Exhibit 13

Five-Year Summary

(dollars in millions, except per share amounts)	2018			2017			2016			2015			2014
For The Year
Net sales	$	66,501		$	59,837		$	57,244		$	56,098		$	57,900
Research and development	2,462			2,427			2,376			2,262			2,489
Restructuring costs	307			253			290			396			354
Net income from continuing operations 1	5,654			4,920			5,436			4,356			6,468
Net income from continuing operations attributable to common shareowners 1	5,269			4,552			5,065			3,996			6,066
Basic earnings per share—Net income from continuing operations attributable to common shareowners	6.58			5.76			6.19			4.58			6.75
Diluted earnings per share—Net income from continuing operations attributable to common shareowners	6.50			5.70			6.13			4.53			6.65
Cash dividends per common share	2.84			2.72			2.62			2.56			2.36
Average number of shares of Common Stock outstanding:
Basic	800			790			818			873			898
Diluted	810			799			826			883			912
Cash flows provided by operating activities of continuing operations	6,322			5,631			6,412			6,755			6,979
Capital expenditures 2	1,902			2,014			1,699			1,652			1,594
Acquisitions, including debt assumed & equity issued	31,142			231			712			556			530
Repurchases of Common Stock 3	325			1,453			2,254			10,000			1,500
Dividends paid on Common Stock (excluding ESOP)	2,170			2,074			2,069			2,184			2,048
At Year End
Working capital 2, 4	$	4,135		$	8,467		$	6,644		$	4,088		$	5,921
Total assets 2	134,211			96,920			89,706			87,484			86,338
Long-term debt, including current portion 2, 5	44,068			27,093			23,300			19,499			19,575
Total debt 2, 5	45,537			27,485			23,901			20,425			19,701
Total debt to total capitalization 5	53		%	47		%	45		%	41		%	38		%
Total equity 5, 6	40,610			31,421			29,169			28,844			32,564
Number of employees 7	240,200			204,700			201,600			197,200			211,500

Note 1 2018 amounts include unfavorable tax charges of approximately $744 million primarily related to non U.S. taxes that will become due when earnings of certain international subsidiaries are remitted, a $300 million pre-tax charge resulting from customer contract matters, partially offset by a $799 million pre-tax gain on the sale of Taylor. 2017 amounts include unfavorable tax charges of approximately $690 million related to U.S. tax reform legislation enacted in December, 2017, commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA) and a $196 million pre-tax charge resulting from customer contract matters, partially offset by pre-tax gains of approximately $500 million on sales of available for sale securities. 2016 amounts include a $423 million pre-tax pension settlement charge resulting from defined benefit plan de-risking actions. 2015 amounts include pre-tax charges of: $867 million as a result of a settlement with the Canadian government, $295 million from customer contract negotiations at Collins Aerospace Systems, and $237 million related to pending and future asbestos claims.

Note 2 Excludes assets and liabilities of discontinued operations held for sale, for all periods presented.

Note 3 The decrease in share repurchases in 2018 is due to the temporary suspension of activity in connection with the acquisition of Rockwell Collins announced on September 4, 2017, excluding activity relating to our employee savings plans. 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.

Note 4 Working capital in 2018 includes the addition of contract assets and liabilities of $3.5B and $5.7B, respectively in accordance with the New Revenue Standard as well as an increase in current borrowings of $1.8 billion. Working capital in 2015 includes approximately $2.4 billion of taxes payable related to the gain on the sale of Sikorsky, which were paid in 2016. As compared with 2014, 2015 working capital also reflects the reclassification of current deferred tax assets and liabilities to non-current assets and liabilities in connection with the adoption of Accounting Standards Update 2015-17.

Note 5 The increase in the 2018 debt to total capitalization ratio primarily reflects additional borrowings in 2018 used to finance the acquisition of Rockwell Collins. The increase in the 2017 and 2016 debt to total capitalization ratio primarily reflects additional borrowings to fund share repurchases, 2017 discretionary pension contributions, and for general corporate purposes.

Note 6 The increase in total equity in 2018 is due to UTC common stock issued as Merger Consideration for Rockwell Collins. 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 7 The increase in employees in 2018 is due to the addition of approximately 30,000 of Rockwell Collins employees. The decrease in employees in 2015, as compared with 2014, primarily reflects the 2015 divestiture of Sikorsky.

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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, Carrier (formerly referred to as UTC Climate, Controls & Security), Pratt & Whitney, and Collins Aerospace Systems (a combination of the segment formerly referred to as UTC Aerospace Systems and Rockwell Collins). Otis and Carrier are referred to as the "commercial businesses," while Pratt & Whitney and Collins Aerospace Systems are referred to as the "aerospace businesses."

On November 26, 2018, we announced the completion of the acquisition of Rockwell Collins and our intention to separate our commercial businesses into independent entities. The separation will result in three global, industry-leading companies:  

• United Technologies, comprised of Collins Aerospace Systems and Pratt & Whitney, will be the preeminent systems supplier to the aerospace and defense industry;

• Otis, the world's leading manufacturer of elevators, escalators and moving walkways; and

• Carrier, a global provider of HVAC, refrigeration, building automation, fire safety and security products with leadership positions across its portfolio.

The proposed separations are expected to be effected through spin-offs of Otis and Carrier that are intended to be tax-free for the Company’s shareowners for U.S. federal income tax purposes, and are expected to be completed by mid-year 2020. Separation of Otis and Carrier from UTC via spin-off transactions will be subject to the satisfaction of customary conditions, including, among others, final approval by the Company’s Board of Directors, receipt of tax rulings in certain jurisdictions and/or a tax opinion from external counsel (as applicable), the filing with the Securities and Exchange Commission (SEC) and effectiveness of Form 10 registration statements, and satisfactory completion of financing.

The commercial businesses generally serve customers in the worldwide commercial and residential property industries, with Carrier 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:

	2018		2017		2016
Commercial and industrial	47	%	50	%	50	%
Military aerospace and space	14	%	13	%	12	%
Commercial aerospace	39	%	37	%	38	%
	100	%	100	%	100	%

Our consolidated net sales were derived from original equipment manufacturing (OEM) and aftermarket parts and services as follows:

	2018		2017		2016
OEM	54	%	53	%	55	%
Aftermarket parts and services	46	%	47	%	45	%
	100	%	100	%	100	%

Our worldwide operations can be affected by industrial, economic and political factors on both a regional and global level. Our operations include original equipment manufacturing and extensive related aftermarket parts and services in both our commercial and aerospace businesses. Our business mix also reflects the combination of shorter cycles at Carrier and in our commercial aerospace spares businesses, and longer cycles at Otis and in our aerospace OEM and aftermarket maintenance businesses. Our customers are in both the public and private sectors, and our businesses reflect an extensive geographic diversification that has evolved with continued globalization. Refer to Note 19 of the Consolidated Financial Statements for additional discussion of sales attributed to geographic regions.

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, Indonesia, Mexico, Poland, Russia, South Africa, Turkey, Ukraine and countries in the Middle East. As of December 31, 2018, the net assets in any one of these countries did not exceed 5% of consolidated shareowners' equity.

In a referendum on June 23, 2016, voters in the United Kingdom (the U.K.) voted in favor of the U.K.'s exiting the European Union (the EU). The manner in which the U.K. decides to exit the EU could have negative macroeconomic consequences. Our 2018 full year sales in and from the U.K. were approximately $3 billion and represented less than 5% of our

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overall sales, and we do not believe the U.K.'s withdrawal from the EU will significantly impact our businesses in the near term.

Organic sales growth was 8% in 2018, reflecting growth across all segments driven by:

• higher commercial aftermarket, commercial OEM, and military sales at Pratt & Whitney

• higher commercial aftermarket and military sales, and higher commercial aerospace OEM sales at Collins Aerospace Systems

• growth in North America residential HVAC, global commercial HVAC, and transport refrigeration sales at Carrier

• higher Otis service sales in North America and Asia, and higher Otis new equipment sales in Europe, Asia excluding China, and North America, partially offset by a decline in China

We expect organic sales growth in 2019 to be 3% to 5%, with foreign exchange expected to have an unfavorable impact of approximately 1%. We continue to invest in new platforms and new markets to position the Company for long-term growth, while remaining focused on innovation, structural cost reduction, disciplined capital allocation and execution to meet or exceed customer and shareowner commitments.

As discussed below in "Results of Operations," operating profit in both 2018 and 2017 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 beneficial impact of net gains from sales of investments, the unfavorable impact of contract matters with customers, transaction, acquisition and integration costs, and other significant non-recurring and non-operational items. 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.

As noted above, on November 26, 2018, pursuant to the terms and conditions of the previously announced Agreement and Plan of Merger, dated September 4, 2017 (the “Merger Agreement”), among United Technologies Corporation (the “Company”), Riveter Merger Sub Corp., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), and Rockwell Collins, Inc. (“Rockwell Collins”), Merger Sub merged with and into Rockwell Collins (the “Merger”), with Rockwell Collins continuing as the surviving corporation of the Merger. As a result of the Merger, Rockwell Collins has become a wholly owned subsidiary of the Company and each share of common stock, par value $0.01 per share, of Rockwell Collins issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares held by Rockwell Collins, the Company, Merger Sub or any of their respective wholly owned subsidiaries) was converted into the right to receive (1) $93.33 in cash, without interest, and (2) .37525 shares of Company common stock (together, the “Merger Consideration”), less any applicable withholding taxes, with cash paid in lieu of fractional shares. At the Effective Time, each then-outstanding Rockwell Collins stock option was canceled in exchange for the right to receive the Merger Consideration in respect of each net option share subject to such option, less applicable tax withholding, with the number of net option shares calculated by subtracting from the total number of shares subject to such option a number of shares with a value equal to the aggregate applicable exercise price. At the Effective Time, each then-outstanding Rockwell Collins restricted stock award, and each Rockwell Collins restricted stock unit award, whether performance-based or time-based, granted prior to the date of the Merger Agreement or to a non-employee director of Rockwell Collins, became fully vested and was canceled in exchange for the right to receive the Merger Consideration in respect of each share of Rockwell Collins common stock subject to such award (with the number of shares subject to any performance-based restricted stock unit award deemed to be equal to the target number of shares), less applicable tax withholding. At the Effective Time, each then-outstanding Rockwell Collins restricted stock unit award, whether performance-based or time-based, granted on or after the date of the Merger Agreement was assumed by the Company and converted into a time-based restricted stock unit award of the Company with an equivalent value (as calculated in accordance with the formula set forth in the Merger Agreement, and with any performance-based restricted stock unit award deemed to be achieved at target level). At the Effective Time, each then-outstanding Rockwell Collins deferred stock unit award that was payable by its terms upon the consummation of the Merger was canceled in consideration for the right to receive (i) if payable in cash by its terms, a lump sum cash payment equal to the product of the value of the Merger Consideration and the number of shares of Rockwell Collins common stock relating to such deferred stock unit award, less applicable tax withholding, or (ii) if payable in shares by its terms, the Merger Consideration in respect of each share of Rockwell Collins common stock subject to such award, less applicable tax withholding. At the Effective Time, each then-outstanding Rockwell Collins deferred stock unit award that was not payable by its terms upon the consummation of the Merger was assumed by the Company and converted into a deferred stock unit award of the Company with an equivalent value (as calculated in accordance with the formula set forth in the Merger Agreement).

The total aggregate consideration payable in the Merger was $15.5 billion in cash and 62.2 million shares of Company common stock. In addition, $7.8 billion of Rockwell Collins debt was outstanding at the time of the Merger.

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In total, our investments in businesses in 2018 and 2017 totaled $31,142 million (including debt assumed of $7,784 million and stock issued of $7,960 million) and $231 million, respectively. In addition to Rockwell Collins, acquisitions completed in 2018 primarily include an acquisition at Carrier and at Pratt & Whitney. Our investments in businesses in 2017 included a number of small acquisitions primarily 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.

On December 22, 2017 Public Law 115-97 “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” was enacted. This law is commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA). We may consider future opportunities for repatriation of our non-U.S. earnings, and accelerated de-leveraging, in addition to investments in our operations, limited additional share repurchases to offset the effects of dilution related to our stock-based compensation programs - see Note 12.

Discontinued Operations

On November 6, 2015, we completed the sale of Sikorsky to Lockheed Martin Corp. for approximately $9.1 billion in cash. 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. Proceeds from the sale were used to fund $6 billion of share repurchases through accelerated share repurchase (ASR) agreements entered into on November 11, 2015. In connection with the sale of Sikorsky, we made tax payments of approximately $2.5 billion in 2016. Net income from discontinued operations attributable to common shareowners for the year ended December 31, 2016 reflects the final purchase price adjustment for the sale of Sikorsky, and the net effects of filing Sikorsky's 2015 tax returns.

RESULTS OF OPERATIONS

Net Sales

(dollars in millions)	2018			2017			2016
Net sales	$	66,501		$	59,837		$	57,244
Percentage change year-over-year	11		%	5		%	2		%

The factors contributing to the total percentage change year-over-year in total net sales are as follows:

	2018		2017
Organic volume	8	%	4	%
Foreign currency translation	1	%	—
Acquisitions and divestitures, net	1	%	1	%
Other	1	%	—
Total % Change	11	%	5	%

All four segments experienced organic sales growth during 2018. Pratt & Whitney sales grew 14% organically, reflecting higher commercial aftermarket, commercial OEM, and military sales. Collins Aerospace Systems grew 8% organically, driven by higher commercial aftermarket and military sales, and higher commercial OEM sales. Organic sales growth of 6% at Carrier was driven by growth in North America residential HVAC, global commercial HVAC, and transport refrigeration sales. Otis sales grew 3% organically, reflecting higher service sales in North America and Asia, and higher new equipment sales in Europe, Asia excluding China, and North America, partially offset by a decline in China.

All four segments also experienced organic sales growth during 2017. Pratt & Whitney sales were up 9% organically, reflecting higher commercial aftermarket sales and higher military sales, partially offset by lower commercial engine sales. Organic sales at Carrier increased 4%, driven by growth in North America residential HVAC, global commercial HVAC, and commercial refrigeration sales. Organic sales at Collins Aerospace Systems grew 2%, primarily driven by an increase in commercial aerospace aftermarket sales partially offset by lower commercial aerospace OEM sales. Otis sales increased 2% organically, reflecting higher service sales in North America and Asia, and higher new equipment sales growth in North America and Europe, partially offset by a decline in China.

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Cost of Products and Services Sold

(dollars in millions)	2018			2017			2016
Total cost of products and services sold	$	49,985		$	44,201		$	41,471
Percentage change year-over-year	13		%	7		%	3		%

The factors contributing to the total percentage change year-over-year in total cost of products and services sold are as follows:

	2018		2017
Organic volume	9	%	7	%
Foreign currency translation	1	%	—
Acquisitions and divestitures, net	1	%	—
Other	2	%	—
Total % Change	13	%	7	%

The organic increase in total cost of products and services sold in 2018 was primarily driven by the organic sales increases noted above. The 2% increase in Other primarily reflects the impact of the adoption of the New Revenue Standard (1%) and a customer contract settlement at Pratt & Whitney (1%), partially offset by the absence of a prior year customer contract matter at Pratt & Whitney.

The organic increase in total cost of products and services sold in 2017 was primarily driven by the organic sales increases noted above and higher negative engine margin at Pratt & Whitney due to unfavorable mix and ramp-related costs.

Gross Margin

(dollars in millions)	2018			2017			2016
Gross margin	$	16,516		$	15,636		$	15,773
Percentage of net sales	24.8		%	26.1		%	27.6		%

The 130 basis point decrease in gross margin as a percentage of sales in 2018, includes a 300 basis point decline in Pratt & Whitney's gross margin driven by the unfavorable year-over-year impact of customer contract matters and higher negative engine margin from higher engine deliveries. Collins Aerospace Systems' gross margin declined 40 basis points as the benefits of higher commercial aftermarket volumes and cost reduction were more than offset by adverse commercial OEM and military OEM mix, and higher warranty expense. Gross margin at Otis declined 140 basis points largely driven by unfavorable price and mix, primarily in China. These declines were partially offset by a 40 basis point increase in Carrier's gross margin as favorable pricing and the favorable year-over-year impact of contract adjustments related to a large commercial project and a prior year product recall program were partially offset by increased commodities and logistics costs.

The 150 basis point decrease in gross margin as a percentage of sales in 2017, as compared with 2016, primarily reflects a 170 basis point decline in Pratt & Whitney's gross margin driven by higher negative engine margin due to unfavorable mix and ramp related costs; a 180 basis point decline in gross margin at Otis driven by unfavorable price and mix, primarily in China; and a 150 basis point decline in gross margin at Carrier reflecting adverse price and mix and the unfavorable impact of a product recall program. These decreases were partially offset by a 10 basis point increase in gross margin at Collins Aerospace driven by higher commercial aftermarket volumes.

Research and Development

(dollars in millions)	2018			2017			2016
Company-funded	$	2,462		$	2,427		$	2,376
Percentage of net sales	3.7		%	4.1		%	4.2		%
Customer-funded	$	1,517		$	1,514		$	1,405
Percentage of net sales	2.3		%	2.5		%	2.5		%

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 Embraer E-Jet E2, Airbus A320neo, Bombardier Global 7500, Mitsubishi Regional Jet, and Airbus A350 programs at Collins Aerospace

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Systems. In 2018, company-funded research and development increased 1% over the prior year. This increase was primarily driven by Collins Aerospace (1%) as higher spend across various commercial programs was largely offset by the deferral of certain development costs as contract fulfillment costs in accordance with the New Revenue Standard. Company-funded research and development expense at Pratt & Whitney was consistent with the prior year.

Customer-funded research and development was consistent with the prior year, as a decrease at Collins Aerospace Systems, primarily driven by the deferral of certain development costs as contract fulfillment costs in accordance with the New Revenue Standard, was offset by an increase at Pratt & Whitney, primarily driven by higher research and development expenses on military development programs.

The year-over-year increase in company-funded research and development (2%) in 2017, compared with 2016, is primarily driven by continued investment in new products at Carrier (1%) and increased spending on strategic initiatives at Otis (1%). Customer-funded research and development increased 6% primarily driven by increased spending on U.S. Government development programs at Pratt & Whitney, partially offset by lower spend within Collins Aerospace Systems related to several commercial and military aerospace programs.

Selling, General and Administrative

(dollars in millions)	2018			2017			2016
Selling, general and administrative	$	7,066		$	6,429		$	5,958
Percentage of net sales	10.6		%	10.7		%	10.4		%

Selling, general and administrative expenses increased 10% in 2018, but decreased 10 basis points as a percentage of net sales. The increase reflects the impact of incremental selling, general and administrative expenses resulting from the acquisition of Rockwell Collins (1%). In addition, 2018 reflects higher expenses at Collins Aerospace Systems (3%) primarily driven by increased headcount and employee compensation related expenses; an increase at Carrier (2%) primarily driven by employee compensation related expenses; higher expenses at Pratt & Whitney (1%) driven by increased headcount and employee compensation related expenses and costs to support higher volumes; and higher expenses at Otis (1%) resulting from higher labor and information technology costs. The remaining increase includes transaction costs related to the acquisition of Rockwell Collins and the proposed separation of our commercial businesses into independent entities.

Selling, general and administrative expenses increased 8% in 2017 and reflect an increase in expenses related to recent acquisitions (1%) and the impact of higher restructuring expenses (1%). The increase also reflects higher expenses at Pratt & Whitney (2%) driven by increased headcount and employee compensation related expenses; higher expenses at Otis (1%) resulting from higher labor and information technology costs; and higher expenses at Collins Aerospace Systems (1%) and Carrier (3%) primarily driven by employee compensation related expenses.

We are continuously evaluating our cost structure and have implemented restructuring actions as a method of keeping our cost structure competitive. As appropriate, the amounts reflected above include the beneficial impact of restructuring actions on Selling, general and administrative expenses. See Note 13: Restructuring Costs and the Restructuring Costs section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Other Income, Net

(dollars in millions)	2018		2017		2016
Other income, net	$	1,565	$	1,358	$	782

Other 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. The year-over-year increase in Other income, net (15%) is primarily driven by the gain on the sale of Taylor Company (59%), partially offset by the absence of a prior year gain from the sale of Carrier's investments in Watsco, Inc. (28%), lower year-over-year gains on the sale of securities (11%), an impairment of assets related to a previously acquired Collins Aerospace Systems business (4%) and the absence of a prior year gain on the sale of a Carrier business (2%).

Other income, net increased $576 million in 2017, compared with 2016, primarily driven by $379 million of gains resulting from Carrier's sale of its investments in Watsco, Inc. (48%), as well as higher year-over year foreign exchange gains and losses (9%), and higher year-over-year gains on the sale of securities (8%) across the UTC businesses.

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Interest Expense, Net

(dollars in millions)	2018			2017			2016
Interest expense	$	1,225		$	1,017		$	1,161
Interest income	(187		)	(108		)	(122		)
Interest expense, net	$	1,038		$	909		$	1,039
Average interest expense rate - average outstanding borrowings during the year:
Short-term borrowings	1.5		%	1.1		%	1.3		%
Total debt	3.5		%	3.5		%	4.1		%
Average interest expense rate - outstanding borrowings as of December 31:
Short-term borrowings	1.2		%	2.3		%	0.6		%
Total debt	3.5		%	3.5		%	3.7		%

Interest expense, net increased 14% in 2018 as compared with 2017. The increase in interest expense reflects the impact of the August 16, 2018 issuance of notes representing $11 billion in aggregate principal; the May 4, 2017 issuance of notes representing $4 billion in aggregate principal; and the May 18, 2018 issuance of Euro-denominated notes representing €2 billion in aggregate principal. These increases were partially offset by the favorable impact of the repayment at maturity of the following: 1.800% notes in June 2017 representing $1.5 billion in aggregate principal; the 6.8% notes in February 2018 representing $99 million of aggregate principal; the Euro-denominated floating rate notes in February 2018 representing €750 million in aggregate principal; and the 1.778% notes in May 2018 representing $1.1 billion of aggregate principal. The average maturity of our long-term debt at December 31, 2018 is approximately 11 years.

The $11 billion in aggregate principal amount of notes issued on August 16, 2018 was primarily used to fund the cash consideration in the acquisition of Rockwell Collins and related fees, expenses and other amounts. The increase in interest income in 2018 as compared with 2017 primarily reflects interest earned on higher cash balances, including interest earned on cash from the $11 billion of notes issued and held prior to funding the acquisition.

The decrease in interest expense during 2017, as compared with 2016, was primarily driven by the absence of a net extinguishment loss of approximately $164 million related to the December 1, 2016 redemption of certain outstanding notes. The unfavorable impact of the May 4, 2017 and November 1, 2016 issuance of notes representing $8 billion in aggregate principal was largely offset by the favorable impact of the significantly lower interest rates on these notes as compared to the 5.375% and 6.125% notes redeemed on December 1, 2016, representing $2.25 billion in aggregate principal, and the favorable impact of these early redemptions and the repayment at maturity of our 1.800% notes due 2017, representing $1.5 billion in aggregate principal. The average maturity of our long-term debt at December 31, 2017 is approximately 11 years. See Note 9 to our Consolidated Financial Statements for further discussion of our borrowing activity.

The year-over-year increase in the weighted-average interest rate for short-term borrowings was primarily driven by increases in LIBOR rates in 2018. The decrease in the weighted-average interest rate for short-term borrowings for 2017 versus 2016 was primarily due to higher average Euro-denominated commercial paper borrowings as compared to 2016. We had no Euro-denominated commercial paper borrowing outstanding at December 31, 2017, resulting in the higher weighted-average interest rate for short-term borrowings as of December 31, 2017, as compared to December 31, 2016.

Income Taxes

	2018		2017		2016
Effective income tax rate	31.7	%	36.6	%	23.8	%

On December 22, 2017 Public Law 115-97 “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” was enacted. This law is commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA).

The 2018 effective tax rate reflects a net charge of $744 million of TCJA related adjustments. The amount primarily relates to non-U.S. taxes that will become due when previously reinvested earnings of certain international subsidiaries are remitted, as discussed in Note 11. The Company has completed its accounting for the TCJA as described in Staff Accounting Bulletin (SAB 118). In 2019, the Company will continue to review and incorporate, as necessary, updates related to forthcoming U.S. Treasury Regulations, other interpretive guidance, and the finalization of the deemed inclusions to be reported on the Company’s 2018 U.S. federal income tax return.

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The 2017 effective tax rate reflects a tax charge of $690 million attributable to the passage of the TCJA. This amount relates to U.S. income tax attributable to previously undistributed earnings of UTC's international subsidiaries and equity investments, net of foreign tax credits, and the revaluation of U.S. deferred income taxes.

The effective income tax rates for 2017 and 2016 reflect tax benefits associated with lower tax rates on international earnings. The expiration of statutes of limitations during 2017 resulted in a favorable adjustment of $55 million largely offset by the unfavorable impact related to a retroactive Quebec tax law change enacted on December 7, 2017 and the absence of certain credits, tax law changes and audit settlements included in 2016 described below.

The 2016 effective tax rate reflects $206 million of favorable adjustments related to the conclusion of the review by the Examination Division of the Internal Revenue Service of both the UTC 2011 and 2012 tax years and the Goodrich Corporation 2011 and 2012 tax years through the date of its acquisition. In addition, at the end of 2016, France enacted a tax law change reducing its corporate income tax rate which resulted in a tax benefit of $25 million.

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)	2018		2017		2016
Net income from continuing operations attributable to common shareowners	$	5,269	$	4,552	$	5,065
Diluted earnings per share from continuing operations	$	6.50	$	5.70	$	6.13

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 Pratt & Whitney Canada (P&WC). In 2018, foreign currency, including hedging at P&WC, had a favorable impact on our consolidated operational results of $0.02 per diluted share. In 2017, foreign currency, including hedging at P&WC, had a favorable impact on our consolidated operational results of $0.13 per diluted share. In 2016, foreign currency, including hedging at P&WC, had a favorable impact on our consolidated operational results of $0.05 per diluted share. For additional discussion of foreign currency exposure, see "Market Risk and Risk Management—Foreign Currency Exposures."

Net income from continuing operations attributable to common shareowners for the year ended December 31, 2018 includes restructuring charges, net of tax benefit, of $228 million ($307 million pre-tax) as well as a net charge for significant non-operational and/or nonrecurring items, including the impact of taxes, of $668 million. Non-operational and/or nonrecurring items include a tax charge in connection with the passage of the TCJA as described in Note 11 and the unfavorable impact of a customer contract matter at Pratt & Whitney, partially offset by a gain on Carrier's sale of Taylor Company. The effect of restructuring charges and nonrecurring items on diluted earnings per share for the year ended December 31, 2018 was a charge of $1.11 per share.

Net income from continuing operations attributable to common shareowners for the year ended December 31, 2017 includes restructuring charges, net of tax benefit, of $176 million ($253 million pre-tax) as well as the net unfavorable impact of significant non-operational and/or nonrecurring items, net of tax, of $587 million. Non-operational and/or nonrecurring items include a tax charge in connection with the passage of the TCJA as described in Note 11, the unfavorable impact of customer contract matters at Pratt & Whitney, and the unfavorable impact of a product recall program at Carrier, partially offset by gains resulting from Carrier's sale of its investments in Watsco, Inc. The effect of restructuring charges and nonrecurring items on diluted earnings per share for 2017 was a charge of $0.95 per share.

Net income from continuing operations attributable to common shareowners for the year ended December 31, 2016 includes restructuring charges, net of tax benefit, of $192 million ($290 million pre-tax) as well as the net unfavorable impact of significant non-operational and/or non-recurring items, net of tax, of $203 million. Non-operational and/or nonrecurring items include a pension settlement charge resulting from pension de-risking actions, a net extinguishment loss related to the early redemption of certain outstanding notes, and the unfavorable impact of customer contract matters at Pratt & Whitney. These items were partially offset by favorable tax adjustments related to the conclusion of the review by the Examination Division of the Internal Revenue Service of the 2011 and 2012 tax years. The effect of restructuring charges and non-recurring items on diluted earnings per share for the year ended December 31, 2016 was a charge of $0.48 per share.

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Net Loss Attributable to Common Shareowners from Discontinued Operations

(dollars in millions, except per share amounts)	2018		2017		2016
Net loss attributable to common shareowners from discontinued operations	$	—	$	—	$	(10	)
Diluted earnings per share from discontinued operations	$	—	$	—	$	(0.01	)

Net loss from discontinued operations attributable to common shareowners for the year ended December 31, 2016 reflects the final purchase price adjustment for the sale of Sikorsky, and the net effects of filing Sikorsky's 2015 tax returns.

RESTRUCTURING COSTS

(dollars in millions)	2018		2017		2016
Restructuring costs	$	307	$	253	$	290

Restructuring actions are an essential component of our operating margin improvement efforts and relate to existing and recently acquired operations. Charges generally arise from severance related to workforce reductions, facility exit and lease termination costs associated with the consolidation of field and manufacturing operations and costs to exit legacy programs. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.

2018 Actions. During 2018, we recorded net pre-tax restructuring charges of $207 million relating to ongoing cost reduction actions initiated in 2018. We are targeting to complete in 2019 and 2020 the majority of the remaining workforce and facility related cost reduction actions initiated in 2018. Approximately 95% 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 2018, we had cash outflows of approximately $84 million related to the 2018 actions. We expect to incur additional restructuring and other charges of $79 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 $270 million annually, of which, approximately $37 million was realized in 2018.

2017 Actions. During 2018 and 2017, we recorded net pre-tax restructuring charges of $94 million and $176 million, respectively, for actions initiated in 2017. We are targeting to complete in 2019 the majority of the remaining workforce and all facility related cost reduction actions initiated in 2017. Approximately 76% 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 2018, we had cash outflows of approximately $100 million related to the 2017 actions. We expect to incur additional restructuring charges of $91 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 $240 million annually.

In addition, during 2018, we recorded net pre-tax restructuring costs totaling $6 million for restructuring actions initiated in 2016 and prior. 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)	2018			2017			2016			2018			2017			2016			2018		2017		2016
Otis	$	12,904		$	12,341		$	11,893		$	1,915		$	2,002		$	2,125		14.8	%	16.2	%	17.9	%
Carrier	18,922			17,812			16,851			3,777			3,165			2,848			20.0	%	17.8	%	16.9	%
Pratt & Whitney	19,397			16,160			14,894			1,269			1,300			1,501			6.5	%	8.0	%	10.1	%
Collins Aerospace Systems	16,634			14,691			14,465			2,303			2,191			2,167			13.8	%	14.9	%	15.0	%
Total segment	67,857			61,004			58,103			9,264			8,658			8,641			13.7	%	14.2	%	14.9	%
Eliminations and other	(1,356		)	(1,167		)	(859		)	(236		)	(81		)	(18		)
General corporate expenses	—			—			—			(475		)	(439		)	(402		)
Consolidated	$	66,501		$	59,837		$	57,244		$	8,553		$	8,138		$	8,221		12.9	%	13.6	%	14.4	%

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. Carrier's financial performance can also be influenced by production and utilization of transport equipment, and weather conditions for

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its residential business. 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. At constant currency and excluding the effect of acquisitions and divestitures, Carrier equipment orders for 2018 increased 8% in comparison to 2017 driven by growth in transport refrigeration (39%) and residential HVAC (11%). At constant currency and excluding the impact of the New Revenue Standard, Otis new equipment orders increased 4% in comparison to the prior year as order growth in North America (11%), and China (6%) was offset by order declines in Europe (3%).

Total commercial business sales generated outside the U.S., including U.S. export sales, were 62% and 63% in 2018 and 2017, respectively. The following table shows sales generated outside the U.S., including U.S. export sales, for each of the commercial business segments:

	2018		2017
Otis	73	%	73	%
Carrier	54	%	55	%

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 as well as 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, residential and infrastructure property sectors around the world. Otis sells direct and through sales representatives and distributors.

							Total Increase (Decrease) Year-Over-Year for:
(dollars in millions)	2018		2017		2016		2018 Compared with 2017					2017 Compared with 2016
Net Sales	$	12,904	$	12,341	$	11,893	$	563		5	%	$	448		4	%
Cost of Sales	9,192		8,612		8,085		580			7	%	527			7	%
	3,712		3,729		3,808
Operating Expenses and Other	1,797		1,727		1,683
Operating Profits	$	1,915	$	2,002	$	2,125	$	(87	)	(4	)%	$	(123	)	(6	)%

	Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
	2018						2017
	Net Sales		Cost of Sales		Operating Profits		Net Sales		Cost of Sales		Operating Profits
Organic / Operational	3	%	5	%	(4	)%	2	%	5	%	(7	)%
Foreign currency translation	1	%	1	%	2	%	—		—		1	%
Acquisitions and divestitures, net	—		—		—		1	%	1	%	—
Restructuring costs	—		—		(1	)%	—		—		—
Other	1	%	1	%	(1	)%	1	%	1	%	—
Total % change	5	%	7	%	(4	)%	4	%	7	%	(6	)%

2018 Compared with 2017

The organic sales increase of 3% primarily reflects higher service sales (2%), driven by growth in North America and Asia, and higher new equipment sales (1%) driven by growth in Europe, Asia excluding China, and North America (combined, 2%), partially offset by a decline in China (1%).

The operational profit decrease of 4% was driven by:

• unfavorable price and mix (8%), primarily in China

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

• unfavorable commodity costs (2%)

• unfavorable transactional foreign exchange from mark-to-market adjustments (1%)

These decreases were partially offset by:

• profit contribution from the higher sales volumes noted above (8%)

• favorable productivity (2%)

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2017 Compared with 2016

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

The operational profit decrease of 7% was driven by:

• unfavorable price and mix (11%), primarily in China

• higher selling, general and administrative expenses (2%), primarily labor and information technology costs

• higher research and development costs (1%)

These decreases were partially offset by:

• profit contribution from the higher sales volumes noted above (4%)

• favorable productivity (3%)

Carrier is a leading provider of heating, ventilating, air conditioning (HVAC), refrigeration, fire, security, and building automation products, solutions, and services for commercial, government, infrastructure, and residential property applications and refrigeration and transportation applications. Carrier provides a wide range of building systems, including cooling, heating, ventilation, refrigeration, fire, flame, gas, and smoke detection, portable fire extinguishers, fire suppression, intruder alarms, access control systems, video surveillance, and building control systems. Carrier also provides a broad array of related building services, including audit, design, installation, system integration, repair, maintenance, and monitoring services. Carrier also provides refrigeration and monitoring products and solutions to the transport industry.

							Total Increase (Decrease) Year-Over-Year for:
(dollars in millions)	2018		2017		2016		2018 Compared with 2017				2017 Compared with 2016
Net Sales	$	18,922	$	17,812	$	16,851	$	1,110	6	%	$	961	6	%
Cost of Sales	13,337		12,630		11,695		707		6	%	935		8	%
	5,585		5,182		5,156
Operating Expenses and Other	1,808		2,017		2,308
Operating Profits	$	3,777	$	3,165	$	2,848	$	612	19	%	$	317	11	%

	Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
	2018						2017
	Net Sales		Cost of Sales		Operating Profits		Net Sales		Cost of Sales		Operating Profits
Organic / Operational	6	%	6	%	6	%	4	%	5	%	(1	)%
Foreign currency translation	1	%	1	%	—		1	%	—		—
Acquisitions and divestitures, net	(1	)%	(1	)%	(1	)%	1	%	2	%	—
Restructuring costs	—		—		1	%	—		—		(2	)%
Other	—		—		13	%	—		1	%	14	%
Total % change	6	%	6	%	19	%	6	%	8	%	11	%

2018 Compared with 2017

The organic sales increase of 6% was driven primarily by growth in North America residential HVAC (2%), global commercial HVAC (2%), and global refrigeration (2%).

The operational profit increase of 6% was driven by:

• profit contribution from the higher sales volumes noted above, net of mix (6%)

• the year-over-year impact of contract adjustments related to a large commercial project (3%)

• favorable pricing, net of commodities (2%)

These increases were partially offset by:

• higher logistics costs (3%)

• higher research and development costs (1%)

The 13% increase in Other primarily reflects the year-over-year impact of gains on sale of businesses and investments (11%), primarily driven by the sale of Taylor Company in 2018 (25%), partially offset by the absence of the prior year sale of

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investments in Watsco, Inc. (12%). The remaining increase in Other is largely driven by the year-over-year impact of a prior year product recall program (2%).

2017 Compared with 2016

The organic sales increase of 4% was driven by growth in North America residential HVAC (1%), global commercial HVAC (1%), and commercial refrigeration (1%).

Operational profit decreased by 1% as the profit contribution from higher sales volumes, net of adverse price (6%) and the beneficial impact from restructuring savings (2%), were more than offset by the impact of unfavorable mix (7%) and unfavorable contract adjustments related to a large commercial project (1%). The 14% increase in “other” primarily reflects gains on the sale of investments (16%), primarily Watsco, Inc., and the absence of prior year acquisition and integration costs (1%), partially offset by the impact of a product recall program (3%).

Aerospace Businesses

The financial performance of Pratt & Whitney and Collins 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) and other long-term maintenance programs. 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. In 2018, as compared with 2017, total commercial aerospace aftermarket sales increased 12% at Pratt & Whitney and 17% at Collins 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 primarily using the cumulative catch-up method. Operating profits included net unfavorable changes in aerospace contract estimates of approximately $50 million, $110 million and $157 million in 2018, 2017 and 2016, respectively, primarily the result of unexpected increases in estimated costs related to Pratt & Whitney long term aftermarket contracts. In accordance with our revenue recognition policy, losses, if any, on long-term contracts are provided for when anticipated. There were no material loss provisions recorded on OEM contracts in continuing operations in 2018 or 2017.

Performance in the general aviation sector is closely tied to the overall health of the economy. We continue to see growth in a strong commercial airline industry. Airline traffic, as measured by revenue passenger miles (RPMs), grew approximately 7% in the first eleven months of 2018.

Our military sales are affected by U.S. Department of Defense spending levels. Total sales to the U.S. Government were $7.4 billion in 2018, $5.8 billion in 2017, and $5.6 billion in 2016, and were 11% of total UTC sales in 2018, and 10% in both 2017 and 2016. The defense portion of our aerospace business is also affected by changes in market demand and the global political environment. Our participation in long-term production and development programs for the U.S. Government has contributed positively to our results in 2018 and is expected to continue to benefit results in 2019.

Pratt & Whitney is among the world’s leading suppliers of aircraft engines for the commercial, military, business jet and general aviation markets. Pratt & Whitney provides fleet management services and aftermarket maintenance, repair and

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overhaul services. Pratt & Whitney produces and develops families of large engines for wide- and narrow-body and large regional aircraft in the commercial market and for fighter, bomber, tanker and transport aircraft in the military market. P&WC is among the world's leading suppliers of engines powering general and business aviation, as well as regional airline, utility and military airplanes, and helicopters. Pratt & Whitney and P&WC also produce, sell and service auxiliary power units for commercial and military aircraft. 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.

							Total Increase (Decrease) Year-Over-Year for:
(dollars in millions)	2018		2017		2016		2018 Compared with 2017					2017 Compared with 2016
Net Sales	$	19,397	$	16,160	$	14,894	$	3,237		20	%	$	1,266		9	%
Cost of Sales	16,301		13,093		11,814		3,208			25	%	1,279			11	%
	3,096		3,067		3,080
Operating Expenses and Other	1,827		1,767		1,579
Operating Profits	$	1,269	$	1,300	$	1,501	$	(31	)	(2	)%	$	(201	)	(13	)%

	Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
	2018						2017
	Net Sales		Cost of Sales		Operating Profits		Net Sales		Cost of Sales		Operating Profits
Organic* / Operational*	14	%	17	%	(8	)%	9	%	12	%	(12	)%
Foreign currency (including P&WC net hedging)*	—		1	%	—		1	%	—		9	%
Acquisitions and divestitures, net	—		—		—		—		—		(1	)%
Restructuring costs	—		—		1	%	—		—		3	%
Other	6	%	7	%	5	%	(1	)%	(1	)%	(12	)%
Total % change	20	%	25	%	(2	)%	9	%	11	%	(13	)%

* 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.

2018 Compared with 2017

The organic sales increase of 14% primarily reflects higher commercial aftermarket sales (6%), higher commercial OEM sales (5%) and increased military sales (3%). The 6% increase in Other primarily reflects the impact of the adoption of the New Revenue Standard (4%) and the absence of a prior year customer contract matter (2%).

The operational profit decrease of 8% was primarily driven by:

• lower commercial OEM profit contribution (27%) primarily driven by higher negative engine margin on higher deliveries

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

• the absence of the favorable impact from a prior year license agreement (4%)

• higher research and development costs (2%)

These decreases were partially offset by:

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

• higher military profit contribution (5%), driven by the sales increase noted above

The 5% increase in Other primarily reflects the favorable impact resulting from the adoption of the New Revenue Standard (13%) partially offset by the unfavorable year-over-year impact of contract settlements (8%).

2017 Compared with 2016

The organic sales increase of 9% primarily reflects higher commercial aftermarket sales (8%) and higher military sales (4%), partially offset by lower commercial engine sales (2%), unfavorable year-over-year contract settlements (1%), and the absence of prior year sales of legacy hardware (1%). The 1% decrease in Other reflects the year-over-year impact of customer contract matters.

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The operational profit decrease of 12% was primarily driven by:

• lower OEM profit contribution (27%) reflecting higher negative engine margin and other ramp-related costs and lower volume at P&WC partially offset by the profit contribution from higher military sales

• higher selling, general and administrative expenses and research and development costs (9%)

• unfavorable year-over-year contract settlements (5%)

• the absence of prior year sales of legacy hardware (3%)

These decreases were partially offset by:

• higher aftermarket profit contribution (29%) driven by increases in both commercial and military aftermarket sales

• the favorable impact of a licensing agreement (3%)

The 12% decrease in Other primarily reflects the year-over-year impact of customer contract matters (7%), the absence of the favorable impact of a prior year program termination (2%), and the absence of a prior year benefit from the licensing of certain intellectual property rights (2%).

Collins 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. Collins Aerospace Systems’ product portfolio includes electric power generation, power management and distribution systems, air data and aircraft sensing systems, engine control systems, intelligence, surveillance and reconnaissance systems, engine components, environmental control systems, fire and ice detection and protection systems, propeller systems, engine nacelle systems, including thrust reversers and mounting pylons, interior and exterior aircraft lighting, aircraft seating and cargo systems, actuation systems, landing systems, including landing gear and wheels and brakes, space products and subsystems, integrated avionics systems, precision targeting, electronic warfare and range and training systems, flight controls, communications systems, navigation systems, oxygen systems, simulation and training systems, food and beverage preparation, storage and galley systems, lavatory and wastewater management systems. Collins Aerospace Systems also designs, produces and supports cabin interior, communications and aviation systems and products and provides information management services through voice and data communication networks and solutions worldwide. Aftermarket services include spare parts, overhaul and repair, engineering and technical support, training and fleet management solutions, and information management services. Collins Aerospace Systems sells aerospace products and services 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)	2018		2017		2016		2018 Compared with 2017				2017 Compared with 2016
Net Sales	$	16,634	$	14,691	$	14,465	$	1,943	13	%	$	226	2	%
Cost of Sales	12,336		10,838		10,689		1,498		14	%	149		1	%
	4,298		3,853		3,776
Operating Expenses and Other	1,995		1,662		1,609
Operating Profits	$	2,303	$	2,191	$	2,167	$	112	5	%	$	24	1	%

	Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
	2018						2017
	Net Sales		Cost of Sales		Operating Profits		Net Sales		Cost of Sales		Operating Profits
Organic / Operational	8	%	7	%	10	%	2	%	2	%	4	%
Foreign currency translation	—		1	%	(1	)%	—		—		—
Acquisitions and divestitures, net	5	%	6	%	1	%	—		(1	)%	(1	)%
Restructuring costs	—		—		(4	)%	—		—		(2	)%
Other	—		—		(1	)%	—		—		—
Total % change	13	%	14	%	5	%	2	%	1	%	1	%

2018 Compared with 2017

The organic sales growth of 8% primarily reflects higher commercial aftermarket and military sales (combined, 6%) and higher commercial aerospace OEM sales (2%).

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The increase in operational profit of 10% primarily reflects:

• higher commercial aftermarket and military profit contribution (combined, 18%) primarily driven by the commercial aftermarket sales growth noted above

• higher commercial aerospace OEM profit contribution (3%)

These increases were partially offset by:

• higher selling, general, and administrative expenses (7%)

• higher warranty costs (4%)

2017 Compared with 2016

The organic sales growth of 2% primarily reflects an increase in commercial aerospace aftermarket sales (3%), partially offset by lower commercial aerospace OEM sales (1%).

The increase in operational profit of 4% primarily reflects higher commercial aerospace profit contribution driven by the commercial aftermarket sales growth noted above, partially offset by lower commercial aerospace OEM profit contribution (net, 7%). This net increase was partially offset by higher selling, general, and administrative expenses (3%).

Eliminations and other

	Net Sales									Operating Profits
(dollars in millions)	2018			2017			2016			2018			2017			2016
Eliminations and other	$	(1,356	)	$	(1,167	)	$	(859	)	$	(236	)	$	(81	)	$	(18	)
General corporate expenses	—			—			—			(475		)	(439		)	(402		)

Eliminations and other reflects the elimination of sales, other income and operating profit transacted between segments, as well as the operating results of certain smaller businesses. The year-over-year increase in sales eliminations in 2018 as compared with 2017 reflects an increase in the amount of inter-segment eliminations, principally between our aerospace businesses. The year-over-year decrease in operating profit for 2018 as compared with 2017, is driven by higher inter-segment profit eliminations resulting from increased inter-segment activity amongst our aerospace businesses, transaction costs related to the acquisition of Rockwell Collins and the strategic review of the Company's portfolio of businesses, and lower year-over-year gains on sales of securities.

The year-over-year increase in the amount of sales eliminations in 2017 as compared with 2016 reflects an increase in the amount of inter-segment sales eliminations, principally between our aerospace businesses. The year-over-year increase in operating profit for 2017 as compared with 2016 is largely driven by the absence of a $423 million pension settlement charge resulting from pension de-risking actions taken in the prior year, partially offset by transaction costs related to the merger agreement with Rockwell Collins, and an increase in the amount of inter-segment eliminations between our aerospace businesses. The year-over-year increase in general corporate expenses for 2017, as compared with 2016 primarily reflects higher expenses related to salaries, wages and employee benefits.

LIQUIDITY AND FINANCIAL CONDITION

(dollars in millions)	2018			2017
Cash and cash equivalents	$	6,152		$	8,985
Total debt	45,537			27,485
Net debt (total debt less cash and cash equivalents)	39,385			18,500
Total equity	40,610			31,421
Total capitalization (total debt plus total equity)	86,147			58,906
Net capitalization (total debt plus total equity less cash and cash equivalents)	79,995			49,921
Total debt to total capitalization	53		%	47		%
Net debt to net capitalization	49		%	37		%

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows from continuing operations. For 2018 our cash flows from continuing operations, net of capital expenditures was $4.4 billion. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, customer financing requirements, investments in businesses,

15

dividends, common stock repurchases, pension funding, access to the commercial paper markets, adequacy of available bank lines of credit, redemptions of debt and the ability to attract long-term capital at satisfactory terms.

At December 31, 2018, we had cash and cash equivalents of $6,152 million, of which approximately 72% was held by UTC's foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. As previously discussed, on December 22, 2017, the TCJA was enacted. Prior to enactment of the TCJA, with few exceptions, U.S. income taxes had not been provided on undistributed earnings of UTC's international subsidiaries as the Company had

intended to reinvest such earnings permanently outside the U.S. or to repatriate such earnings only when it was tax effective to repatriate. The Company no longer intends to reinvest certain undistributed earnings of its international subsidiaries that have been previously taxed in the U.S. and has recorded non U.S. taxes that will become due when earnings of certain international subsidiaries are remitted to the U.S. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, UTC will continue to reinvest these earnings permanently. We have repatriated $6.2 billion of overseas cash for the year ended December 31, 2018.

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, 2018, 2017 and 2016, the amount of such restricted cash was approximately $60 million, $33 million and $32 million, respectively.

On November 26, 2018, we completed the acquisition of Rockwell Collins. Under the terms of the merger agreement, each share of common stock, par value $0.01 per share, of Rockwell Collins issued and outstanding immediately prior to the effective time of the Merger (other than shares held by Rockwell Collins, the Company, Merger Sub or any of their respective wholly owned subsidiaries) was converted into the right to receive (1) $93.33 in cash, without interest, and (2) 0.37525 of a share of Company common stock, par value $1.00 per share, and cash in lieu of fractional shares (together, the “Merger Consideration”), less any applicable withholding taxes. The total aggregate consideration payable in the Merger was $15.5 billion in cash ($14.9 billion net of cash acquired) and 62.2 million shares of Company common stock. In addition, $7.8 billion of Rockwell Collins debt was outstanding as of the acquisition date.

Our domestic pension funds experienced a negative return on assets of 5% during 2018 and a positive return on assets of 15.0% during 2017. Approximately 88% of these domestic pension plans' funds are invested in readily-liquid investments, including equity, fixed income, asset-backed receivables and structured products. The balance of these domestic pension plans' funds (12%) is invested in less-liquid but market-valued investments, including real estate and private equity. As part of our long-term strategy to de-risk our defined benefit pension plans, we made discretionary contributions of approximately $1.9 billion to our domestic defined benefit pension plans in 2017. Across our global pension plans, higher discount rates for pension obligations and the acquisition of Rockwell Collins, partially offset by higher discount rates for interest cost and 2018 actual returns on plan assets, will result in a net periodic pension benefit in 2019 that is expected to be approximately $100 million favorable relative to 2018 amounts. As part of the Rockwell acquisition on November 26, 2018, we assumed approximately $3.7 billion of projected pension benefit obligations and $3.4 billion of plan assets.

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 or additional credit facilities at comparable risk-based interest rates is partly a function of our existing debt-to-total-capitalization level as well as our credit standing. Our debt-to-total-capitalization increased 600 basis points from 47% at December 31, 2017 to 53% at December 31, 2018 primarily reflecting additional borrowings in 2018 used to finance the acquisition of Rockwell Collins as well as the acquisition of Rockwell Collins' outstanding debt. The average maturity of our long-term debt at December 31, 2018 is approximately 11 years.

At December 31, 2018, we had revolving credit agreements with various banks permitting aggregate borrowings of up to $4.35 billion pursuant to a $2.20 billion revolving credit agreement and a $2.15 billion multicurrency revolving credit agreement, both of which expire in August 2021. Additionally, on November 26, 2018, we entered into a $1.5 billion revolving credit agreement, which will mature on May 25, 2019. As of December 31, 2018, 2017 and 2016, there were no borrowings under any 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. In addition to the credit facilities referenced above, we expect to enter into additional credit facilities in 2019 for general corporate purposes, including to pay existing debt.

As of December 31, 2018, our maximum commercial paper borrowing authority was $4.35 billion. Commercial paper borrowings at December 31, 2018 of $1,257 million include approximately €750 million ($858 million) of euro-denominated commercial paper. We use our commercial paper borrowings for general corporate purposes, including the funding of potential acquisitions, discretionary pension contributions, debt refinancing, dividend payments and repurchases of our common stock. The need for commercial paper borrowings arises when the use of domestic cash for general corporate purposes exceeds the sum of domestic cash generation and foreign cash repatriated to the U.S.

We had the following issuances of debt in 2018, 2017 and 2016.

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(dollars in millions)

Issuance Date	Description of Notes	Aggregate Principal Balance
August 16, 2018:	3.350% notes due 20211	$	1,000
	3.650% notes due 20231	2,250
	3.950% notes due 20251	1,500
	4.125% notes due 20281	3,000
	4.450% notes due 20381	750
	4.625% notes due 20482	1,750
	LIBOR plus 0.65% floating rate notes due 20211	750
May 18, 2018:	1.150% notes due 20243	€	750
	2.150% notes due 20303	500
	EURIBOR plus 0.20% floating rate notes due 20203	750
November 13, 2017:	EURIBOR plus 0.15% floating rate notes due 20192	€	750
May 4, 2017:	1.900% notes due 20204	$	1,000
	2.300% notes due 20224	500
	2.800% notes due 20244	800
	3.125% notes due 20274	1,100
	4.050% notes due 20474	600
November 1, 2016:	1.500% notes due 20192	$	650
	1.950% notes due 20212	750
	2.650% notes due 20262	1,150
	3.750% notes due 20462	1,100
	LIBOR plus 0.35% floating rate notes due 20192	350
February 22, 2016:	1.125% notes due 20213	€	950
	1.875% notes due 20263	500
	EURIBOR plus 0.80% floating rate notes due 20183	750

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

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

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

4 The net proceeds received from these debt issuances were used to fund the repayment at maturity of our 1.800% notes due 2017, representing $1.5 billion in aggregate principal and other general corporate purposes.

We made the following repayments of debt in 2018, 2017 and 2016:

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(dollars in millions)

Repayment Date	Description of Notes	Aggregate Principal Balance
December 14, 2018	Variable-rate term loan due 2020 (1 month LIBOR plus 1.25%)1	$	482
May 4, 2018	1.778% junior subordinated notes	$	1,100
February 22, 2018	EURIBOR plus 0.80% floating rate notes	€	750
February 1, 2018	6.80% notes	$	99
June 1, 2017	1.800% notes	$	1,500
December 1, 2016:	5.375% notes due in 20172	$	1,000
	6.125% notes due in 20192	$	1,250

1 This term loan was assumed in connection with the Rockwell Collins acquisition and subsequently repaid.

2 These notes were redeemed under our redemption notice issued on November 1, 2016. A combined net extinguishment loss of approximately $164

million was recognized within Interest expense, net in the accompanying Consolidated Statement of Operations.

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 or additional credit facilities provides potential sources of liquidity should they be required or appropriate.

Cash Flow—Operating Activities of Continuing Operations

(dollars in millions)	2018		2017		2016
Net cash flows provided by operating activities of continuing operations	$	6,322	$	5,631	$	6,412

2018 Compared with 2017

Cash generated from continuing operating activities in 2018 was approximately $691 million higher than 2017. Cash outflows for working capital increased $703 million over the prior period to support higher top line organic growth. Factoring activity resulted in a decrease of approximately $148 million in cash generated from operating activities during the year ended, December 31, 2018, as compared to the prior year. This decrease was primarily driven from lower factoring levels at Pratt & Whitney and Carrier. Factoring activity does not reflect the factoring of certain aerospace receivables performed at customer request for which we are compensated by the customer for the extended collection cycle.

The 2018 cash outflows from working capital were $755 million. Accounts receivable increased approximately $2.4 billion due to an increase in sales volume. Contract assets, current increased $604 million due to costs in excess of billings primarily at Pratt & Whitney driven by military engines, at Otis due to progression on major projects, and at Collins Aerospace Systems. Inventory increased $537 million primarily driven by an increase in production for the Geared Turbofan at Pratt & Whitney, increases at Carrier to support higher sales volume and increases at Collins Aerospace Systems. This was partially offset by decreases in Other assets of $161 million primarily due to tax refunds received, an increase in Accounts payable and accrued liabilities of approximately $2.4 billion, driven by higher inventory purchasing activity at Pratt & Whitney and higher direct material purchases at Collins Aerospace Systems, as well as an increase in Contract liabilities, current of $205 million driven by progress payments on major contracts and seasonal advanced billings at Otis.

The funded status of our defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and actuarial mortality assumptions. We can contribute cash or UTC shares to our plans at our discretion, subject to applicable regulations. Total cash contributions to our global defined benefit pension plans were $147 million, $2,112 million and $303 million during 2018, 2017 and 2016, respectively. As of December 31, 2018, the total investment by the global defined benefit pension plans in the Company's securities was less than 1% of total plan assets. Our qualified domestic defined benefit pension plans are approximately 97% funded on a projected benefit obligation basis as of December 31, 2018, and we are not required to make additional contributions through the end of 2024. We expect to make total contributions of approximately $100 million to our global defined benefit pension plans in 2019. Contributions to our global defined benefit pension plans in 2019 are expected to meet or exceed the current funding requirements.

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2017 Compared with 2016

As part of our long-term strategy to de-risk our defined benefit pension plans, we made discretionary contributions of approximately $1.9 billion to our domestic defined benefit pension plans in 2017. Including the effects of this contribution, cash generated from operating activities of continuing operations in 2017 was $781 million lower than 2016. Lower net income and the higher global pension contributions were partially offset by lower investments in working capital of approximately $1.1 billion and approximately $0.6 billion in favorable Other operating activities, net. The 2017 Other operating activities, net was driven by increases in net noncurrent income tax liabilities resulting from the TCJA enacted in December 2017 as discussed above, partially offset by gains on sales of investments included in net income, including Carrier's sale of investments in Watsco, Inc.

The 2017 cash outflows for working capital ($52 million) were primarily driven by increases in inventories of approximately $1.1 billion, primarily in our aerospace businesses supporting an increase in forecasted OEM deliveries and related aftermarket demand, including approximately $200 million of inventory costs attributable to new engine offerings recognized based on the average cost per unit expected over the life of each contract using the units-of-delivery method of percentage of completion accounting, as discussed in Note 6. Accounts receivable increases at Pratt & Whitney were partially offset by declines at Carrier. Factoring activity provided an increase of approximately $700 million in cash generated from operating activities of continuing operations in 2017, as compared to the prior year period. This increase does not reflect the factoring of certain aerospace receivables performed at customer request for which we are compensated by the customer for the extended payment cycle. These increases were largely offset by the net increase in accrued liabilities and accounts payable of approximately $1.6 billion, primarily driven by production volumes at Pratt & Whitney.

For 2016, cash outflows for working capital ($1,161 million) were primarily driven by increases in inventory in our aerospace businesses to support deliveries and other contractual commitments, including approximately $220 million of inventory costs attributable to new engine offerings recognized based on the average cost per unit expected over the life of each contract using the units-of-delivery method of percentage of completion accounting, as discussed in Note 6. Increases in accounts receivable at Pratt & Whitney and our commercial businesses were partially offset by increases in accounts payable and accrued liabilities across all of our businesses.

Cash Flow—Investing Activities of Continuing Operations

(dollars in millions)	2018			2017			2016
Net cash flows used in investing activities of continuing operations	$	(16,973	)	$	(3,019	)	$	(2,509	)

2018 Compared with 2017

Cash flows used in investing activities of continuing operations for 2018 and 2017 primarily reflect capital investments/dispositions of businesses, expenditures, cash investments in customer financing assets, payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms and settlements of derivative contracts. The $14 billion increase in cash flows used in investing activities from the prior year primarily relates to the $14.9 billion of cash paid for the acquisition of Rockwell Collins (net of cash acquired) and the absence of $596 million in net proceeds received from Carrier's sale of investments in Watsco, Inc. in 2017, partially offset by proceeds from the sale of Taylor Company in June 2018 by Carrier of $1.0 billion, a decrease in customer financing assets of $593 million and $143 million in receipts from settlements of derivative contracts compared to payments of $317 million in 2017.

Capital expenditures in 2018 ($1,902 million) primarily relate to investments in production capacity at Pratt & Whitney, investments in production capacity and several small projects at Collins Aerospace Systems, and new facilities and investments in products and information technology at Carrier, and investments in digital and information technology at Otis.

Cash investments in businesses (net of cash acquired) in 2018 ($15.4 billion) primarily relate to the acquisition of Rockwell Collins in November 2018. Dispositions of businesses in 2018 of $1.1 billion primarily relate to the sale of Taylor Company.

Customer financing activities, primarily driven by additional Geared Turbofan engines to support customer fleets, were a net use of cash of $382 million and $975 million in 2018 and 2017, respectively. We may also arrange for third-party investors to assume a portion of our commitments. At December 31, 2018, we had commercial aerospace financing and other contractual commitments of approximately $15.5 billion related to commercial aircraft and certain contractual rights to provide product on new aircraft platforms, of which as much as $1.7 billion may be required to be disbursed during 2019. 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, 2018, our collaborators' share of these commitments was approximately $5.3 billion of which as much as $468 million may be required to be disbursed to us during

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2019. Refer to Note 5 to the Consolidated Financial Statements for additional discussion of our commercial aerospace industry assets and commitments.

In 2018, we increased our collaboration intangible assets by approximately $400 million, which primarily relates to payments made under our 2012 agreement to acquire Rolls-Royce's collaboration interests in IAE.

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, 2018 and 2017, we had net cash receipts of approximately $143 million and net cash payments of approximately $317 million, respectively, from the settlement of these derivative instruments.

2017 Compared with 2016

Cash flows used in investing activities of continuing operations for 2017 and 2016 primarily reflect capital expenditures, cash investments in customer financing assets, cash investments in businesses, and payments related to our collaboration intangible assets and contractual rights to provide product on new aircraft platforms. In 2017, we realized net proceeds of $596 million from Carrier's sale of investments in Watsco, Inc.

In 2017, we increased our collaboration intangible assets by approximately $380 million, of which approximately $340 million represented payments made under our 2012 agreement to acquire Rolls-Royce's ownership and collaboration interests in IAE. Capital expenditures for 2017 ($2,014 million) primarily relate to investments in production capacity at Pratt & Whitney and Collins Aerospace Systems, as well as new facilities at Pratt & Whitney and Carrier. Cash investments in businesses in 2017 ($231 million) consisted of a number of small acquisitions, primarily in our commercial businesses.

Cash Flow—Financing Activities of Continuing Operations

(dollars in millions)	2018		2017			2016
Net cash flows provided by (used in) financing activities of continuing operations	$	7,965	$	(993	)	$	(1,188	)

2018 Compared with 2017

Our financing activities primarily include the issuance and repayment of short term and long term debt, payment of dividends and stock repurchases. Net cash provided by financing activities increased $8,958 million in 2018 compared to the prior year due to an increase in long-term debt issuances of $8.5 billion, including the $11 billion issued in 2018 for the financing of the Rockwell Collins acquisition, and a decrease in repurchases of common stock of $1.1 billion, partially offset by an increase in repayments of long-term debt of $0.9 billion.

Commercial paper borrowings and revolving credit facilities provide short-term liquidity to supplement operating cash flows and are used for general corporate purposes, including the funding of potential acquisitions and repurchases of our stock. We had approximately $1.3 billion of outstanding commercial paper at December 31, 2018.

At December 31, 2018, management had remaining authority to repurchase approximately $2.0 billion of our common stock under the October 14, 2015 share repurchase program. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase programs, and under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended. We may also reacquire shares outside of the program from time to time in connection with the surrender of shares to cover taxes on vesting of restricted stock and in connection with our employee savings plan. We made cash payments of approximately $325 million to repurchase approximately 2.7 million shares of our common stock during the year ended December 31, 2018.

We paid aggregate dividends on common stock of approximately $2.2 billion and $2.1 billion in 2018 and 2017, respectively. On February 4, 2019, the Board of Directors declared a dividend of $0.735 per share payable March 10, 2019 to shareowners of record at the close of business on February 15, 2019.

We have an existing universal shelf registration statement filed with the SEC for an indeterminate amount of debt and equity securities for future issuance, subject to our internal limitations on the amount of debt to be issued under this shelf registration statement.

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2017 Compared with 2016

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, including approximately $3.4 billion and $4.0 billion of net long-term debt issuances in 2017 and 2016, respectively. 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 $300 million and $522 million of outstanding commercial paper at December 31, 2017 and 2016, respectively. Commercial paper borrowings at December 31, 2016 were comprised of approximately €500 million ($522 million) of Euro-denominated commercial paper. We had no Euro-denominated commercial paper borrowings outstanding at December 31, 2017.

At December 31, 2017, we made cash payments of approximately $1.45 billion to repurchase approximately 12.9 million shares of our common stock during the year ended December 31, 2017. In addition to the transactions under the ASR agreements discussed above, we repurchased approximately 22 million shares of our common stock for approximately $2.25 billion during the year ended December 31, 2016.

In both 2017 and 2016, we paid aggregate dividends on common stock of approximately $2.1 billion.

Cash Flow—Discontinued Operations

(dollars in millions)	2018		2017		2016
Net cash flows used in discontinued operations	$	—	$	—	$	(2,526	)

Cash flows used in operating activities of discontinued operations in 2016 primarily reflect the payment of taxes associated with the net gain realized on the sale of Sikorsky to Lockheed Martin Corp. in November 2015.

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. Effective January 1, 2018, we adopted ASU 2014-09 and its related amendments (collectively, the New Revenue Standard) and elected the modified retrospective approach. Note 3 of the Consolidated Financial Statements contains further detail regarding the adoption of the New Revenue Standard and its impact on the Consolidated Financial Statements as of and for the year ended December 31, 2018. Under the New Revenue Standard, costs incurred for engineering and development of aerospace products under contracts with customers must be capitalized as contract fulfillment costs, to the extent recoverable from the associated contract margin, and subsequently amortized as the OEM products are delivered to the customer. The estimation of contract margin requires management's judgment. As described in Note 1, the New Revenue Standard changed the revenue recognition practices for a number of revenue streams across our businesses. Several of our businesses which previously accounted for revenue on a point in time basis are now required to use an over-time revenue recognition model when their contracts meet one or more of the mandatory criteria established in the New Revenue Standard. Revenue is now recognized on an over-time basis using an input method for repair contracts within Otis and Carrier; certain U.S. Government and commercial aerospace equipment contracts; and aerospace aftermarket service work. We measure progress toward completion for these contracts using costs incurred to date relative to total estimated costs at completion. This over-time basis using an input method requires estimates of future revenues and costs over the full term of product and/or service delivery. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management's judgment.

The long-term nature of these contracts, the complexity of the products, and the strict safety and performance standards under which they are regulated can affect our ability to estimate costs and margin precisely. As a result, we review our cost estimates on significant contracts on a quarterly basis and for others, at least annually or when circumstances change and warrant a modification to a previous estimate. We record changes in contract estimates using the cumulative catch-up method.

Income Taxes. The future tax benefit arising from deductible temporary differences and tax carryforwards was $4.7 billion at December 31, 2018 and $3.8 billion at December 31, 2017. Management believes that our earnings during the periods when the

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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 18 for discussion of UTC administrative review proceedings with the German Tax Office.

See Note 11 to the Consolidated Financial Statements for additional provision items recorded in regards to TCJA.

Goodwill and Intangible Assets. Our investments in businesses net of cash acquired in 2018 totaled $31.1 billion (including debt assumed of $7.8 billion and stock issued of $8 billion). 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 our 2012 agreement to acquire Rolls-Royce's ownership and collaboration interests in IAE, as discussed above and in Note 2 to the Consolidated Financial Statements. As a result of the acquisition of Rockwell Collins, goodwill and intangible assets were recorded in the amount of $20.5 billion and $10.8 billion, respectively. The fair value for acquired customer relationship intangibles is determined as of the acquisition date based on estimates and judgments regarding expectations for the future after-tax cash flows arising from the follow-on revenue from customer relationships that existed on the acquisition date over their estimated lives, including the probability of expected future contract renewals and revenue, less a contributory assets charge, all of which is discounted to present value. The fair value of the tradename intangible assets were determined utilizing the relief from royalty method which is a form of the income approach. Under this method, a royalty rate based on observed market royalties is applied to projected revenue supporting the tradename and discounted to present value using an appropriate discount rate.  See Note 2 to the Consolidated Financial Statements for further details.

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 typically results 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, 2018 was approximately $11.3 billion, of which approximately $2.7 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. On July 1, 2017, we early adopted ASU 2017-04, which eliminates Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss is now measured at the amount by which a reporting unit's carrying value exceeds its fair value, without exceeding the recorded amount of goodwill. In developing our estimates for the fair value of our reporting units, significant judgment is required in the determination of the appropriateness of using a qualitative assessment or quantitative assessment. For these quantitative assessments that are performed, fair value is primarily based on income approaches using discounted cash flow models which

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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, 2018 and determined that no significant adjustments to the carrying value of goodwill or indefinite lived intangible assets were necessary. 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 18 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. Of note, the design, development, production and support of new aerospace technologies is inherently complex and subject to risk.  Since the PurePower PW1000G Geared Turbofan engine entered into service in 2016, technical issues have been identified and experienced with the engine, which is typical for new engines and new aerospace technologies. Pratt & Whitney has addressed these issues through various improvements and modifications. These issues have resulted in financial impacts, including increased warranty provisions, customer contract settlements, and reductions in contract performance estimates. Additional technical issues may also arise in the normal course, which may result in financial impacts that could be material to the Company’s financial position, results of operations and cash flows.

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 periodic cost to a 25 basis point change in the discount rates for benefit obligations, interest cost and service cost as of December 31, 2018:

(dollars in millions)	Increase in Discount Rate of 25 bps			Decrease in Discount Rate of 25 bps
Pension plans
Projected benefit obligation	$	(1,006	)	$	1,056
Net periodic pension (benefit) cost	(39		)	41
Other postretirement benefit plans1
Accumulated postretirement benefit obligation	(13		)	14

^{1 The impact on net periodic postretirement (benefit) cost is less than $1M.}  

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 2018 pension expense by approximately $87 million.

The weighted-average discount rates used to measure pension liabilities and costs are set by reference to UTC-specific analyses using each plan's specific cash flows and are then compared to high-quality bond indices for reasonableness. For our significant plans, we utilize a full yield curve approach in the estimation of the service cost and interest cost components by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant projected cash flows. Global market interest rates have increased in 2018 as compared with 2017 and, as a result, the weighted-average discount rate used to measure pension liabilities increased from 3.4% in 2017 to 4.0% in 2018. The weighted-average discount

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rates used to measure service cost and interest cost were 3.3% and 3.0% in 2018, respectively. 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, higher discount rates for pension obligations and the acquisition of Rockwell Collins, partially offset by higher discount rates for interest cost and 2018 actual returns on plan assets, will result in a net periodic pension benefit in 2019 that is expected to be approximately $100 million favorable relative to 2018 amounts.

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, 2018 is as follows:

			Payments Due by Period
(dollars in millions)	Total		2019		2020-2021		2022-2023		Thereafter
Long-term debt—principal	$	44,416	$	2,876	$	7,587	$	7,433	$	26,520
Long-term debt—future interest	18,394		1,515		2,735		2,336		11,808
Operating leases	2,916		683		951		536		746
Purchase obligations	13,948		9,926		3,693		289		40
Other long-term liabilities	3,832		1,017		1,192		541		1,082
Total contractual obligations	$	83,506	$	16,017	$	16,158	$	11,135	$	40,196

Purchase obligations include amounts committed for the purchase of goods and services under legally enforceable contracts or purchase orders. Where it is not practically feasible to determine the legally enforceable portion of our obligation under certain of our long-term purchase agreements, we include additional expected purchase obligations beyond what is legally enforceable. Approximately 18% 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, 2018 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 Rockwell Collins in 2018 and Goodrich in 2012, we recorded assumed liabilities of approximately $970 million and $2.2 billion, respectively related to customer contractual obligations on certain programs with terms less favorable than could be realized in market transactions as of the acquisition date. These liabilities are being liquidated in accordance with the underlying pattern of obligations, as reflected by the net cash outflows incurred on the contracts. Total consumption of the contractual obligations for the year ended December 31, 2018 was approximately $252 million. Total future consumption of the contractual obligations is expected to be as follows: $381 million in 2019, $295 million in 2020, $217 million in 2021, $163 million in 2022, $134 million in 2023 and $500 million thereafter. These amounts are not included in the table above.

The above table also does not reflect unrecognized tax benefits of $1,619 million, the timing of which is uncertain, except for approximately $30 million that may become payable during 2019. Refer to Note 11 to the Consolidated Financial Statements for additional discussion on unrecognized tax benefits.

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COMMERCIAL COMMITMENTS

The following table summarizes our commercial commitments outstanding as of December 31, 2018:

	Amount of Commitment Expiration per Period
(dollars in millions)	Committed		2019		2020-2021		2022-2023		Thereafter
Commercial aerospace financing commitments	$	4,556	$	862	$	1,710	$	1,513	$	471
Other commercial aerospace commitments	10,914		815		1,379		1,293		7,427
Commercial aerospace financing arrangements	348		—		21		5		322
Credit facilities and debt obligations (expire 2019 to 2028)	116		101		—		—		15
Performance guarantees	55		7		—		39		9
Total commercial commitments	$	15,989	$	1,785	$	3,110	$	2,850	$	8,244

In connection with our 2012 agreement to acquire Rolls-Royce's ownership and collaboration interests in IAE, additional payments are due to Rolls-Royce contingent upon each hour flown through June 2027 by the V2500-powered aircraft in service as of the acquisition date. These flight hour payments, included in "Other commercial aerospace commitments" in the table above, are being capitalized as collaboration intangible assets. The collaboration intangible assets are amortized based upon the pattern of economic benefit as represented by the underlying cash flows.

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 distinct rights are 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 17 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 relatively 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, 2018, 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, excluding U.S. export sales, averaged approximately $26 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, at December 31, 2018 we have approximately €4.95 billion of euro-denominated long-term debt and €750 million of euro-denominated commercial paper borrowings outstanding, which qualify as a net investment hedge against our investments in European businesses. As of December 31, 2018, the net investment hedge is deemed to be effective. 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,

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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. Additionally, we transact business in various foreign currencies which exposes our cash flows and earnings to changes in foreign currency exchange rates. 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 Collins Aerospace Systems, and hedging activity also occurs to a lesser extent at the remainder of Pratt & Whitney. At P&WC and Collins Aerospace Systems, firm and forecasted sales for both original equipment and spare parts are hedged at varying amounts for up to 49 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, 2018.

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 741 locations, mostly in the United States, at which we may have some liability for remediating contamination. We have resolved our liability at 352 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 128 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, 2018 and 2017, we had $830 million reserved for environmental remediation. Cash outflows for environmental remediation were $48 million in 2018, $42 million in 2017 and $44 million in 2016. We estimate that ongoing environmental remediation expenditures in each of the next two years will not exceed approximately $100 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 established a reserve for our potential asbestos exposure, recording a noncash pretax charge to earnings of $237 million in the fourth quarter of 2015.

Our estimated total liability to resolve all pending and unasserted potential future asbestos claims through 2059 is approximately $335 million and is principally recorded in Other long-term liabilities on our Consolidated Balance Sheet as of December 31, 2018. This amount is on a pre-tax basis, not discounted, and excludes the Company’s legal fees to defend the asbestos claims (which will continue to be expensed by the Company as they are incurred). In addition, the Company has an insurance recovery receivable for probable asbestos related recoveries of approximately $155 million, which is included

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primarily in Other assets on our Consolidated Balance Sheet as of December 31, 2018. See Note 18 "Contingent Liabilities" of our Consolidated Financial Statements for further discussion of this matter.

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 18 "Contingent Liabilities" of our Consolidated Financial Statements for further discussion of these and other government matters.

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Cautionary Note Concerning Factors That May Affect Future Results

This 2018 Annual Report to Shareowners (2018 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," "outlook", "confident" and other words of similar meaning in connection with a discussion of future operating or financial performance or the separation transactions. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash, share repurchases, tax rates and other measures of financial performance or potential future plans, strategies or transactions of United Technologies or the independent companies following United Technologies’ expected separation into three independent companies, the anticipated benefits of the acquisition of Rockwell Collins or of the separation transactions, including estimated synergies resulting from the Rockwell Collins transaction, the expected timing of completion of the separation transactions, estimated costs associated with such transactions and other statements that are not historical facts. All forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Such risks, uncertainties and other factors include, without limitation:

• the effect of economic conditions in the industries and markets in which we 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 (including expected returns under customer contracts) of advanced technologies and new products and services;

• the scope, nature, impact or timing of the expected separation transactions and other acquisition and divestiture activity, including among other things integration of acquired businesses into UTC's existing businesses and realization of synergies and opportunities for growth and innovation and incurrence of related costs and expenses;

• future levels of indebtedness, including indebtedness that may be incurred in connection with the expected separation transactions, and capital spending and research and development spending;

• future availability of credit and factors that may affect such availability, including credit market conditions and our capital structure;

• the timing and scope of future repurchases of our common stock, which may be suspended at any time due to various factors, including market conditions and the level of other investing activities and uses of cash;

• delays and disruption in delivery of materials and services from suppliers;

• company and customer-directed cost reduction efforts and restructuring costs and savings and other consequences thereof;

• new business and investment opportunities;

• our ability to realize the intended benefits of organizational changes;

• the anticipated benefits of diversification and balance of operations across product lines, regions and industries;

• the outcome of legal proceedings, investigations and other contingencies;

• pension plan assumptions and future contributions;

• the impact of the negotiation of collective bargaining agreements and labor disputes;

• the effect of changes in political conditions in the U.S. and other countries in which we operate, including the effect of changes in U.S. trade policies or the U.K.'s pending withdrawal from the European Union, on general market conditions, global trade policies and currency exchange rates in the near term and beyond;

• the effect of changes in tax (including the U.S. tax reform enacted on December 22, 2017 and is commonly referred to as the Tax Cuts and Jobs Act of 2017 (TCJA)), environmental, regulatory (including among other things import/export) and other laws and regulations in the U.S. and other countries in which we operate;

• negative effects of the Rockwell Collins acquisition or of the announcement or pendency of the separation transactions on the market price of UTC’s common stock and on its financial performance;

• risks relating to the integration of Rockwell Collins, including the risk that the integration may be more difficult, time-consuming or costly than expected or may not result in the achievement of estimated synergies within the contemplated time frame or at all;

• our ability to retain and hire key personnel;

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• the expected benefits and timing of the separation transactions, and the risk that conditions to the separation transactions will not be satisfied and/or that the separation transactions will not be completed within the expected time frame, on the expected terms or at all;

• the expected qualification of the separation transactions as tax-free transactions for U.S. federal income tax purposes;

• the possibility that any consents or approvals required in connection with the expected separation transactions will not be received or obtained within the expected time frame, on the expected terms or at all;

• expected financing transactions undertaken in connection with the separation transactions and risks associated with additional indebtedness;

• the risk that dissynergy costs, costs of restructuring transactions and other costs incurred in connection with the expected separation transactions will exceed our estimates; and

• the impact of the expected separation transactions on our businesses and the risk that the separation transactions may be more difficult, time-consuming or costly than expected, including the impact on our resources, systems, procedures and controls, diversion of management’s attention and the impact on relationships with customers, suppliers, employees and other business counterparties.

In addition, our Annual Report on Form 10-K for 2018 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 18: 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 2018 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 2018 Annual Report in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Restructuring Costs," "Environmental Matters" and "Governmental Matters." 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.

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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.

On November 26, 2018, the Company completed its merger of Rockwell Collins.  Accordingly, the acquired assets and liabilities of Rockwell Collins are included in our consolidated balance sheet as of December 31, 2018 and the results of its operations and cash flows are reported in our consolidated statements of operations and cash flows from November 26, 2018 through December 31, 2018.  We have elected to exclude Rockwell Collins from the scope of our report on internal control over financial reporting as of December 31, 2018. Rockwell Collins is a wholly-owned subsidiary whose total assets and total revenues excluded from the scope of our report represent 5 percent and 1 percent, respectively of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.

Management has assessed the effectiveness of UTC's internal control over financial reporting as of December 31, 2018. 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, 2018. The effectiveness of UTC's internal control over financial reporting, as of December 31, 2018, 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

Chairman, President and Chief Executive Officer

/s/ Akhil Johri

Akhil Johri

Executive Vice President & Chief Financial Officer

/s/ Robert J. Bailey

Robert J. Bailey

Corporate Vice President, Controller

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Report of Independent Registered Public Accounting Firm

To the Shareowners and Board of Directors of United Technologies Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of United Technologies Corporation and its subsidiaries (the “Corporation”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Corporation's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principles

As discussed in Notes 3 and 12 to the consolidated financial statements, the Corporation changed the manner in which it accounts for revenue from contracts with customers and the manner in which it accounts for net periodic benefit cost in 2018.

Basis for Opinions

The Corporation's management is responsible for these consolidated 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 the Corporation’s consolidated financial statements and on the Corporation's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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 described in Management’s Report on Internal Control over Financial Reporting, management has excluded Rockwell Collins, Inc. from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Corporation in a purchase business combination during 2018. We have also excluded Rockwell Collins, Inc. from our audit of internal control over financial reporting. Rockwell Collins, Inc. is a wholly-owned subsidiary whose total assets and

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total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 5%and 1%,respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.

Definition and Limitations of Internal Control over Financial Reporting

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.

PricewaterhouseCoopers LLP

Hartford, Connecticut

February 7, 2019

We have served as the Corporation’s auditor since 1947.

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Consolidated Statement of Operations

(dollars in millions, except per share amounts; shares in millions)	2018			2017			2016
Net Sales:
Product sales	$	45,434		$	41,361		$	40,735
Service sales	21,067			18,476			16,509
	66,501			59,837			57,244
Costs and Expenses:
Cost of products sold	36,754			31,224			30,304
Cost of services sold	13,231			12,977			11,167
Research and development	2,462			2,427			2,376
Selling, general and administrative	7,066			6,429			5,958
	59,513			53,057			49,805
Other income, net	1,565			1,358			782
Operating profit	8,553			8,138			8,221
Non-service pension (benefit) cost	(765		)	(534		)	49
Interest expense, net	1,038			909			1,039
Income from continuing operations before income taxes	8,280			7,763			7,133
Income tax expense	2,626			2,843			1,697
Net income from continuing operations	5,654			4,920			5,436
Less: Noncontrolling interest in subsidiaries' earnings from continuing operations	385			368			371
Income from continuing operations attributable to common shareowners	5,269			4,552			5,065
Discontinued operations:
Income from operations	—			—			1
Gain on disposal	—			—			13
Income tax expense	—			—			(24		)
Net loss from discontinued operations	—			—			(10		)
Net income attributable to common shareowners	$	5,269		$	4,552		$	5,055
Earnings Per Share of Common Stock—Basic:
Net income from continuing operations attributable to common shareowners	$	6.58		$	5.76		$	6.19
Net income attributable to common shareowners	$	6.58		$	5.76		$	6.18
Earnings Per Share of Common Stock—Diluted:
Net income from continuing operations attributable to common shareowners	$	6.50		$	5.70		$	6.13
Net income attributable to common shareowners	$	6.50		$	5.70		$	6.12
Weighted average number of shares outstanding:
Basic shares	800.4			790.0			818.2
Diluted shares	810.1			799.1			826.1

See accompanying Notes to Consolidated Financial Statements

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Consolidated Statement of Comprehensive Income

(dollars in millions)	2018		2017		2016
Net income from continuing operations	$	5,654	$	4,920	$	5,436
Net loss from discontinued operations	—		—		(10		)
Net income	5,654		4,920		5,426
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustments