from 2015 levels.
Selling, General and Administrative
(dollars in millions)
2015
 
2014
 
2013
Selling, general and administrative
$
5,886

 
$
6,172

 
$
6,364

Percentage of net sales
10.5
%
 
10.7
%
 
11.2
%

5




The decrease in selling, general and administrative expenses in 2015, as compared with 2014 (5%), is due to the benefit of foreign exchange (5%), particularly within the commercial businesses. Higher pension costs (1%) were offset by lower employee compensation related expenses. The 20 basis point decrease in selling, general and administrative expense as a percentage of sales reflects the impact of organic sales growth, partially offset by higher pension expense across our business units.
The decrease in selling, general and administrative expenses in 2014, as compared with 2013, (3%) is due primarily to a decline at UTC Aerospace Systems (1%) driven by lower pension expense and restructuring savings, and the impact of divestitures completed over the preceding twelve months (1%). Higher overhead expenses at our commercial businesses (2%), largely driven by continued investment in emerging markets, was partially offset by the benefits of cost savings from previous restructuring actions and foreign exchange translation. The 50 basis point decrease in selling, general and administrative expense as a percentage of sales reflects higher sales volume and lower pension expense across our business units.
Other Income, Net
(dollars in millions)
2015
 
2014
 
2013
Other (expense) income, net
$
(211
)
 
$
1,238

 
$
1,123

Other (expense) income, net includes the operational impact of equity earnings in unconsolidated entities, royalty income, foreign exchange gains and losses as well as other ongoing and infrequently occurring items including the following:
(dollars in millions)
2015
 
2014
 
2013
Joint venture income
$
207

 
$
284

 
$
275

Licensing and royalty income
122

 
158

 
87

Charge related to a Canadian government settlement
(867
)
 

 

Charge for pending and future asbestos claims
(237
)
 

 

Impairment of certain UTC Aerospace System assets held for sale
(61
)
 

 

Gain on re-measurement to fair value of previously held equity interest in UTC Climate, Controls & Security joint venture investments
126

 

 

(Charge) gain from a state taxing authority agreement for monetization of tax credits
(27
)
 
220

 

Net gain primarily from fair value adjustments related to acquisition of majority interest in a Pratt & Whitney joint venture

 
83

 

Charge to adjust the fair value of a Pratt & Whitney joint venture investment

 
(60
)
 
(25
)
Gain from the sale of the Pratt & Whitney power systems business

 

 
193

UTC Climate, Controls, & Security portfolio transformation gain

 
30

 
55

Gain on settlement with an engine program partner

 

 
39

Other recurring activity
526


523


499

 
$
(211
)
 
$
1,238

 
$
1,123

See Note 8 "Accrued Liabilities" of our Consolidated Financial Statements for further discussion of the charge related to a Canadian government settlement and Note 17 "Commitments & Contingencies" for further discussion of the charge for pending and future asbestos claims.
Interest Expense, Net
(dollars in millions)
2015
 
2014
 
2013
Interest expense
$
945

 
$
1,099

 
$
1,032

Interest income
(121
)
 
(218
)
 
(137
)
Interest expense, net
$
824

 
$
881

 
$
895

Average interest expense rate during the year on:
 
 
 
 
 
Short-term borrowings
0.6
%
 
0.8
%
 
1.6
%
Total debt
4.1
%
 
4.3
%
 
4.2
%
Interest expense was lower in 2015, as compared with 2014, primarily due to the absence of approximately $143 million of unfavorable pre-tax interest accruals in 2014 related to the ongoing dispute with German tax authorities concerning a

6




1998 reorganization of the corporate structure of Otis operations in Germany. Interest income declined in 2015, as compared with 2014, reflecting the absence of $132 million favorable pre-tax interest adjustments in 2014 related to the settlement of outstanding tax matters. See Note 11 "Income Taxes" of our Consolidated Financial Statements for further discussion.
Interest expense increased in 2014, as compared with 2013, reflecting approximately $143 million of unfavorable pre-tax interest accruals related to the ongoing dispute with German tax authorities concerning a 1998 reorganization of the corporate structure of Otis operations in Germany, partially offset by lower average debt balances as a result of debt repayments. Interest income increased in 2014, as compared with 2013, as a result of favorable pre-tax interest adjustments related to the settlement of outstanding tax matters. See further discussion in Note 11 to the Consolidated Financial Statements.
The decrease in the weighted-average interest rates for short-term borrowings was due to the mix of our borrowings with a greater percentage of short-term borrowings at lower interest rates in 2015 than the percentage in 2014.
Income Taxes
 
2015
 
2014
 
2013
Effective income tax rate
32.6
%
 
25.8
%
 
26.1
%
The effective income tax rates for 2015, 2014, and 2013 reflect tax benefits associated with lower tax rates on international earnings for which we intend to permanently reinvest outside the United States and U.S. corporate tax extenders, which were enacted separately in each of the respective years. The effective tax rate for 2015 also includes a charge of approximately $274 million related to the planned repatriation of certain foreign earnings, the majority of which are current year earnings. It further includes a favorable impact of approximately $45 million related to a non-taxable gain recorded in the first quarter. France, the U.K. and certain U.S. states enacted tax law changes in the fourth quarter which resulted in net incremental cost of approximately $68 million in 2015. The effective income tax rate for 2014 includes the favorable settlement of certain tax matters during 2014 and the adverse impact of an approximately $265 million income tax accrual related to the ongoing dispute with German tax authorities concerning a 1998 reorganization of the corporate structure of Otis operations in Germany, offset by the benefit from repatriation of highly taxed earnings. See Note 17 to the Consolidated Financial Statements for further discussion of the German tax litigation. The 2013 tax includes a smaller benefit related to tax settlements than recognized in 2014. We estimate our full year annual effective income tax rate in 2016 will be approximately 28%. We anticipate some variability in the tax rate quarter to quarter in 2016 from potential discrete items.
For additional discussion of income taxes and the effective income tax rate, see "Critical Accounting Estimates—Income Taxes" and Note 11 to the Consolidated Financial Statements.
Net Income Attributable to Common Shareowners from Continuing Operations
(dollars in millions, except per share amounts)
2015
 
2014
 
2013
Net income attributable to common shareowners from continuing operations
$
3,996

 
$
6,066

 
$
5,265

Diluted earnings per share from continuing operations
$
4.53

 
$
6.65

 
$
5.75

To help mitigate the volatility of foreign currency exchange rates on our operating results, we maintain foreign currency hedging programs, the majority of which are entered into by P&WC. In 2015, foreign currency generated a net adverse impact on our consolidated operational results of $0.19 per diluted share. Foreign currency, including hedging at P&WC, did not result in any impact on earnings per diluted share in 2014 or 2013. For additional discussion of foreign currency exposure, see "Market Risk and Risk Management—Foreign Currency Exposures."
Net income attributable to common shareowners from continuing operations in 2015 includes restructuring charges, net of tax benefit, of $274 million as well as a net charge from significant non-recurring and non-operational items, net of tax benefit, of $1,293 million, which have been discussed above. The effect of restructuring charges on diluted earnings per share for 2015 was a charge of $0.31 per share, while the effect of significant non-operational items on diluted earnings per share for 2015 was a charge of $1.46 per share.
Net Income Attributable to Common Shareowners from Discontinued Operations
(dollars in millions, except per share amounts)
2015
 
2014
 
2013
Net income attributable to common shareowners from discontinued operations
$
3,612

 
$
154

 
$
456

Diluted earnings per share from discontinued operations
$
4.09

 
$
0.17

 
$
0.50

Net income from discontinued operations attributable to common shareowners for the year ended December 31, 2015 includes the gain on the sale of Sikorsky, net of tax expense, of $3.4 billion and $122 million of costs incurred in connection

7




with the sale. Net income from discontinued operations attributable to common shareowners also includes income from Sikorsky's operations, net of tax expense, of $169 million, including pension curtailment charges associated with our domestic pension plans. Net income from discontinued operations attributable to common shareowners for 2014 includes a previously disclosed cumulative adjustment related to a contract with the Canadian government for the development by Sikorsky of the CH-148 derivative of the H-92 helicopter, a military variant of the S-92 helicopter. The cumulative adjustment resulted in the recognition of losses, net of tax benefit, of $277 million in 2014.
RESTRUCTURING COSTS
(dollars in millions)
 
2015
 
2014
 
2013
Restructuring costs included within continuing operations
 
$
396

 
$
354

 
$
431

Restructuring costs included within discontinued operations
 
139

 
14

 
48

Restructuring costs
 
$
535

 
$
368

 
$
479

Restructuring actions are an essential component of our operating margin improvement efforts and relate to both existing operations and those recently acquired. Charges generally relate to severance incurred on workforce reductions and facility exit and lease termination costs associated with the consolidation of field and manufacturing operations. We expect to incur additional restructuring costs in 2016 of approximately $500 million, including trailing costs related to prior actions associated with our continuing cost reduction efforts and the integration of acquisitions. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions. Restructuring costs included within discontinued operations include approximately $109 million of net settlement and curtailment losses for pension benefits during 2015.
2015 Actions. During 2015, we recorded net pre-tax restructuring charges of $326 million relating to ongoing cost reduction actions initiated in 2015. We are targeting to complete in 2016 and 2017 the majority of the remaining workforce and facility related cost reduction actions initiated in 2015. Approximately 58% 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 2015, we had cash outflows of approximately $105 million related to the 2015 actions. We expect to incur additional restructuring and other charges of $217 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 $390 million annually, of which, approximately $53 million was realized in 2015.
2014 Actions. During 2015 and 2014, we recorded net pre-tax restructuring charges of $73 million and $325 million, respectively, for actions initiated in 2014. We are targeting to complete in 2016 the majority of the remaining workforce and all facility related cost reduction actions initiated in 2014. Approximately 83% 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 2015, we had cash outflows of approximately $121 million related to the 2014 actions. We expect to incur additional restructuring charges of $48 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 $300 million annually.
For additional discussion of restructuring, see Note 13 to the Consolidated Financial Statements.
SEGMENT REVIEW
 
Net Sales
 
Operating Profits
 
Operating Profit Margin
(dollars in millions)
2015
 
2014
 
2013
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Otis
$
11,980

 
$
12,982

 
$
12,484

 
$
2,338

 
$
2,640

 
$
2,590

 
19.5
%
 
20.3
%
 
20.7
%
UTC Climate, Controls & Security
16,707

 
16,823

 
16,809

 
2,936

 
2,782

 
2,590

 
17.6
%
 
16.5
%
 
15.4
%
Pratt & Whitney
14,082

 
14,508

 
14,501

 
861

 
2,000

 
1,876

 
6.1
%
 
13.8
%
 
12.9
%
UTC Aerospace Systems
14,094

 
14,215

 
13,347

 
1,888

 
2,355

 
2,018

 
13.4
%
 
16.6
%
 
15.1
%
Total segment
56,863

 
58,528

 
57,141

 
8,023

 
9,777

 
9,074

 
14.1
%
 
16.7
%
 
15.9
%
Eliminations and other
(765
)
 
(628
)
 
(541
)
 
(268
)
 
304

 
(44
)
 
 
 
 
 
 
General corporate expenses

 

 

 
(464
)
 
(488
)
 
(481
)
 
 
 
 
 
 
Consolidated
$
56,098

 
$
57,900

 
$
56,600

 
$
7,291

 
$
9,593

 
$
8,549

 
13.0
%
 
16.6
%
 
15.1
%
Commercial Businesses
The financial performance of our commercial businesses can be 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

8




Climate, Controls & Security's financial performance can also be influenced by production and utilization of transport equipment, and for its residential business, weather conditions. Geographic and industry diversity across the commercial businesses help to balance the impact of such factors on our consolidated operating results, particularly in the face of uneven economic growth. Worldwide economic conditions were generally favorable for Otis in 2015, compared with 2014, with continued strong new equipment order growth rates at constant currency in North America (31%), Europe (11%) and the Middle East (70%), led by a significant increase in orders there related to a landmark project, partially offset by declines in orders in China (13%). Within the UTC Climate, Controls & Security segment order growth rates at constant currency for 2015 were mixed with an increase in transport refrigeration orders (7%) offset by declines in residential HVAC equipment orders (12%). Foreign exchange rate fluctuations had an adverse effect on orders during 2015 at Otis (8%) and UTC Climate, Controls & Security (6%).
Total commercial business sales generated outside the U.S., including U.S. export sales were 65% and 69% in 2015 and 2014, respectively. The following table shows sales generated outside the U.S., including U.S. export sales, for each of the commercial business segments:
 
2015
 
2014
Otis
77
%
 
81
%
UTC Climate, Controls & Security
56
%
 
59
%
Otis is the world's largest elevator and escalator manufacturing, installation and service company. Otis designs, manufactures, sells and installs a wide range of passenger and freight elevators for low-, medium- and high-speed applications, as well as a broad line of escalators and moving walkways. In addition to new equipment, Otis provides modernization products to upgrade elevators and escalators as well as maintenance and repair services for both its products and those of other manufacturers. Otis serves customers in the commercial and residential property industries around the world. Otis sells directly to the end customer and through sales representatives and distributors.
 
 
 
 
 
 
 
Total Increase (Decrease) Year-Over-Year for:
(dollars in millions)
2015
 
2014
 
2013
 
2015 Compared with 2014
 
2014 Compared with 2013
Net Sales
$
11,980

 
$
12,982

 
$
12,484

 
$
(1,002
)
 
(8
)%
 
$
498

 
4
%
Cost of Sales
8,122

 
8,756

 
8,345

 
(634
)
 
(7
)%
 
411

 
5
%
 
3,858

 
4,226

 
4,139

 
 
 
 
 
 
 
 
Operating Expenses and Other
1,520

 
1,586

 
1,549

 
 
 
 
 
 
 
 
Operating Profits
$
2,338

 
$
2,640

 
$
2,590

 
$
(302
)
 
(11
)%
 
$
50

 
2
%
 
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
 
2015
 
2014
 
Net Sales

 
Cost of Sales

 
Operating Profits

 
Net Sales

 
Cost of Sales

 
Operating Profits

Organic / Operational
1
 %
 
3
 %
 
(2
)%
 
6
 %
 
7
 %
 
4
 %
Foreign currency translation
(9
)%
 
(10
)%
 
(9
)%
 
(2
)%
 
(2
)%
 
(2
)%
Restructuring costs

 

 
1
 %
 

 

 

Other

 

 
(1
)%
 

 

 

Total % change
(8
)%
 
(7
)%
 
(11
)%
 
4
 %
 
5
 %
 
2
 %
2015 Compared with 2014
Organic sales increased 1% primarily due to higher new equipment sales (2%), with growth in North America (2%) and Asia outside of China (1%), partially offset by decline in China (1%), which was primarily driven by new equipment pricing headwind and volume declines. Service sales growth in the Americas and Asia (combined 1%) was offset by declines in Europe (1%), on lower volumes and unfavorable pricing and mix.
Operational profit decreased 2% primarily due to lower service contribution (3%) predominantly in Europe and higher selling, general and administrative expenses (1%), primarily due to sales growth in Americas and Asia outside of China, partially offset by higher new equipment contribution (3%).
2014 Compared with 2013
Organic sales increased (6%) due to higher new equipment sales primarily in China (2%), the Americas (1%), Europe (1%) and the Middle East (1%). Service sales growth in the Americas and China (combined 1%), was offset by declines in Europe (1%).

9




Operational profit increased (4%) due primarily to higher new equipment contribution (6%) partially offset by a decrease in service contribution (1%), due primarily to continued pricing pressures in Europe, and higher overhead expenses (2%) in connection with continued investment in emerging markets.
UTC Climate, Controls & Security is a leading provider of HVAC and refrigeration solutions, including controls for residential, commercial, industrial and transportation applications. These products and services are sold under the Carrier name and other brand names to building contractors and owners, homeowners, transportation companies, retail stores and food service companies. UTC Climate, Controls & Security is also a global provider of security and fire safety products and services. UTC Climate, Controls & Security provides electronic security products such as intruder alarms, access control systems and video surveillance systems, and designs and manufactures a wide range of fire safety products including specialty hazard detection and fixed suppression products, portable fire extinguishers, fire detection and life safety systems, and other firefighting equipment. Services provided to the electronic security and fire safety industries include systems integration, video surveillance, installation, maintenance, and inspection. In certain markets, UTC Climate, Controls & Security also provides monitoring and response services to complement its electronic security and fire safety businesses. Through its venture with Watsco, Inc., UTC Climate, Controls & Security distributes Carrier, Bryant, Payne and Totaline residential and light commercial HVAC products in the U.S. and selected territories in the Caribbean and Latin America. UTC Climate, Controls & Security sells directly to end customers and through manufacturers’ representatives, distributors, wholesalers, dealers and retail outlets. Certain of UTC Climate, Controls & Security’s HVAC businesses are seasonal and can be impacted by weather. UTC Climate, Controls & Security customarily offers its customers incentives to purchase products to ensure an adequate supply in the distribution channels. 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 in sales. UTC Climate, Controls & Security products and services are used by governments, financial institutions, architects, building owners and developers, security and fire consultants, homeowners and other end-users requiring a high level of security and fire protection for their businesses and residences. UTC Climate, Controls & Security provides its security and fire safety products and services under Chubb, Kidde and other brand names, and sells directly to customers as well as through manufacturer representatives, distributors, dealers and U.S. retail distribution.
 
 
 
 
 
 
 
Total Increase (Decrease) Year-Over-Year for:
(dollars in millions)
2015
 
2014
 
2013
 
2015 Compared with 2014
 
2014 Compared with 2013
Net Sales
$
16,707

 
$
16,823

 
$
16,809

 
$
(116
)
 
(1
)%
 
$
14

 

Cost of Sales
11,611

 
11,707

 
11,918

 
(96
)
 
(1
)%
 
(211
)
 
(2
)%
 
5,096

 
5,116

 
4,891

 
 
 
 
 
 
 
 
Operating Expenses and Other
2,160

 
2,334

 
2,301

 
 
 
 
 
 
 
 
Operating Profits
$
2,936

 
$
2,782

 
$
2,590

 
$
154

 
6
 %
 
$
192

 
7
 %
 
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
 
2015
 
2014
 
Net Sales

 
Cost of Sales

 
Operating
Profits

 
Net Sales

 
Cost of Sales

 
Operating
Profits

Organic / Operational
3
 %
 
3
 %
 
6
 %
 
3
 %
 
1
 %
 
11
 %
Foreign currency translation
(6
)%
 
(6
)%
 
(5
)%
 
(1
)%
 
(1
)%
 
(1
)%
Acquisitions and divestitures, net
2
 %
 
2
 %
 

 
(2
)%
 
(2
)%
 

Restructuring costs

 

 

 

 

 
(1
)%
Other

 

 
5
 %
 

 

 
(2
)%
Total % change
(1
)%
 
(1
)%
 
6
 %
 

 
(2
)%
 
7
 %
2015 Compared with 2014
The organic sales increase (3%) primarily reflects growth in Americas (2%) driven by the U.S. commercial and residential HVAC businesses, and growth in refrigeration (1%) driven by the transport refrigeration business.
The 6% operational profit increase was primarily driven by favorable volume and price (combined 2%) on the sales increase noted above. The beneficial impact from lower commodity costs (2%) and net restructuring and cost productivity (2%) was partially offset by lower joint venture income (1%). The 5% increase in "Other" was primarily driven by a gain as a result of a fair value adjustment related to the acquisition of a controlling interest in a joint venture investment (5%) and a gain as a result of a fair value adjustment related to a separate acquisition of a controlling interest in another joint venture investment (1%), partially offset by the absence of a gain from UTC Climate, Controls & Security's portfolio transformation in 2014 (1%).

10




2014 Compared with 2013
The organic sales increase (3%) for the year primarily reflects growth in Americas (2%) driven by the U.S. residential HVAC and fire safety products businesses, and growth in refrigeration (1%) driven by the transport refrigeration 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 portfolio transformation.
The 11% operational profit increase was driven by favorable volume and price (combined 5%), the benefits of previous restructuring actions and cost productivity (combined 2%), favorable commodity costs (2%) and higher equity income (2%). The 2% decrease in "Other" primarily reflects net year-over-year impact from UTC Climate, Controls & Security's portfolio transformation.
Aerospace Businesses
The financial performance of Pratt & Whitney and UTC Aerospace Systems is directly tied to the economic conditions of the commercial aerospace and defense aerospace industries. In particular, Pratt & Whitney experiences intense competition for new commercial airframe/engine combinations. Engine suppliers may offer substantial discounts and other financial incentives, performance and operating cost guarantees, and participate in financing arrangements, in an effort to compete for the aftermarket associated with these engine sales. These OEM engine sales may result in losses on the engine sales, which economically are recovered through the sales and profits generated over the engine's maintenance cycle. At times, the aerospace businesses also enter into development programs and firm fixed-price development contracts, which may require the company to bear cost overruns related to unforeseen technical and design challenges that arise during the development stage of the program. Customer selections of engines and components can also have a significant impact on later sales of parts and service. Predicted traffic levels, load factors, worldwide airline profits, general economic activity and global defense spending have been reliable indicators for new aircraft and aftermarket orders within the aerospace industry. Spare part sales and aftermarket service trends are affected by many factors, including usage, technological improvements, pricing, regulatory changes and the retirement of older aircraft. Our commercial aftermarket businesses continue to evolve as an increasing proportion of our aerospace businesses' customers are covered under Fleet Management Programs (FMPs). FMPs are comprehensive long-term spare part and maintenance agreements with our customers. We expect a continued shift to FMPs in lieu of transactional spare part sales as new engines enter customers' fleets on FMP and legacy fleets are retired. Performance in the general aviation sector is closely tied to the overall health of the economy. In 2015, as compared with 2014, total commercial aerospace aftermarket sales increased 6% at Pratt & Whitney and 1% at UTC Aerospace Systems.
Our long-term aerospace contracts are subject to strict safety and performance regulations which can affect our ability to estimate costs precisely. Contract cost estimation for the development of complex projects, in particular, requires management to make significant judgments and assumptions regarding the complexity of the work to be performed, availability of materials, the performance by subcontractors, the timing of funding from customers and the length of time to complete the contract. As a result, we review and update our cost estimates on significant contracts on a quarterly basis, and no less frequently than annually for all others, and when circumstances change and warrant a modification to a previous estimate. Changes in estimates relate to the current period impact of revisions to total estimated contract sales and costs at completion. We record changes in contract estimates using the cumulative catch-up method. Operating profits included significant net favorable changes in aerospace contract estimates of approximately $115 million in 2015 primarily representing favorable contract adjustments recorded at Pratt & Whitney. In accordance with our revenue recognition policy, losses, if any, on long-term contracts are provided for when anticipated. Loss provisions on OEM contracts are recognized to the extent that estimated inventoriable manufacturing, engineering, product warranty and product performance guarantee costs, as appropriate, exceed the projected revenue from the products and services contemplated under the existing and related implied future contractual arrangements. There were no material loss provisions recorded on OEM contracts in continuing operations in 2015 or 2014.
The commercial airline industry was strong throughout 2015 benefiting from traffic growth and lower fuel costs. Airline traffic growth rates, as measured by revenue passenger miles (RPMs) grew nearly 7% in the first eleven months of 2015, as compared with 2014, while jet fuel costs have declined more than 30% relative to prices one year ago in most geographic regions. Pratt & Whitney is developing the geared turbofan engine that will power currently-proposed and future aircraft and is building capacity to meet demand for new engines which are fuel efficient and have reduced noise levels and exhaust emissions. The PurePower® PW1100G-JM engine completed Federal Aviation Agency (FAA) certification for the Airbus A320neo platform on December 19, 2014, and entered into service in January 2016.
Our military sales are affected by U.S. Department of Defense spending levels. However, the sale of Sikorsky during 2015 reduced our U.S. Government defense-spending exposure. Excluding Sikorsky, total sales to the U.S. Government were $5.6 billion in 2015, $5.9 billion in 2014, and $6.3 billion in 2013, and were 10%, 10% and 11% of total UTC sales, respectively. The defense portion of our aerospace business is also affected by changes in market demand and the global

11




political environment. Our participation in long-term production and development programs for the U.S. Government has contributed positively to our results in 2015 and is expected to continue to benefit results in 2016.
As previously disclosed, Pratt & Whitney's PurePower PW1500G engine models have been selected by Bombardier to power the new CSeries passenger aircraft, which is scheduled to enter service in 2016. There have been multi-year delays in the development of the CSeries aircraft. Notwithstanding these delays, Bombardier reports that they have received 243 orders for the aircraft, and that the program has nearly completed the certification process and is exceeding performance expectations. Further, they reached an agreement with the Canadian government for additional funding of $1 billion in the fourth quarter of 2015. We have made various investments in support of the production and delivery of our PW1500G engines and systems for the CSeries program, which we currently expect to recover through future deliveries of PW1500G powered CSeries aircraft.  Our net asset exposure related to the CSeries program is approximately $253 million, consisting of inventory, compliance engines and exclusivity assets, the recoverability of which is predicated on achieving a certain minimum volume of future engine deliveries. Bombardier is currently forecasting aircraft demand beyond this level and, as such, our net assets are considered recoverable.  We will continue to monitor the progress of the program and our ability to recover our investments.
Pratt & Whitney is among the world's leading suppliers of aircraft engines for the commercial, military, business jet and general aviation markets. Pratt & Whitney also provides fleet management services and aftermarket maintenance, repair and overhaul services, including the sale of spare parts, auxiliary power units and industrial gas generators. Pratt & Whitney produces families of large engines for wide and narrow-body and large regional aircraft in the commercial market, and for fighter and transport aircraft in the military market. Pratt & Whitney's products are sold principally to aircraft manufacturers, airlines and other aircraft operators, aircraft leasing companies, and the U.S. and foreign governments. Pratt & Whitney's products and services must adhere to strict regulatory and market-driven safety and performance standards. The frequently changing nature of these standards, along with the long duration of aircraft engine development, production and support programs, creates uncertainty regarding engine program profitability.
The development of new engines and improvements to current production engines present important growth opportunities. Pratt & Whitney is under contract with the U.S. Government's F-35 Joint Program Office to develop, produce and sustain the F135 engine, a derivative of Pratt & Whitney's F119 engine, to power the single-engine F-35 Lightning II aircraft (commonly known as the Joint Strike Fighter) being developed and produced by Lockheed Martin. The two F135 propulsion system configurations for the F-35A/F-35C and F-35B jets are certified for production and in use by the U.S. Air Force and the U.S. Marine Corps. F135 engines are also used on F-35 aircraft purchased by Joint Strike Fighter partner countries and foreign military sales countries.
In addition, Pratt & Whitney is currently developing technology, including the PurePower PW1000G Geared TurboFan engine, intended to enable it to power both currently-proposed and future aircraft. The PurePower PW1000G engine targets a significant reduction in fuel burn and noise levels with lower environmental emissions and operating costs than current production engines. Airbus has selected the PW1100G engine, a member of the PurePower PW1000G engine family, as a new engine option to power its A320neo family of aircraft. The PW1100G-JM is being developed as part of a collaboration with MTU Aero Engines (MTU) and Japanese Aero Engines Corporation (JAEC). Additionally, PurePower® PW1000G engine models have been selected by Bombardier to power the new CSeries passenger aircraft, Mitsubishi Aircraft Corporation to power the new Mitsubishi Regional Jet, Irkut Corporation to power the proposed new Irkut MC-21 passenger aircraft and Embraer to power the next generation of Embraer’s E-Jet family of aircraft. In October 2014, Gulfstream announced the selection of the PurePower® PW800 engine to exclusively power Gulfstream’s new G500 and G600 business jets scheduled to enter service in 2018. The CSeries passenger aircraft is scheduled to enter into service in the second quarter of 2016. The Mitsubishi Regional Jet, the Irkut MC-21 and Embraer's next generation of E-Jet family aircraft are scheduled to enter into service in 2018. The success of these aircraft and the PurePower® family of engines is dependent upon many factors including technological accomplishments, program execution, aircraft demand, and regulatory approval. Based on these factors, as well as the level of success of aircraft program launches by aircraft manufacturers and other conditions, additional investment in the PurePower® program may be required.
In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into collaboration arrangements in which sales, costs and risks are shared. At December 31, 2015, the interests of third party participants in Pratt & Whitney-directed commercial jet engine programs ranged from 14% to 50%. In addition, Pratt & Whitney has interests in other engine programs, including a 50% ownership interest in the Engine Alliance (EA), a joint venture with GE Aviation, which markets and manufactures the GP7000 engine for the Airbus A380 aircraft. Pratt & Whitney has entered into risk and revenue sharing arrangements with third parties for 40% of the products and services that Pratt & Whitney is responsible for providing to the EA. Pratt & Whitney accounts for its interests in the EA joint venture under the equity method of accounting. Pratt & Whitney holds a 61% net program share interest in the IAE International Aero Engines AG (IAE) collaboration with MTU and JAEC and a 49.5% ownership interest in IAE. Pratt & Whitney continues to pursue additional collaboration partners.

12




 
 
 
 
 
 
 
Total Increase (Decrease) Year-Over-Year for:
(dollars in millions)
2015
 
2014
 
2013
 
2015 Compared with 2014
 
2014 Compared with 2013
Net Sales
$
14,082

 
$
14,508

 
$
14,501

 
$
(426
)
 
(3
)%
 
$
7

 

Cost of Sales
10,910

 
10,926

 
11,148

 
(16
)
 

 
(222
)
 
(2
)%
 
3,172

 
3,582

 
3,353

 
 
 
 
 
 
 
 
Operating Expenses and Other
2,311

 
1,582

 
1,477

 
 
 
 
 
 
 
 
Operating Profits
$
861

 
$
2,000

 
$
1,876

 
$
(1,139
)
 
(57
)%
 
$
124

 
7
 %
 
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
 
2015
 
2014
  
Net Sales

 
Cost of Sales

 
Operating
Profits

 
Net Sales

 
Cost of Sales

 
Operating
Profits

Organic* / Operational*
(1
)%
 
2
 %
 
(12
)%
 
2
 %
 

 
6
 %
Foreign currency (including P&WC net hedging)*
(1
)%
 
(2
)%
 
3
 %
 
(1
)%
 
(1
)%
 
2
 %
Acquisitions and divestitures, net

 
1
 %
 
1
 %
 
(1
)%
 
(1
)%
 
(1
)%
Restructuring costs

 

 
(2
)%
 

 

 
5
 %
Other
(1
)%
 
(1
)%
 
(47
)%
 

 

 
(5
)%
Total % change
(3
)%
 

 
(57
)%
 

 
(2
)%
 
7
 %
*
As discussed further in the "Business Overview" and "Results of Operations" sections, for Pratt & Whitney only, the transactional impact of foreign exchange hedging at P&WC has been netted against the translational foreign exchange impact for presentation purposes in the above table. For all other segments, these foreign exchange transactional impacts are included within the organic sales/operational operating profit caption in their respective tables. Due to its significance to Pratt & Whitney's overall operating results, we believe it is useful to segregate the foreign exchange transactional impact in order to clearly identify the underlying financial performance.
2015 Compared with 2014
The organic sales decrease (1%) reflects lower military engine volume (1%) and lower commercial engine volume (2%), offset by higher commercial engine aftermarket sales (2%). "Other" reflects a sales reduction in connection with customer contract negotiations (1%).
Pratt & Whitney's operating profit includes higher pension cost partially offset by restructuring savings across its business. The operational profit decrease (12%) was due to higher negative engine margin within the Large Commercial Engine business and lower volume within P&WC (15%), lower engine volume and unfavorable mix within the Military Engine business (2%), unfavorable aftermarket mix and a decline in the amount of favorable contract performance adjustments within the Military Engine business (4%), and lower commercial developmental profit (2%), partially offset by lower research and development spending (5%), higher aftermarket profits at P&WC (4%), and an increase in favorable contract termination benefits (3%). Operating profit increased 1% as a result of the acquisition of a majority interest in a joint venture in the third quarter of 2014. The "Other" operating profit decline reflects a charge resulting from amendments to research and development support arrangements previously entered into with federal and provincial Canadian government agencies (43%) and a charge resulting from customer contract negotiations (4%).
2014 Compared with 2013
The organic sales increase (2%) primarily reflects higher spares volume at P&WC (1%) and higher commercial aftermarket volume (2%), offset by lower military sales volume (1%). Sales decreased (1%) as a result of the divestiture of Pratt & Whitney Power Systems in 2013 (2%), offset by the acquisition of a majority interest in a joint venture in 2014 (1%).
Pratt & Whitney's operating profit benefited from lower pension costs and restructuring savings across its businesses. The operating profit increase (6%) was due to the net volume increase and sales mix (9%), mentioned above, and favorable contract performance (3%), partially offset by higher research and development costs (4%) and lower contract termination benefits (1%). Operating profit decreased (1%) as a result of the divestiture of Pratt & Whitney Power Systems in 2013. "Other" reflects the impairment of assets related to a joint venture (1%) and the absence of the gain on the sale of Pratt & Whitney Power Systems (10%), offset by fair value adjustments related to the acquisition of a majority interest in a joint venture (4%) and higher intellectual property sales (2%).
UTC Aerospace Systems is a leading global provider of technologically advanced aerospace products and aftermarket service solutions for aircraft manufacturers, airlines, regional, business and general aviation markets, military, space and undersea operations. UTC Aerospace Systems’ product portfolio includes electric power generation, power management and distribution

13




systems, air data and flight sensing and management systems, engine control systems, electric systems, intelligence, surveillance and reconnaissance systems, engine components, environmental control systems, fire and ice detection and protection systems, propeller systems, aircraft aerostructures including engine nacelles, thrust reversers, and mounting pylons, interior and exterior aircraft lighting, aircraft seating and cargo systems, actuation systems, landing systems, including landing gears, wheels and brakes, and space products and subsystems. Aftermarket services include spare parts, overhaul and repair, engineering and technical support and fleet management solutions. UTC Aerospace Systems sells aerospace products to aircraft manufacturers, airlines and other aircraft operators, the U.S. and foreign governments, maintenance, repair and overhaul providers, and independent distributors.
 
 
 
 
 
 
 
Total Increase (Decrease) Year-Over-Year for:
(dollars in millions)
2015
 
2014
 
2013
 
2015 Compared with 2014
 
2014 Compared with 2013
Net Sales
$
14,094

 
$
14,215

 
$
13,347

 
$
(121
)
 
(1
)%
 
$
868

 
7
%
Cost of Sales
10,533

 
10,192

 
9,534

 
341

 
3
 %
 
658

 
7
%
 
3,561

 
4,023

 
3,813

 
 
 
 
 
 
 
 
Operating Expenses and Other
1,673

 
1,668

 
1,795

 
 
 
 
 
 
 
 
Operating Profits
$
1,888

 
$
2,355

 
$
2,018

 
$
(467
)
 
(20
)%
 
$
337

 
17
%
 
Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
 
2015
 
2014
  
Net Sales

 
Cost of Sales

 
Operating
Profits

 
Net Sales

 
Cost of Sales

 
Operating
Profits

Organic / Operational
3
 %
 
6
 %
 
(6
)%
 
6
%
 
7
%
 
15
%
Foreign currency translation
(2
)%
 
(3
)%
 
2
 %
 
1
%
 

 

Acquisitions and divestitures, net
(1
)%
 
(1
)%
 

 

 

 

Restructuring costs

 

 
(1
)%
 

 

 
1
%
Other
(1
)%
 
1
 %
 
(15
)%
 

 

 
1
%
Total % change
(1
)%
 
3
 %
 
(20
)%
 
7
%
 
7
%
 
17
%
2015 Compared with 2014
The organic sales growth (3%) primarily reflects an increase in commercial aerospace OEM and commercial aftermarket sales volume (3%) and a benefit from a change in a customer relationship (2%), partially offset by the absence of the favorable impact of a prior year customer contract settlement (1%) and lower military OEM sales volume (1%). "Other" represents the unfavorable impact of significant customer contract negotiations (1%).
The organic decrease in operational profit (6%) primarily reflects lower commercial aerospace OEM profit contribution (6%) primarily due to adverse mix, higher pension costs (5%), lower military profit contribution (4%), and the absence of the favorable impact of a prior year customer contract settlement (2%), partially offset by the favorable impact of several customer contract negotiations, dispute resolutions and other settlements (4%), lower research and development costs (3%), lower selling, general and administrative expenses (3%), and the favorable impact of a contract termination (2%). "Other" primarily represents the unfavorable impact of significant customer contract negotiations (13%) and the impairment of certain assets held for sale (2%).
2014 Compared with 2013
The organic sales growth (6%) primarily reflects an increase in commercial aerospace OEM and commercial aftermarket sales volumes (6%).
The organic increase in operational profit (15%) primarily reflects the profit contribution from higher commercial OEM and aftermarket sales volumes (10%), lower selling, general and administrative expenses including lower pension expense (5%), and the favorable impact of a customer contract settlement (2%), partially offset by higher research and development costs (2%).
Eliminations and other
 
Net Sales
 
Operating Profits
(dollars in millions)
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Eliminations and other
$
(765
)
 
$
(628
)
 
$
(541
)
 
$
(268
)
 
$
304

 
$
(44
)
General corporate expenses

 

 

 
(464
)
 
(488
)
 
(481
)

14




Eliminations and other reflect the elimination of sales, other income and operating profit transacted between segments, as well as the operating results of certain smaller businesses. The change in sales in 2015, as compared with 2014, reflects an increase in the amount of inter-segment sales eliminations between our aerospace business segments. The decline in operating profit in 2015, as compared with 2014, reflects a $237 million charge for pending and future asbestos claims through 2059, a $27 million charge related to an agreement with a state taxing authority for the monetization of tax credits, and the absence of a $220 million gain on an agreement with a state taxing authority for the monetization of tax credits in 2014.
The change in sales in 2014, as compared with 2013, reflects an increase in the amount of inter-segment sales eliminations, principally between our aerospace businesses. The change in the operating profit elimination in 2014, as compared with 2013, reflects lower divestiture costs in 2014 and an approximately $220 million gain on an agreement with a state taxing authority for the monetization of tax credits in 2014.

LIQUIDITY AND FINANCIAL CONDITION
(dollars in millions)
2015
 
2014
Cash and cash equivalents
$
7,075

 
$
5,229

Total debt
20,425

 
19,701

Net debt (total debt less cash and cash equivalents)
13,350

 
14,472

Total equity
28,844

 
32,564

Total capitalization (total debt plus total equity)
49,269

 
52,265

Net capitalization (total debt plus total equity less cash and cash equivalents)
42,194

 
47,036

Total debt to total capitalization
41
%
 
38
%
Net debt to net capitalization
32
%
 
31
%
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows from continuing operations, which, after netting out capital expenditures, we target to equal or exceed net income attributable to common shareowners from continuing operations. For 2016, we expect this to approximate 90% to 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: common stock repurchases, capital expenditures, customer financing requirements, investments in businesses, dividends, 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.
Our domestic pension funds experienced a positive return on assets of approximately 0.1% during 2015. Approximately 87% of these domestic pension plans are invested in readily-liquid investments, including equity, fixed income, asset-backed receivables and structured products. The balance of these domestic pension plans (13%) is invested in less-liquid but market-valued investments, including real estate and private equity. Across our global pension plans, the impact of higher discount rates for pension obligations, a change in the manner of estimating discount rates for service cost and interest cost and the continued recognition of prior pension investment gains, partially offset by a reduction in the expected return on plan assets and 2015 actual returns on plan assets, will result in decreased pension expense in 2016 of approximately $500 million as compared to 2015.
Historically, our strong debt ratings and financial position have enabled us to issue long-term debt at favorable market rates. Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing debt-to-total-capitalization level as well as our credit standing. In September 2015, several external rating agencies downgraded our debt ratings ("A" to "A-", and "A2" to "A3") with a stable ratings outlook, primarily attributing their actions to the level of completed and projected share repurchase activity. Our debt-to-total-capitalization increased 300 basis points from 38% at December 31, 2014 to 41% at December 31, 2015 primarily due to lower total equity from our share repurchases in 2015 and the use of short-term borrowings. 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, 2015, we completed the optional remarketing of the 1.550% junior subordinated notes, which were originally issued as part of our equity units on June 18, 2012. As a result of the remarketing, these notes were redesignated as our 1.778% junior subordinated notes due May 4, 2018. On August 3, 2015, we received approximately $1.1 billion from the proceeds of the remarketing, and issued approximately 11.3 million shares of Common Stock to settle the purchase obligation of the holders of the equity units under the purchase contract entered into at the time of the original issuance of the equity units.

15




During the quarter ended June 30, 2015, we repaid at maturity all 4.875% notes due in 2015 and all floating rate notes due in 2015, representing $1.7 billion in aggregate principal. On May 4, 2015, we issued $850 million aggregate principal amount of 4.150% notes due May 15, 2045. On May 22, 2015 we issued €750 million aggregate principal amount of 1.250% notes due May 22, 2023. The net proceeds from these debt issuances were used primarily to repay the 4.875% notes and floating rate notes maturing during the quarter ended June 30, 2015.
In 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.
On March 13, 2015, we entered into accelerated share repurchase (ASR) agreements to repurchase an aggregate of $2.65 billion of our common stock, which was largely funded by our commercial paper borrowings. Under the terms of the ASR agreements, we made the aggregate payments and received an initial delivery of approximately 18.6 million shares of our common stock, representing approximately 85% of the shares expected to be repurchased. On July 31, 2015, the shares associated with the remaining portion of the aggregate purchase were settled upon final delivery of approximately 4.2 million additional shares of common stock.
On November 6, 2015, we completed the sale of Sikorsky to Lockheed Martin Corp. for approximately $9,083 million in cash, subject to customary post-closing working capital and net debt adjustments. In connection with the sale of Sikorsky, we expect to make tax payments of approximately $2.4 billion, primarily during the first quarter of 2016.
On November 11, 2015, we entered into ASR agreements to repurchase an aggregate of $6 billion of our common stock utilizing the net after-tax proceeds from the sale of Sikorsky. Under the terms of the ASR agreements, we made the aggregate payments on November 16, 2015 and received an initial delivery of approximately 51.9 million shares of our common stock, representing approximately 85% of the shares expected to be repurchased. The shares associated with the remaining portion of the aggregate purchase price are to be settled over six tranches. Upon settlement of each tranche, we may be entitled to receive additional common shares or, under certain limited circumstances, be required to deliver shares or make additional payments to the counterparties. The final settlement of the transactions under all tranches is expected to occur no later than the third quarter of 2016.
At December 31, 2015, 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 December 31, 2015 and 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 December 31, 2015, our maximum commercial paper borrowing authority was $4.35 billion. We generally use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions and repurchases of our common stock.
At December 31, 2015, over 85% of our cash was held by UTC's foreign subsidiaries, due to our extensive international operations. 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. In the quarter ended December 31, 2015, we recognized an income tax provision of approximately $274 million related to the intended repatriation of foreign cash, the majority of which is from current year earnings of certain international subsidiaries. As discussed in Note 11, with few other exceptions, U.S. income taxes have not been provided on other undistributed earnings of international subsidiaries. Our intention is to reinvest these earnings permanently or to repatriate the earnings only when it is tax effective to do so.
We continue to be involved in litigation with the German Tax Office in the German Tax Court with respect to certain tax benefits that we have claimed related to a 1998 reorganization of the corporate structure of Otis operations in Germany. We made tax and interest payments of approximately $300 million during 2015 to avoid additional interest accruals while we continue to litigate this matter. We do not expect to make significant additional tax or interest payments pending final resolution of this matter. See Note 17 for a further discussion of this German tax litigation.
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 December 31, 2015 and 2014, the amount of such restricted cash was approximately $45 million and $255 million, respectively.
We believe our future operating cash flows will be sufficient to meet our future operating cash needs. Further, we continue to have access to the commercial paper markets and our existing credit facilities, and our ability to obtain debt or equity financing, as well as the availability under committed credit lines, provides additional potential sources of liquidity should they be required or appropriate.


16




Cash Flow—Operating Activities of Continuing Operations
(dollars in millions)
2015
 
2014
 
2013
Net cash flows provided by operating activities of continuing operations
$
6,698

 
$
6,994

 
$
7,314

2015 Compared with 2014
Cash generated from operating activities of continuing operations in 2015 was $296 million lower than 2014. Income from continuing operations and noncash deferred income tax provision and depreciation and amortization charges were approximately $1.8 billion lower than 2014. This decline includes the noncash expense related to the Canadian government settlement of $867 million and the noncash portion of other infrequently occurring items, as discussed in Results of Operations, which are included in Other operating activities, net in the Consolidated Statement of Cash Flows for the year ended December 31, 2015. The 2015 cash outflows for working capital were primarily driven by increases in inventory in our aerospace businesses to support deliveries and other contractual commitments, and were partially offset by increases in accounts payable and accrued liabilities in these businesses. Increases in accounts receivable in our commercial businesses were largely offset by increases in accounts payable and customer advances in these businesses. Factoring activity in 2015 was approximately $100 million higher than the prior year, excluding customer-funded factoring at Pratt & Whitney related to certain extensions of contractual payment terms. Reductions in accrued liabilities also include payments of interest and taxes of approximately $300 million related to the German tax matter, as discussed in Note 17. For 2014, cash outflows for working capital were driven by increases in inventory to support deliveries and other contractual commitments across all business segments. Reductions in accounts receivable in our aerospace businesses, driven primarily by accelerated customer collections and selected factoring primarily at Pratt & Whitney, were partially offset by increases in accounts receivable in our commercial businesses.
The funded status of our defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and actuarial mortality assumptions. We can contribute cash or UTC shares to our plans at our discretion, subject to applicable regulations. Total cash contributions to our global defined benefit pension plans were $147 million, $517 million and $108 million during 2015, 2014 and 2013, respectively. In 2015, we made noncash contributions of $250 million in UTC common stock to our defined benefit pension plans. As of December 31, 2015, the total investment by the global defined benefit pension plans in our securities was approximately 3% of total plan assets. Although our domestic defined benefit pension plans are approximately 88% funded on a projected benefit obligation basis as of December 31, 2015, and we are not required to make additional contributions through the end of 2020, we may elect to make discretionary contributions in 2016. We expect to make total contributions of approximately $175 million to our global defined benefit pension plans in 2016. Contributions to our global defined benefit pension plans in 2016 are expected to meet or exceed the current funding requirements.
2014 Compared with 2013
Cash generated from operating activities of continuing operations in 2014 was $320 million lower than 2013. Income from continuing operations and noncash deferred income tax provision and depreciation and amortization charges were approximately $1 billion higher than 2013, offset by $883 million of higher investments in working capital and $409 million of higher global pension contributions than in 2013. The 2014 cash outflows for working capital were driven by increases in inventory to support deliveries and other contractual commitments across all business segments. Reductions in accounts receivable in our aerospace businesses, driven primarily by accelerated customer collections and selected factoring primarily at Pratt & Whitney, were partially offset by increases in accounts receivable in our commercial businesses. For 2013, cash inflows for working capital were driven by an increase in customer advances and accruals, primarily at Pratt & Whitney and Otis, partially offset by an increase in accounts receivable attributable to sales volumes and timing, primarily at Pratt & Whitney and UTC Aerospace Systems. Increases in inventories and contracts in progress were largely offset by increases in accounts payable.
Cash Flow—Investing Activities of Continuing Operations
(dollars in millions)
2015
 
2014
 
2013
Net cash flows used in investing activities of continuing operations
$
(2,527
)
 
$
(2,192
)
 
$
(1,323
)
2015 Compared with 2014
Cash flows used in investing activities of continuing operations for 2015 primarily reflect capital expenditures of approximately $1.7 billion and payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms of approximately $685 million. Cash flows used in investing activities of continuing operations for 2014 primarily reflect capital expenditures of approximately $1.6 billion and payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms of approximately $800 million, partially offset by net

17




proceeds of approximately $344 million from business dispositions, primarily a number of small dispositions in our commercial businesses.
In 2015, we increased our collaboration intangible assets by approximately $437 million, of which $300 million represented payments made under our 2012 agreement to acquire Rolls-Royce's ownership and collaboration interests in IAE. Capital expenditures for 2015 primarily relate to investments in new programs at Pratt & Whitney and UTC Aerospace Systems. Cash investments in businesses in 2015 were approximately $538 million, and were partially offset by net proceeds of approximately $200 million from business dispositions. Cash investments in businesses in 2015 consisted of the acquisition of the majority interest in a UTC Climate, Controls & Security business, the acquisition of an imaging technology company by UTC Aerospace Systems and a number of small acquisitions, primarily in our commercial businesses. Approximately $210 million of our restricted cash balance as of December 31, 2014 was utilized in cash investments in businesses in 2015.
We expect total cash investments for acquisitions in 2016 to be $1 billion to $2 billion. However, actual acquisition spending may vary depending upon the timing, availability and appropriate value of acquisition opportunities. We expect capital expenditures in 2016 to be approximately $1.7 billion.
As discussed in Note 14 to the Consolidated Financial Statements, we enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) and those utilized as economic hedges. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, including swaps, forward contracts and options to manage certain foreign currency, interest rate and commodity price exposures. During the years ended December 31, 2015 and 2014, we had net cash receipts of approximately $160 million and $93 million, respectively, from the settlement of these derivative instruments, primarily related to the strengthening of the U.S. Dollar.
Customer financing activities were a net use of cash of $169 million in 2015 and a net source of cash of $129 million in 2014. While we expect that 2016 customer financing activity will be a net use of funds, actual funding is subject to usage under existing customer financing commitments during the year. We may also arrange for third-party investors to assume a portion of our commitments. At December 31, 2015, we had commercial aerospace financing and other contractual commitments of approximately $14.6 billion related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which as much as $1.2 billion may be required to be disbursed during 2016. As discussed in Note 1 to the Consolidated Financial Statements, we have entered into certain collaboration arrangements, which may include participation by our collaborators in these commitments. At December 31, 2015, our collaborators' share of these commitments was approximately $4.1 billion of which as much as $344 million may be required to be disbursed to us during 2016. Refer to Note 5 to the Consolidated Financial Statements for additional discussion of our commercial aerospace industry assets and commitments.
2014 Compared with 2013
Cash flows used in investing activities of continuing operations for 2014 primarily reflect capital expenditures of approximately $1.6 billion and payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms of approximately $800 million.
Cash flows used in investing activities of continuing operations in 2013 primarily reflect the net proceeds of approximately $1.6 billion from business dispositions, offset by capital expenditures of approximately $1.6 billion and payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms of approximately $930 million. Business dispositions in 2013 included the sale of the legacy Goodrich pumps and engine controls business, the sale of the legacy Goodrich electric power systems business and the sale of Pratt & Whitney Power Systems.
Cash investments in businesses in 2014 were approximately $402 million, and included the acquisition of the majority interest in a Pratt & Whitney joint venture and a number of small acquisitions, primarily in our commercial businesses. Capital expenditures in 2014 were consistent with 2013 and related primarily to investments in new programs at Pratt & Whitney and UTC Aerospace Systems, as well as continuation of Goodrich integration activities at UTC Aerospace Systems. Customer financing activities were a net source of cash of $129 million in 2014 and a net use of cash of $134 million in 2013.
Cash Flow—Financing Activities of Continuing Operations
(dollars in millions)
2015
 
2014
 
2013
Net cash flows used in financing activities of continuing operations
$
(10,776
)
 
$
(4,247
)
 
$
(5,931
)

18




2015 Compared with 2014
The timing and levels of certain cash flow activities, such as acquisitions and repurchases of our stock, have resulted in the issuance of both long-term and short-term debt. Commercial paper borrowings and revolving credit facilities provide short-term liquidity to supplement operating cash flows and are used for general corporate purposes, including the funding of potential acquisitions and repurchases of our stock. We had approximately $727 million of outstanding commercial paper at December 31, 2015. At December 31, 2014, we had no commercial paper outstanding.
On May 4, 2015, we completed the previously announced optional remarketing of the 1.550% junior subordinated notes, which were originally issued as part of our equity units on June 18, 2012. As a result of the remarketing, these notes were redesignated as our 1.778% junior subordinated notes due May 4, 2018. On August 3, 2015, we received approximately $1.1 billion from the proceeds of the remarketing, and issued approximately 11.3 million shares of our common stock to settle the purchase obligation of the holders of the equity units under the purchase contract entered into at the time of the original issuance of the equity units.
On March 13, 2015, we entered into ASR agreements to repurchase an aggregate of $2.65 billion of our common stock, which was largely funded by our commercial paper borrowings. Under the terms of the ASR agreements, we made the aggregate payments and received an initial delivery of approximately 18.6 million shares of our common stock, representing approximately 85% of the shares expected to be repurchased. On July 31, 2015, the shares associated with the remaining portion of the aggregate purchase were settled upon final delivery of approximately 4.2 million additional shares of common stock.
On July 19, 2015, our Board of Directors authorized a share repurchase program for up to 75 million shares of our common stock, replacing the program announced on February 4, 2013 which was nearing completion. The remaining authority to repurchase approximately 16.2 million shares of our common stock under the February 2013 share repurchase program was revoked and replaced as of July 19, 2015 with the new share repurchase program. Under this program shares were authorized to be purchased, and under the October 2015 program discussed below, shares may be purchased on the open market, in privately negotiated transactions, under ASR programs, and under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended. We may also reacquire shares outside of the program from time to time in connection with the surrender of shares to cover taxes on vesting of restricted stock.
On October 14, 2015, our Board of Directors authorized a share repurchase program for up to $12 billion of our common stock, replacing the program announced on July 19, 2015. On November 11, 2015, we entered into ASR agreements to repurchase an aggregate of $6 billion of our common stock utilizing the net after-tax proceeds from the sale of Sikorsky. Under the terms of those November 11th ASR agreements, we made the aggregate payments on November 16, 2015 and received an initial delivery of approximately 51.9 million shares of our common stock, representing approximately 85% of the shares expected to be repurchased. The shares associated with the remaining portion of the aggregate purchase price are to be settled over six tranches. Upon settlement of each tranche, we may be entitled to receive additional common shares or, under certain limited circumstances, be required to deliver shares or make additional payments to the counterparties. The final settlement of the transactions under all tranches is expected to occur no later than the third quarter of 2016. In addition to transactions under the ASR agreements discussed above, we repurchased approximately 14 million shares of our common stock for approximately $1.35 billion during the year ended December 31, 2015. In 2014, we repurchased 13.5 million shares of our common stock for approximately $1.5 billion.
We expect 2016 share repurchases to be approximately $3 billion. Our share repurchases vary depending upon various factors including the level of our other investing activities. In 2015 and 2014, we paid aggregate dividends on common stock of approximately $2.2 billion and $2.0 billion, respectively.
We have an existing universal shelf registration statement filed with the SEC for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of securities to be issued under this shelf registration statement.
2014 Compared with 2013
In 2014, we made repayments of long-term debt of $304 million, including redemption of all remaining outstanding 2016 Goodrich 6.290% notes, representing approximately $188 million in aggregate principal. In 2013 we made repayments of long-term debt of approximately $2.9 billion. We had no commercial paper outstanding at December 31, 2014. We had $200 million of commercial paper outstanding at December 31, 2013. Financing cash outflows for 2013 included the repurchase of 12.6 million shares of our common stock for approximately $1.2 billion.
In 2014, we paid aggregate dividends on common stock of approximately $2.0 billion. During 2013, an aggregate $1.9 billion of cash dividends were paid to common stock shareowners.

19




Cash Flow—Discontinued Operations 
(dollars in millions)
2015
 
2014
 
2013
Net cash flows provided by (used in) discontinued operations
$
8,619

 
$
217

 
$
(236
)
2015 Compared with 2014
Cash flows from discontinued operations for the year ended December 31, 2015 primarily reflect those from investing activities, which includes the proceeds of $9,083 million from the sale of Sikorsky to Lockheed Martin Corp., completed on November 6, 2015, partially offset by capital expenditures of Sikorsky in 2015. Cash outflows from operating activities of discontinued operations for the year ended December 31, 2015 primarily reflect operating income and noncash expenses, as well as net investments in working capital and other net operating assets of Sikorsky.
For the year ended December 31, 2014, cash flows provided by discontinued operations primarily reflect cash provided by Sikorsky operating income of approximately $150 million and noncash charges, including $438 million of charges related to the change in estimate resulting from contract amendments signed with the Canadian government for the CH-148 derivative of the H-92 helicopter, a military variant of the S-92 helicopter (the Cyclone Helicopter program), partially offset by working capital investments in inventories. Cash flows used in investing activities of $113 million were primarily related to capital expenditures of Sikorsky.
2014 Compared with 2013
For the year ended December 31, 2014, cash flows provided by discontinued operations primarily reflect cash provided by Sikorsky operating income of approximately $150 million and noncash charges, including $438 million of charges related to the change in estimate for the contract amendments signed with the Canadian government for the Cyclone Helicopter program, partially offset by working capital investments in inventories. Cash flows used in investing activities of $113 million were primarily related to capital expenditures of Sikorsky.
Cash flows used in discontinued operations in 2013 were driven by tax payments of approximately $640 million, primarily related to transactions concluded in 2012 and reported in discontinued operations. Net cash flows used in discontinued operations for 2013 includes positive cash flows of approximately $400 million related to the sale of Rocketdyne, and cash flows from the operating activities of Rocketdyne, and of UTC Power through its date of disposition of February 12, 2013, as well as payments made in settlement of liabilities, transaction costs, and interim funding of UTC Power and of Clipper, which was divested in 2012. Cash flows from discontinued operations in 2013 related to Sikorsky include operating cash flows of approximately $190 million partially offset by investing cash flows of approximately $140 million, primarily related to capital expenditures of Sikorsky.
CRITICAL ACCOUNTING ESTIMATES
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Consolidated Financial Statements describes the significant accounting policies used in preparation of the Consolidated Financial Statements. Management believes 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. The most significant areas involving management judgments and estimates are described below. Actual results in these areas could differ from management's estimates.
Long-Term Contract Accounting. We utilize percentage-of-completion accounting on certain of our long-term contracts. The percentage-of-completion method requires estimates of future revenues and costs over the full term of product and/or service delivery. We also utilize the completed-contract method of accounting on certain lesser value commercial contracts. Under the completed-contract method, sales and cost of sales are recognized when a contract is completed.
Losses, if any, on long-term contracts are provided for when anticipated. We recognize loss provisions on original equipment contracts to the extent that estimated inventoriable manufacturing, engineering, product warranty and product performance guarantee costs, as appropriate, exceed the projected revenue from the products contemplated under the contractual arrangement. For new commitments, we generally record loss provisions at the earlier of contract announcement or contract signing except for certain requirements contracts under which losses are recorded based upon receipt of the purchase order which obligates us to perform. For existing commitments, anticipated losses on contracts are recognized in the period in which losses become evident. Products contemplated under the contractual arrangement include products purchased under the contract and, in the large commercial engine and wheels and brakes businesses, future highly probable sales of replacement parts required by regulation that are expected to be purchased subsequently for incorporation into the original equipment. Revenue projections used in determining contract loss provisions are based upon estimates of the quantity, pricing and timing of future product deliveries. We measure the extent of progress toward completion on our long-term commercial aerospace

20




equipment contracts using units-of-delivery. In addition, we use the cost-to-cost method for elevator and escalator sales, installation and modernization contracts in the commercial businesses and certain aerospace development contracts. For long-term aftermarket contracts, we recognize revenue over the contract period in proportion to the costs expected to be incurred in performing services under the contract. Contract accounting also requires estimates of future costs over the performance period of the contract as well as an estimate of award fees and other sources of revenue.
Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management's judgment. The long-term nature of these contracts, the complexity of the products, and the strict safety and performance standards under which they are regulated can affect our ability to estimate costs precisely. As a result, we review and update our cost estimates on significant contracts on a quarterly basis, and no less frequently than annually for all others, and when circumstances change and warrant a modification to a previous estimate. We record changes in contract estimates using the cumulative catch-up method in accordance with the Revenue Recognition Topic of the FASB ASC.
Income Taxes. The future tax benefit arising from net deductible temporary differences and tax carryforwards was $6.2 billion at December 31, 2015 and $5.5 billion at December 31, 2014. Management believes that our earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits, which may be realized over an extended period of time. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided.
In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through an increase to tax expense in the period in which that determination is made or when tax law changes are enacted. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease to tax expense in the period in which that determination is made.
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. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. See Notes 1 and 11 to the Consolidated Financial Statements for further discussion. Also see Note 17 for discussion of UTC administrative review proceedings with the German Tax Office.
Goodwill and Intangible Assets. Our investments in businesses in 2015 totaled $556 million (including debt assumed of $18 million). The assets and liabilities of acquired businesses are recorded under the acquisition method of accounting at their estimated fair values at the dates of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying identifiable net assets of acquired businesses. Intangible assets consist of service portfolios, patents, trademarks/tradenames, customer relationships and other intangible assets including a collaboration asset established in connection with the restructuring of IAE as discussed above and in Note 2 to the Consolidated Financial Statements.
Also included within other intangible assets are payments made to secure certain contractual rights to provide product on new commercial aerospace platforms. Such payments are capitalized when there are distinct rights obtained and there are sufficient incremental cash flows to support the recoverability of the assets established. Otherwise, the applicable portion of the payments are expensed. Capitalized payments made on these contractual commitments are amortized as a reduction of sales. We amortize these intangible assets based on the 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 increasing amortization expense 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. The gross value of these contractual commitments at December 31, 2015 was approximately $9.9 billion, of which approximately $1.6 billion has been paid to date. We record these payments as intangible assets when such payments are no longer conditional. The recoverability of these intangibles is dependent upon the future success and profitability of the underlying aircraft platforms including the associated aftermarket revenue streams.
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual, or more frequent if necessary, impairment testing using the guidance and criteria described in the Intangibles—Goodwill and Other Topic of the FASB ASC. This testing compares carrying values to fair values and, when appropriate, the carrying values of these assets are reduced to fair value. In developing our estimates for the fair value of our reporting units, significant judgment

21




is required in the determination of the appropriateness of using a qualitative assessment or quantitative assessment. When quantitative assessments are required or elected to be performed, fair value is primarily based on income approaches using discounted cash flow models which have significant assumptions. Such assumptions are subject to variability from year to year and are directly impacted by global market conditions. We completed our annual impairment testing as of July 1, 2015 and determined that no significant adjustments to the carrying value of goodwill or indefinite lived intangible assets were necessary based on the results of the impairment tests. Although these assets are not currently impaired, there can be no assurance that future impairments will not occur. See Note 2 to the Consolidated Financial Statements for further discussion.
Contingent Liabilities. Our operating units include businesses which sell products and services and conduct operations throughout the world. As described in Note 17 to the Consolidated Financial Statements, contractual, regulatory and other matters, including asbestos claims, in the normal course of business may arise that subject us to claims or litigation. Additionally, we have significant contracts with the U.S. Government, subject to government oversight and audit, which may require significant adjustment of contract prices. We accrue for liabilities associated with these matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of then currently available facts with respect to each matter. When no amount within a range of estimates is more likely, the minimum is accrued. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.
Employee Benefit Plans. We sponsor domestic and foreign defined benefit pension and other postretirement plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on plan assets, rate of increase in employee compensation levels, mortality rates, and health care cost increase projections. Assumptions are determined based on company data and appropriate market indicators, and are evaluated each year at December 31. A change in any of these assumptions would have an effect on net periodic pension and postretirement benefit costs reported in the Consolidated Financial Statements.
In the following table, we show the sensitivity of our pension and other postretirement benefit plan liabilities and net annual periodic cost to a 25 basis point change in the discount rate as of December 31, 2015:
(dollars in millions)
 
Increase in
Discount Rate
of 25 bps

 
Decrease in
Discount Rate
of 25 bps

Pension plans
 
 
 
 
Projected benefit obligation
 
$
(1,047
)
 
$
1,087

Net periodic pension cost
 
(75
)
 
77

Other postretirement benefit plans
 
 
 
 
Accumulated postretirement benefit obligation
 
(17
)
 
18

Net periodic postretirement benefit cost
 
(1
)
 
1

These estimates assume no change in the shape or steepness of the company-specific yield curve used to plot the individual spot rates that will be applied to the future cash outflows for future benefit payments in order to calculate interest and service cost. A flattening of the yield curve, from a narrowing of the spread between interest and obligation discount rates, would increase our net periodic pension cost. Conversely, a steepening of the yield curve, from an increase in the spread between interest and obligation discount rates, would decrease our net periodic pension cost.
Pension expense is also sensitive to changes in the expected long-term rate of asset return. An increase or decrease of 25 basis points in the expected long-term rate of asset return would have decreased or increased 2015 pension expense by approximately $75 million.
The weighted-average discount rate used to measure pension liabilities and costs is set by reference to UTC-specific analysis using each plan's specific cash flows and is then compared to high-quality bond indices for reasonableness. Global market interest rates have increased in 2015 as compared with 2014 and, as a result, the weighted-average discount rate used to measure pension liabilities increased from 3.8% in 2014 to 4.1% in 2015. In December 2009, we amended the salaried retirement plans (qualified and non-qualified) to change the retirement formula effective January 1, 2015. The formula changed from a final average earnings (FAE) and credited service formula to the existing cash balance formula that was adopted in 2003 for newly hired non-union employees and for other non-union employees who made a one-time voluntary election to have future benefit accruals determined under this formula. Employees hired after 2009 are not eligible for any defined benefit pension plan and will instead receive an enhanced benefit under the UTC Savings Plan. As of July 26, 2012 the same amendment was applied to legacy Goodrich salaried employees. Across our global pension plans, the impact of higher discount rates for pension obligations, a change in the manner of estimating discount rates for service cost and interest cost and the continued recognition of prior pension investment gains, partially offset by a reduction in the expected return on plan assets and

22




2015 actual return on plan assets, will result in decreased pension expense in 2016 of approximately $500 million as compared to 2015, including a $215 million decrease in 2016 pension expense as a result of the change in accounting estimate discussed in Note 12.
See Note 12 to the Consolidated Financial Statements for further discussion.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We extend a variety of financial guarantees to third parties in support of unconsolidated affiliates and for potential financing requirements of commercial aerospace customers. We also have obligations arising from sales of certain businesses and assets, including indemnities for representations and warranties and environmental, health and safety, tax and employment matters. Circumstances that could cause the contingent obligations and liabilities arising from these arrangements to come to fruition include changes in an underlying transaction (e.g., hazardous waste discoveries, etc.), nonperformance under a contract, customer requests for financing, or deterioration in the financial condition of the guaranteed party.
A summary of our consolidated contractual obligations and commitments as of December 31, 2015 is as follows:
 
 
  
 
Payments Due by Period
(dollars in millions)
 
Total
 
2016
 
2017-2018
 
2019-2020
 
Thereafter
Long-term debt—principal
 
$
19,439

 
$
179

 
$
3,837

 
$
3,070

 
$
12,353

Long-term debt—future interest
 
12,585

 
872

 
1,642

 
1,351

 
8,720

Operating leases
 
2,183

 
529

 
676

 
340

 
638

Purchase obligations
 
13,316

 
6,763

 
4,773

 
1,724

 
56

Other long-term liabilities
 
5,096

 
1,381

 
1,226

 
433

 
2,056

Total contractual obligations
 
$
52,619

 
$
9,724

 
$
12,154

 
$
6,918

 
$
23,823

Purchase obligations include amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity, delivery and termination liability. Approximately 13% of the purchase obligations disclosed above represent purchase orders for products to be delivered under firm contracts with the U.S. Government for which we have full recourse under customary contract termination clauses.
Other long-term liabilities primarily include those amounts on our December 31, 2015 balance sheet representing obligations under product service and warranty policies, performance and operating cost guarantees, estimated environmental remediation costs and expected contributions under employee benefit programs. The timing of expected cash flows associated with these obligations is based upon management's estimates over the terms of these agreements and is largely based upon historical experience.
In connection with the acquisition of Goodrich in 2012, we recorded assumed liabilities of approximately $2.2 billion related to customer contractual obligations on certain OEM development programs where the expected costs exceeded the expected revenue under contract. These liabilities are being liquidated in accordance with the underlying economic pattern of obligations, as reflected by the net cash outflows incurred on the OEM contracts. Total consumption of the contractual obligations for the year ended December 31, 2015 was approximately $193 million. Total future consumption of the contractual obligations is expected to be as follows: $252 million in 2016, $259 million in 2017, $250 million in 2018, $219 million in 2019, $84 million in 2020 and $351 million thereafter. These amounts are not included in the table above.
The above table also does not reflect unrecognized tax benefits of $1,169 million, the timing of which is uncertain, except for approximately $28 million that may become payable during 2016. Refer to Note 11 to the Consolidated Financial Statements for additional discussion on unrecognized tax benefits.

23




COMMERCIAL COMMITMENTS
The following table summarizes our commercial commitments outstanding as of December 31, 2015:
 
 
Amount of Commitment Expiration per Period
(dollars in millions)
 
Committed
 
2016
 
2017-2018
 
2019-2020
 
Thereafter
Commercial aerospace financing commitments
 
$
2,608

 
$
410

 
$
939

 
$
559

 
$
700

Other commercial aerospace commitments
 
11,985

 
821

 
1,825

 
1,471

 
7,868

Commercial aerospace financing arrangements
 
365

 
2

 
4

 
12

 
347

Credit facilities and debt obligations (expire 2016 to 2028)
 
241

 
162

 
64

 

 
15

Performance guarantees
 
55

 
7

 

 
39

 
9

Total commercial commitments
 
$
15,254

 
$
1,402

 
$
2,832

 
$
2,081

 
$
8,939

In 2012, Pratt & Whitney obtained increased ownership and collaboration interests in IAE and an intellectual property license, paying Rolls-Royce $1.5 billion at closing, with additional payments due to Rolls-Royce contingent upon each hour flown by the V2500-powered aircraft in service as of June 29, 2012 during the fifteen-year period following closing of the purchase. These flight hour payments, included in "Other commercial aerospace commitments" in the table above, are being capitalized as collaboration intangible assets.
We also have other contractual commitments, including commitments to secure certain contractual rights to provide product on new aircraft platforms, which are included in "Other commercial aerospace commitments" in the table above. Such payments are capitalized when there are distinct rights obtained and there are sufficient incremental cash flows to support the recoverability of the assets established. Otherwise, the applicable portion of the payments are expensed. Capitalized payments made on these contractual commitments are included in intangible assets and are amortized over the term of underlying economic benefit.
Refer to Notes 1, 5 and 16 to the Consolidated Financial Statements for additional discussion on contractual and commercial commitments.
MARKET RISK AND RISK MANAGEMENT
We are exposed to fluctuations in foreign currency exchange rates, interest rates and commodity prices. To manage certain of those exposures, we use derivative instruments, including swaps, forward contracts and options. Derivative instruments utilized by us in our hedging activities are viewed as risk management tools, involve little complexity and are not used for trading or speculative purposes. We diversify the counterparties used and monitor the concentration of risk to limit our counterparty exposure.
We have evaluated our exposure to changes in foreign currency exchange rates, interest rates and commodity prices in our market risk sensitive instruments, which are primarily cash, debt and derivative instruments, using a value at risk analysis. Based on a 95% confidence level and a one-day holding period, at December 31, 2015, the potential loss in fair value on our market risk sensitive instruments was not material in relation to our financial position, results of operations or cash flows. Our calculated value at risk exposure represents an estimate of reasonably possible net losses based on volatilities and correlations and is not necessarily indicative of actual results. Refer to Notes 1, 9 and 14 to the Consolidated Financial Statements for additional discussion of foreign currency exchange, interest rates and financial instruments.
Foreign Currency Exposures. We have a large volume of foreign currency exposures that result from our international sales, purchases, investments, borrowings and other international transactions. International segment sales, including U.S. export sales, averaged approximately $36 billion over the last three years. We actively manage foreign currency exposures that are associated with committed foreign currency purchases and sales, and other assets and liabilities created in the normal course of business at the operating unit level. More than insignificant exposures that cannot be naturally offset within an operating unit are hedged with foreign currency derivatives. We also have a significant amount of foreign currency net asset exposures. As discussed in Note 9 to the Consolidated Financial Statements, on May 22, 2015 we issued approximately €750 million of Euro-denominated debt, which qualifies as a net investment hedge against our investments in European businesses under ASC 815, Derivatives and Hedging. As of December 31, 2015, the net investment hedge is deemed to be effective as defined under ASC 815. Currently, we do not hold any derivative contracts that hedge our foreign currency net asset exposures but may consider such strategies in the future.
Within aerospace, our sales are typically denominated in U.S. Dollars under accepted industry convention. However, for our non-U.S. based entities, such as P&WC, a substantial portion of their costs are incurred in local currencies. Consequently,

24




there is a foreign currency exchange impact and risk to operational results as U.S. Dollars must be converted to local currencies such as the Canadian Dollar in order to meet local currency cost obligations. In order to minimize the exposure that exists from changes in the exchange rate of the U.S. Dollar against these other currencies, we hedge a certain portion of sales to secure the rates at which U.S. Dollars will be converted. The majority of this hedging activity occurs at P&WC, and hedging activity also occurs to a lesser extent at certain UTC Aerospace Systems' European businesses. At P&WC, firm and forecasted sales for both engines and spare parts are hedged at varying amounts up to 48 months on the U.S. Dollar sales exposure as represented by the excess of U.S. Dollar sales over U.S. Dollar denominated purchases. Hedging gains and losses resulting from movements in foreign currency exchange rates are partially offset by the foreign currency translation impacts that are generated on the translation of local currency operating results into U.S. Dollars for reporting purposes. While the objective of the hedging program is to minimize the foreign currency exchange impact on operating results, there are typically variances between the hedging gains or losses and the translational impact due to the length of hedging contracts, changes in the sales profile, volatility in the exchange rates and other such operational considerations.
Interest Rate Exposures. Our long-term debt portfolio consists mostly of fixed-rate instruments. From time to time, we may hedge to floating rates using interest rate swaps. The hedges are designated as fair value hedges and the gains and losses on the swaps are reported in interest expense, reflecting that portion of interest expense at a variable rate. We issue commercial paper, which exposes us to changes in interest rates. Currently, we do not hold any derivative contracts that hedge our interest exposures, but may consider such strategies in the future.
Commodity Price Exposures. We are exposed to volatility in the prices of raw materials used in some of our products and from time to time we may use forward contracts in limited circumstances to manage some of those exposures. In the future, if hedges are used, gains and losses may affect earnings. There were no significant outstanding commodity hedges as of December 31, 2015.
ENVIRONMENTAL MATTERS
Our operations are subject to environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over our foreign operations. As a result, we have established, and continually update, policies relating to environmental standards of performance for our operations worldwide. We believe that expenditures necessary to comply with the present regulations governing environmental protection will not have a material effect upon our competitive position, results of operations, cash flows or financial condition.
We have identified 723 locations, mostly in the United States, at which we may have some liability for remediating contamination. We have resolved our liability at 326 of these locations. We do not believe that any individual location's exposure will have a material effect on our results of operations. Sites in the investigation, remediation or operation and maintenance stage represent approximately 93% of our accrued environmental remediation reserve.
We have been identified as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA or Superfund) at 127 sites. The number of Superfund sites, in and of itself, does not represent a relevant measure of liability because the nature and extent of environmental concerns vary from site to site and our share of responsibility varies from sole responsibility to very little responsibility. In estimating our liability for remediation, we consider our likely proportionate share of the anticipated remediation expense and the ability of other potentially responsible parties to fulfill their obligations.
At December 31, 2015 and 2014, we had $837 million and $863 million reserved for environmental remediation, respectively. Cash outflows for environmental remediation were $50 million in 2015, $63 million in 2014 and $40 million in 2013. We estimate that ongoing environmental remediation expenditures in each of the next two years will not exceed approximately $85 million.
ASBESTOS MATTERS
As a result of the definitization of the insurance coverage for existing and potential future asbestos claims through the negotiation and establishment of settlement agreements during 2015, as well as the stabilization of company and industry experience, we believe the basis exists to establish a reasonably estimable reserve for our potential asbestos exposure.
With the aid of an outside actuarial expert, we have estimated and recorded a total undiscounted liability, including previously recognized liabilities, for pending and future asbestos-related claims through 2059 of $376 million. Additionally, we have recorded probable insurance recoveries related to this estimated liability of $106 million based upon the coverage-in-place agreements negotiated with our insurers during 2015. As a result, we recorded a noncash pretax charge to earnings of $237 million in the fourth quarter of 2015. See Note 17 "Commitments & Contingencies" of our Consolidated Financial Statements for further discussion of this matter.

25




GOVERNMENT MATTERS
As described in "Critical Accounting Estimates—Contingent Liabilities," our contracts with the U.S. Government are subject to audits. Such audits may recommend that certain contract prices should be reduced to comply with various government regulations, or that certain payments be delayed or withheld. We are also the subject of one or more investigations and legal proceedings initiated by the U.S. Government with respect to government contract matters. See "Legal Proceedings" in Item 1 to this Form 10-K and Note 11 "Income Taxes" and Note 17 "Commitments & Contingencies" of our Consolidated Financial Statements for further discussion of these and other government matters.


26




Cautionary Note Concerning Factors That May Affect Future Results
This 2015 Annual Report to Shareowners (2015 Annual Report) contains statements which, to the extent they are not statements of historical or present fact, constitute "forward-looking statements" under the securities laws. From time to time, oral or written forward-looking statements may also be included in other information released to the public. These forward-looking statements are intended to provide management’s current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as "believe," "expect," "expectations," "plans," "strategy," "prospects," "estimate," "project," "target," "anticipate," "will," "should," "see," "guidance," "confident" and other words of similar meaning in connection with a discussion of future operating or financial performance. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash, share repurchases and other measures of financial performance or potential future plans, strategies or transactions. All forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Such risks, uncertainties and other factors include, without limitation:
the effect of economic conditions in the industries and markets in which we operate in the U.S. and globally and any changes therein, including financial market conditions, fluctuations in commodity prices, interest rates and foreign currency exchange rates, levels of end market demand in construction and in both the commercial and defense segments of the aerospace industry, levels of air travel, financial condition of commercial airlines, the impact of weather conditions and natural disasters and the financial condition of our customers and suppliers;
challenges in the development, production, delivery, support, performance and realization of the anticipated benefits of advanced technologies and new products and services;
future levels of indebtedness and capital spending and research and development spending;
future availability of credit and factors that may affect such availability, including credit market conditions and our capital structure;
delays and disruption in delivery of materials and services from suppliers;
customer- and Company- directed cost reduction efforts and restructuring costs and savings and other consequences thereof;
the scope, nature, impact or timing of acquisition and divestiture activity, including among other things integration of acquired businesses into our existing businesses and realization of synergies and opportunities for growth and innovation;
new business opportunities;
our ability to realize the intended benefits of organizational changes;
the anticipated benefits of diversification and balance of operations across product lines, regions and industries;
the timing and scope of future repurchases of our common stock;
the outcome of legal proceedings, investigations and other contingencies;
pension plan assumptions and future contributions;
the impact of the negotiation of collective bargaining agreements and labor disputes;
the effect of changes in political conditions in the U.S. and other countries in which we operate; and
the effect of changes in tax, environmental, regulatory (including among other things import/export) and other laws and regulations in the U.S. and other countries in which we operate.
In addition, our Annual Report on Form 10-K for 2015 includes important information as to risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. See the "Notes to Consolidated Financial Statements" under the heading "Note 17: Contingent Liabilities," the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Business Overview," "Results of Operations," "Liquidity and Financial Condition," and "Critical Accounting Estimates," and the section titled "Risk Factors." Our Annual Report on Form 10-K for 2015 also includes important information as to these factors in the "Business" section under the headings "General," "Description of Business by Segment" and "Other Matters Relating to Our Business as a Whole," and in the "Legal Proceedings" section. Additional important information as to these factors is included in this 2015 Annual Report in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Restructuring Costs," "Environmental Matters" and "Governmental Matters." The forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Additional information as to factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements is disclosed from time to time in our other filings with the SEC.


27




Management's Report on Internal Control over Financial Reporting
The management of UTC is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the effectiveness of UTC's internal control over financial reporting as of December 31, 2015. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control—Integrated Framework, released in 2013. Management concluded that based on its assessment, UTC's internal control over financial reporting was effective as of December 31, 2015. The effectiveness of UTC's internal control over financial reporting, as of December 31, 2015, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
/s/ Gregory J. Hayes
 
Gregory J. Hayes
 
President and Chief Executive Officer
 
 
 
/s/ Akhil Johri
 
Akhil Johri
 
Executive Vice President & Chief Financial Officer
 
 
 
/s/ Neil G. Mitchill, Jr.
 
Neil G. Mitchill, Jr.
 
Corporate Vice President, Controller
 


28




Report of Independent Registered Public Accounting Firm
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF UNITED TECHNOLOGIES CORPORATION:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statement of operations, of comprehensive income, of cash flows and of changes in equity present fairly, in all material respects, the financial position of United Technologies Corporation and its subsidiaries at December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Corporation's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As disclosed in Notes 9, 11, and 12 to the consolidated financial statements, the Corporation changed the classification and presentation of debt issuance costs and deferred income taxes, and the leveling classification of pension assets in 2015.

A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


 
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 11, 2016


29




Consolidated Statement of Operations
(dollars in millions, except per share amounts; shares in millions)
 
2015
 
2014
 
2013
Net Sales:
 
 
 
 
 
 
Product sales
 
$
39,801

 
$
41,545

 
$
40,500

Service sales
 
16,297

 
16,355

 
16,100

 
 
56,098

 
57,900

 
56,600

Costs and Expenses:
 
 
 
 
 
 
Cost of products sold
 
29,771

 
30,367

 
30,051

Cost of services sold
 
10,660

 
10,531

 
10,417

Research and development
 
2,279

 
2,475

 
2,342

Selling, general and administrative
 
5,886

 
6,172

 
6,364

 
 
48,596

 
49,545

 
49,174

Other (expense) income, net
 
(211
)
 
1,238

 
1,123

Operating profit
 
7,291

 
9,593

 
8,549

Interest expense, net
 
824

 
881

 
895

Income from continuing operations before income taxes
 
6,467

 
8,712

 
7,654

Income tax expense
 
2,111

 
2,244

 
1,999

Net income from continuing operations
 
4,356

 
6,468

 
5,655

Less: Noncontrolling interest in subsidiaries' earnings from continuing operations
 
360

 
402

 
390

Income from continuing operations attributable to common shareowners
 
3,996

 
6,066

 
5,265

Discontinued operations (Note 3):
 
 
 
 
 
 
Income from operations
 
252

 
175

 
721

Gain (loss) on disposal
 
6,042

 

 
(33
)
Income tax expense
 
(2,684
)
 
(20
)
 
(234
)
Net income from discontinued operations
 
3,610

 
155

 
454

Less: Noncontrolling interest in subsidiaries' earnings (loss) from discontinued operations
 
(2
)
 
1

 
(2
)
Income from discontinued operations attributable to common shareowners
 
3,612

 
154

 
456

Net income attributable to common shareowners
 
$
7,608

 
$
6,220

 
$
5,721

 
 
 
 
 
 
 
Earnings Per Share of Common Stock—Basic:
 
 
 
 
 
 
Net income from continuing operations attributable to common shareowners
 
$
4.58

 
$
6.75

 
$
5.84

Net income attributable to common shareowners
 
$
8.72

 
$
6.92

 
$
6.35

Earnings Per Share of Common Stock—Diluted:
 
 
 
 
 
 
Net income from continuing operations attributable to common shareowners
 
$
4.53

 
$
6.65

 
$
5.75

Net income attributable to common shareowners
 
$
8.61

 
$
6.82

 
$
6.25

Dividends Per Share of Common Stock
 
$
2.560

 
$
2.360

 
$
2.195

Weighted average number of shares outstanding:
 
 
 
 
 
 
Basic shares
 
872.7

 
898.3

 
901.0

Diluted shares
 
883.2

 
911.6

 
915.1

See accompanying Notes to Consolidated Financial Statements

30




Consolidated Statement of Comprehensive Income
(dollars in millions)
 
2015
 
2014
 
2013
Net income from continuing operations
 
$
4,356

 
$
6,468

 
$
5,655

Net income from discontinued operations
 
3,610

 
155

 
454

Net income
 
7,966

 
6,623

 
6,109

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
Foreign currency translation adjustments arising during period
 
(1,502
)
 
(1,302
)
 
(523
)
Reclassification adjustments from sale of an investment in a foreign entity recognized in net income
 
42

 
7

 
25

 
 
(1,460
)
 
(1,295
)
 
(498
)
Pension and post-retirement benefit plans
 
 
 
 
 
 
Net actuarial (loss) gain arising during period
 
(284
)
 
(4,362
)
 
3,987

Prior service cost arising during period
 
(37
)
 
(5
)
 
(225
)
Other
 
326

 
121

 
50

Amortization of actuarial loss and prior service cost
 
867

 
416

 
906

 
 
872

 
(3,830
)
 
4,718

Tax (expense) benefit
 
(298
)
 
1,388

 
(1,735
)
 
 
574

 
(2,442
)
 
2,983

Unrealized (loss) gain on available-for-sale securities