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BUS632 – Advanced Financial Statement Analysis

Final Project 1st Part

Due: by 11:

5

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9pm EST on Sunday at the end of Unit # 7

Final Project-1st Deliverable:

Attached is 2016 Annual Report for UTX. I want you to review the report but mainly I want you to focus on pages 10-42 of the 78 page report. These area focus on the MD&A of specific activity within the divisions of UTX, forecasts, and then the consolidated financial statements. I want you to get comfortable with the statement and you do not have to memorize it but I want you to review it as you will be using this as a reference.

1st Scenario: The Development of Pro-Forma Statements-Forecasts

Based upon the MD&A, Income Statement, Balance Sheet and Cash Flow Statement from pages 16 & 37-39 I want each student to copy the format of the Segment Review on page 16 and the Income Statement and Balance Sheet from pages 37-38 within an Excel workbook (a tab for each statement) and account for this scenario in which you will develop pro-forma, or forecasted data, within each statement.

Scenario: Honeywell Corp. has decided that they want to grow and expand but instead of building a new product division that have decided that it may be cheaper to purchase a division from their competitor UTX. They have made a tender offer to purchase UTXs Pratt & Whitney (P&W) jet engine division that is worth $14.9B in net sales form 2016 with operating profits of $1.5B and operating gross margin of 10.4%.

The tender offer has been made that consists of $20B that is made up of $15B cash and $5B stock.

1. Within the income statement and balance sheet I want each student to forecast out to 2018 a 3% increase in all categories within each statement. This means that for Net Income from continuing operations the 2017 number will be $5,559B and the Net (loss) would be $(10.3). Balance sheet will be Cash and Cash Equivalents $7372B and AR will be $11825B.

a. I want each category to be forecasted out by 3% for 2017 and 3% for 2018 for all categories within the P/L and Balance Sheet.

b. Choose 5 financial ratio metrics, any 5 you have chosen, and then calculate them based upon the 2017 & 2018 Data.

i. You will run a set of 5 metrics for 2017 and another for 2018.

2. From the sale of P&W I want each student to perform 3 deliverables:

a. Drop in the sale of $15B in cash and $5B debt in the correct categories within the P/L and Balance Sheet.

b. Deduct the net sales and operating profits from the Income Statement and then recalculate 2017 & 2018 categories for just the Income Statement

c. Redo the metrics for 2017 & 2018 and then compare them from 1.B

3. Develop a shorty White Paper on the impacts of the sale of P&W and how it will affect sales.

a. Use your metrics and the changes in them for example.

i. This does not must be more than 1 page that you can embed within your workbook.

Thus, this 1st part of the project will have multiple tabs within a workbook and for each scenario I want to see a new tab and please clearly label each tab for each scenario and on the headers for all your papers.

Students: Be sure to read the criteria, by which your paper/project will be evaluated, before you write, and again after you write.

TaskPointsEarnedComments

Has the student performed adequate analysis based upon their

pre-defined ratios deriving from company examples data?30

Has the student shown applicable critical thinking skills within

their analysis and redevelopment of financial data?30

Has the student provided ample and solid support to senior

management stemming from recommendations?30

Free from error, spelling and grammar5

1000

Sound use of APA 6th principles

“ Our relentless focus on our four key

priorities — innovation, execution,
cost reduction and disciplined capital
allocation — is the reason we are
optimistic about our future.”

GREG HAYES, CHAIRMAN & CEO

2016 Annual Report

12 13 14 15 1

51.

56.6 57.9 56.5 57.4

ADJUSTED
NET SALES1

Dollars in billions

12 13 14 15 16

4.1
4.5

RESEARCH AND
DEVELOPMENT

Dollars in billions
12 13 14 15 16

4.75

5.72
6.46 6.30

6.61

ADJUSTED DILUTED EARNINGS
PER COMMON SHARE FROM
CONTINUING OPERATIONS1

Dollars per share

12 13 14 15 16

2.0

2.20

2.36
2.56 2.62

DIVIDENDS PAID
PER COMMON SHARE

Dollars per share
12 13 14 15 16

6.0

7.3 7.0 6.

6.4

CASH FLOW FROM
OPERATIONS3

Dollars in billions
12 13 14 15 16

38 38
41

DEBT TO CAPITAL4

Percent

United Technologies Corp.
(UTC) is a leader in the global
building and aerospace
businesses. Our company was
founded by some of the world’s
greatest inventors. Our 200,000
employees continue their
commitment to innovation. Our
large investments in technology
enable us to develop new and
improved ways to keep people
safe, comfortable, productive
and on the move. By combining
a passion for science with
precision engineering, we create
the smart, sustainable solutions
that move the world forward.

Our commercial building
businesses comprise Otis, the
world’s leading manufacturer
of elevators, escalators and
moving walkways; and UTC
Climate, Controls & Security,
a leading provider of heating,
ventilating, air-conditioning,
refrigeration, fire and security
systems, and building
automation and controls. Our
aerospace businesses consist
of Pratt & Whitney aircraft
engines and UTC Aerospace
Systems. We also operate a
central research organization
that pursues technologies for
improving the performance,
energy efficiency and cost of
our products and processes.

To learn more, visit

www.utc.com.

CONTENTS

01 Letter to Shareowners

04 Business Highlights

09 Financials

32 Cautionary Note
Concerning Factors
That May Affect
Future Results

71 Reconciliation of
Non-GAAP Measures
to Corresponding
GAAP Measures

Board of Directors

Leadership

Shareowner Information

INSIDE BACK COVER
Sustainability

Recognition

FINANCIALS

United Technologies provides high-technology products and services to the aerospace and commercial
building industries worldwide. In 2016 UTC adjusted net sales were $57.4 billion.

BUSINESSES IN BALANCE
UTC’s portfolio is balanced across customer segments, markets and geographies.

1 Adjusted net sales and adjusted diluted earnings per share from continuing operations are non-GAAP financial measures.
For the corresponding measures calculated in accordance with generally accepted accounting principles (GAAP) and a
reconciliation of the differences between the non-GAAP and GAAP measures, please refer to page 71 in this Annual Report.

² Amounts include company- and customer-funded research and development.
3 Amounts presented for 2012 to 2015 have been restated to reflect the adoption in 2016 of Accounting Standards Updates

No. 2016-15 and No. 2016-18. Refer to the financial section, which begins on page 9, for additional information.
4 The increase in the 2016 debt to capitalization ratio primarily reflects debt issuances in 2016 to fund share repurchases and

for general corporate purposes.

38%

20%

28%

50%

12%

38%

46% 54%

14%

United
StatesAsia

Pacific

Europe

Commercial &
Industrial

Commercial
Aerospace

Aftermarket
Original
Equipment
Manufacturing

Military Aerospace &
Space Other

NET SALES BY GEOGRAPHY

as a percent of total net sales

NET SALES BY TYPE

as a percent of total net sales

38%
20%

28%
50%
12%
38%
46% 54%
14%
United
StatesAsia
Pacific
Europe
Commercial &
Industrial
Commercial
Aerospace
Aftermarket
Original
Equipment
Manufacturing
Military Aerospace &
Space Other
NET SALES BY GEOGRAPHY

as a percent of total net sales
NET SALES BY TYPE

as a percent of total net sales

2016 will be remembered as a solid
year for our company. Importantly, it
was a year in which United Technologies
returned to its performance tenet to
under promise and over deliver. We
delivered adjusted earnings per share
of $6.61,* just above the full year
expectations of $6.30 to $6.60 that we
communicated in December 2015.

Despite headwinds from our investments in inventory and capital to
support the unprecedented production ramp up in our aerospace
businesses, we generated $4.7 billion of free cash flow.* We also
delivered on our commitment to return value to our shareowners,
raising our dividend for the 80th consecutive year. United Technologies
remains on track to return more than $22 billion to shareowners
through dividends and share repurchases from 2015 through 2017.
Even as we returned record amounts to our shareowners,
we continued to invest for the future in both our aerospace and
commercial buildings businesses, spending $3.7 billion on research
and development and $1.7 billion on capital expenditures. These
investments will improve efficiency in our facilities and support
organic growth in the coming years.
Throughout 2016 we achieved impressive milestones and
strengthened the competitive position of our four global businesses:
Otis, Pratt & Whitney, UTC Aerospace Systems and UTC Climate,
Controls & Security. We aggressively managed costs in all of our
businesses and moved forward on a multiyear, approximately
$1.5 billion restructuring plan.
Our 2016 results are due to a continuing focus on our four
key priorities: innovation, execution, cost reduction and disciplined

capital allocation. These four priorities will continue to drive our
performance over the coming years.

STRENGTH IN THE FACE OF GLOBAL UNCERTAINTY

These last few years have seen unprecedented global change. As
we look ahead, rapid change will become the new normal for the
world. 2016 brought us Brexit and a new U.S. administration as the
tensions arising from globalization were manifested at the ballot box.
With upcoming elections in Europe and slowing growth in China and
emerging markets, these trends may continue in the coming year,
creating uncertainty and instability in the global economy.
Our continued commitment to our four key priorities combined
with our portfolio of industry-leading businesses, global footprint
and scale, and a strong balance sheet provide us with sustainable
competitive advantages. They also give us confidence in our ability
to deliver even in the most challenging of environments.
We are well-positioned to achieve our long-term growth
objectives. We have made the right investments, and we have the
right management team in place. We will continue to invest in our
people and our technologies so that we create value for customers
and deliver the returns our investors expect.

A FOUNDATION FOR FUTURE GROWTH

We achieved several notable milestones during the year.
Otis continued to deliver solutions to the world’s most iconic
buildings. During the year Otis was awarded significant contracts in
China and India where urbanization is occurring rapidly, including the

Greg Hayes

Chairman & CEO

United Technologies Corporation | 01

DEAR
SHAREOWNER

* Adjusted earnings per share and free cash flow are non-GAAP financial measures.
For additional information regarding the use of these measures, the corresponding
amounts prepared in accordance with generally accepted accounting principles
(GAAP) and a reconciliation of the differences between the non-GAAP and GAAP
measures, please refer to page 71 in this Annual Report.

02 | 2016 Annual Report

Gregory J. Hayes

Chairman & CEO

Shenzhen Financial Centre and two properties for Taj Hotels Resorts
and Palaces in Mumbai. It was also recently awarded a major
contract to modernize elevators in Chicago’s Willis Tower, the tallest
building in the United States by highest occupied floor.
UTC Climate, Controls & Security launched 132 new products
in 2016 that are expected to generate organic sales growth. With a
strong portfolio of respected brands such as Carrier, Kidde, Chubb
and Carrier Transicold, UTC Climate, Controls & Security has a
reputation for providing customers with the most innovative, energy-
efficient and cost-effective products on the market.
Pratt & Whitney’s Geared Turbofan engine successfully entered
into service early in the year, delivering on its promise of 16 percent
greater fuel efficiency, 75 percent reduction in noise footprint and
50 percent reduction in regulated emissions. Customer demand
for the GTF engine remains exceptionally strong with more than
8,000 orders, including options, at the end of 2016.
UTC Aerospace Systems enabled entry into service of the
Airbus A320neo and Bombardier C Series and the first flights of the
Embraer E2 and Boeing 737 MAX. With state-of-the-art systems and
controls present on virtually every aircraft in service, UTC Aerospace
Systems is well-positioned for growth.
Our strategy to continue providing innovative, cost-
competitive and sustainable technologies for the aerospace and
building industries and our relentless focus on our four key priorities
are the reasons we are optimistic about our future.

A FUTURE PROPELLED BY MEGATRENDS

Urbanization and the resulting growth in large cities, an expanding
middle class and growth in commercial air travel provide significant
opportunities for our businesses over the next 15 years.
The urban population is projected to grow by 1 billion people
by 2030, and the middle class is expected to double over the same
period to almost 60 percent of the global population. These trends
will drive the need for more housing, office buildings and mass
transportation, along with demand for climate controls, food safety,
elevators and moving walkways, and fire and security systems.
Another trend is the dramatic growth in commercial air travel.
Today there are approximately 27,000 aircraft in service. By 2030
that number is expected to grow to 47,000. Our unique position on
these new aircraft will allow us to benefit from the growing demand
for jet engines and advanced aerospace systems.

AN INVESTMENT IN FUTURE TECHNOLOGY

Our investment in innovation continues both in research and
development and in the execution of our digital strategies. In
2016 we launched initiatives in each of our businesses to capitalize
on the significant opportunities presented by an increasingly
connected world.
Otis services more than 1.9 million elevators and is deploying
digital tools to its 31,000 mechanics to improve field productivity
and service performance for customers. With 40 percent more

sensors than the V2500, Pratt & Whitney’s GTF engine can generate
approximately 4 million data points per engine per flight, allowing us
to proactively monitor engine performance, minimize disruption and
predict future maintenance needs.
These are just a few examples of how digital technology is
advancing our company. By developing different solutions in each
of our businesses to capture and analyze the vast amounts of data
generated by our high-technology products and systems, we are
able to drive efficiency into our businesses and create greater value
for our customers.
As digitalization continues to change the way we approach
our business, our ability to anticipate and adapt to change is critical.
We continue to implement new and better ways to work faster and
smarter to enable our future performance.

AN INVESTMENT IN OUR PEOPLE

While our investment in new technology is critical, I am reminded
constantly that companies don’t innovate, people do. Our most
important investments, therefore, are the ones we make in
our people.
We are proud to have celebrated the 20th anniversary of our
Employee Scholar Program in 2016. Through the ESP we cover the
costs for our employees to continue their education in whatever
field they choose. Since its inception, more than 45,000 employees
from more than 60 countries have participated in the ESP, earning
more than 38,500 degrees. We encourage our employees to develop
the skills they need, not only for their current jobs, but also for the
jobs of tomorrow. The forces of globalization cannot be ignored or
disputed, and the skills of today will not guarantee success in the
future. At United Technologies we understand that only a highly
educated, world-class workforce will enable us to survive and thrive
in the competitive world in which we live. Education will be the
differentiator of the future.
We also have a diverse and global workforce that embraces
many different viewpoints, but we all share a common commitment
to maintaining the highest ethical standards and creating a safe and
healthy work environment. We are leaders in sustainability, working
to solve tomorrow’s environmental challenges in our facilities and
with our products. And we partner with communities around the
world to inspire the next generation of leaders.
I want to thank our 200,000 employees for their commitment
and dedication throughout the year. Every day we strive to make
United Technologies the best it can be. I look forward to another
great year in 2017 and beyond.

United Technologies Corporation | 03

2016 was a good year for United Technologies. But no
matter how much we accomplish, we recognize that
there is always more to do. The competitive landscape
is changing at a rapid pace, requiring companies to be
flexible and adapt quickly. That is why we approach our
work with a sense of urgency — so that no matter what
the business environment, we deliver the results that our
shareowners and customers expect of us.

DOING MORE
MORE TO DO

Otis is the world’s leading manufacturer and maintainer of people-
moving products, including elevators, escalators and moving
walkways. Otis offers products and services in approximately
200 countries and territories, and maintains more than 1.9 million
elevators and escalators worldwide.

Otis can be found in many of the world’s most iconic buildings. In 2016
Otis was selected to modernize elevators in Chicago’s Willis Tower, the
tallest building in the United States by highest occupied floor.
Demonstrating its commitment to innovation, Otis increased its
investment in research and development by 25 percent in 2016 and
plans to double it over the next few years. The resources are directed
at developing transformational technologies that deliver greater energy
efficiency, enhanced service, and increased comfort, convenience and
connectivity for passengers. As part of this effort Otis China will build a
new engineering research center in Shanghai to develop new products
and service technologies for the large China segment and other global
markets. The center will include one of the world’s tallest above-ground
test towers.
Otis is working on new digital tools and technologies that will
transform its elevator service network and enable greater connectivity
with customers. In 2016 Otis began equipping its 31,000 mechanics
with sophisticated digital tools and applications that will use big data

to drive condition-based monitoring and maintenance. Otis and UTC
Climate, Controls & Security are exploring other opportunities to develop
digital solutions for integrated, smart building equipment.
During the year Otis unveiled its new intelligent, connected elevator,
the Gen2 Life. Based upon its proprietary Gen2 technology, the Gen2
Life offers higher energy efficiency, optimizes space requirements and
enables greater connectivity for building owners and users. It also offers
customers new interior design packages with more than 400,000 options.
Otis achieved a number of milestones in 2016, including the
installation of the world’s longest rise double-deck elevator in South
Korea’s Lotte World Tower, the country’s tallest building. The elevator
can carry 54 passengers from the ground to an observation deck on
the 121st floor in one minute. Otis also marked the sale of its 500,000th
Gen2 elevator during the year, one of its most energy-efficient and
best-selling elevators. Otis continued to be awarded contracts for major
projects in China and India where the building market is especially large.

04 | 2016 Annual Report

OTIS $11.9B
NET SALES

$2.2B*
ADJUSTED
OPERATING PROFIT

67,396
EMPLOYEES

INNOVATIVE
ICONIC
LANDMARKS

A city of skyscrapers, Chicago has long been defined by
Willis Tower. Otis, the company that invented the modern
elevator and sets the industry standard, has been selected
to modernize elevators in this landmark building.

* Adjusted operating profit is a non-GAAP financial measure. For additional information
regarding the use of this measure, the corresponding amount prepared in accordance with
generally accepted accounting principles (GAAP) and a reconciliation of the differences
between the non-GAAP and GAAP measure, please refer to page 71 in this Annual Report.

United Technologies Corporation | 05

UTC CLIMATE,
CONTROLS &
SECURITY

$16.9B
NET SALES

$3.1B*
ADJUSTED
OPERATING PROFIT

56,475
EMPLOYEES

SAFER
SMARTER
BUILDINGS

Backed by more than 80 of the world’s most
respected brands, UTC Climate, Controls &
Security is at the forefront of developing digital
products that can be connected to provide
safety, comfort, convenience and greater
productivity for a building’s occupants. At the
same time, it builds on a legacy of innovation,
continuing to deliver products that are energy
efficient, environmentally responsible and
cost competitive.

UTC Climate, Controls & Security promotes safer and smarter
sustainable buildings with state-of-the-art fire safety, security,
building automation, heating, ventilating, air-conditioning and
refrigeration systems and services.

UTC Climate, Controls & Security continues to build momentum for long-
term growth in an increasingly urban and connected world. It is backed
by a portfolio of more than 80 leading brands, a strong global presence
and a commitment to operational excellence. Innovation is a key
differentiator. This business consistently invests to deliver state-of-the-art
products and to enhance the performance of existing lines.
The company’s commitment to research and development
can be seen in the 132 new products launched in 2016. Among them
was Carrier’s new AquaEdge 19DV centrifugal chiller that offers
excellent performance and leading efficiency with a next-generation,
environmentally sustainable refrigerant. Carrier introduced the Côr home
automation system, which enables homeowners to secure, control and
remotely manage their homes’ most critical systems from a mobile app.
Onity delivered its digital DirectKey mobile access solution, providing
hotel guests a secure way to use their smartphone as a room key and
access other controlled areas.
The company broke ground in transport refrigeration when
U.K. food retailer Sainsbury’s became the first customer to take delivery
of Carrier Transicold’s prototype natural refrigerant trailer unit. The
new-generation system uses low global warming potential carbon
dioxide refrigerant, a safe and non-ozone depleting gas that sets the

standard for refrigerants and supports advances toward a smart,
sustainable cold chain.
Research and development investment remains a priority. The new
Hyderabad Research & Design Center in India opened and is expected to
become the largest center supporting R&D for UTC Climate, Controls &
Security. The Center of Excellence in Culoz, France, also opened. The
facility focuses on innovations that improve air quality and treatment,
shorten new product development, and improve energy performance
and user comfort. Along with Otis, UTC Climate, Controls & Security also
announced plans to establish a research center of excellence with the
University of Maryland.
UTC Climate, Controls & Security continues to expand its global
presence. As one example, the acquisition of approximately 70 percent
of Riello Group, S.p.A., a leading Italian heating company, has opened
key segments in Europe and elsewhere.
In all of its work, UTC Climate, Controls & Security remains a
leader in the green building movement. During the year it broke ground
on the UTC Center for Intelligent Buildings, a state-of-the-art showcase
designed to provide visitors a new way to interact with current and
emerging building technologies. The center, scheduled for completion
in 2017 and targeted to be LEED certified, will be located in Palm Beach
Gardens, Fla.

06 | 2016 Annual Report

Pratt & Whitney is a world leader in the design, manufacture and
service of aircraft engines and auxiliary power units.

Pratt & Whitney is entering a new era of growth propelled by demand for
its revolutionary Geared Turbofan commercial engines; Pratt & Whitney
Canada’s leading civil aircraft engines, including a powerful new line for
business jets; and its military engines, including the F135 engine for the
F-35 Lightning II aircraft, the most technologically advanced fighter jet
in history.
The GTF engine is transforming the aviation industry as the most
sustainable engine on the market. In 2016 GTF engine orders increased
to more than 8,000, including options. Since its entry into service in early
2016 it has delivered its promised 16 percent reduction in fuel burn,
50 percent fewer environmental emissions and a noise footprint that is
reduced by 75 percent.
As the GTF continues to enter service, Pratt & Whitney is
taking steps to offer customers a strong maintenance, repair and
overhaul network that provides global reach, choice and value. During
the year it announced a $65 million investment in its engine overhaul
facility in Columbus, Georgia, a site with decades of high-volume
engine maintenance experience. Other members of the GTF network
include MTU Aero Engines, Japanese Aero Engines Corporation and
Lufthansa Technik.

Pratt & Whitney Canada continues to prove why it sets the
industry standard for civil aircraft engines. In 2016 it received two engine
certifications and one aircraft certification. In addition its PW815GA
engine powered the first flight of the Gulfstream G600, a next-generation
business jet. To enhance customer service, Pratt & Whitney Canada
introduced MyP&WC Power, an online portal that enables customers to
connect with the company and access information and support tools.
On the military front, Pratt & Whitney was announced as the
engine provider for the U.S. Air Force’s B-21 Raider. The U.S. Air Force
declared Initial Operational Capability on the F-35A, signaling that it had
met all key criteria to be considered combat ready. The U.S. Air Force
also awarded the company a contract for the development of a future
combat engine through its Adaptive Engine Transition Program.
Late in the year the U.S. Army selected Advanced Turbine
Engine Company, a joint venture of Pratt & Whitney and Honeywell,
for the preliminary design of a new engine for Black Hawk and
Apache helicopters.

PRATT &
WHITNEY

$15.1B*
ADJUSTED
NET SALES

$1.8B*
ADJUSTED
OPERATING PROFIT

35,104
EMPLOYEES

EVERY ENGINE

EVERY PARAMETER
EVERY SECOND

* Adjusted net sales and adjusted operating profit are non-GAAP financial measures. For
additional information regarding the use of these measures, the corresponding amount
prepared in accordance with generally accepted accounting principles (GAAP) and a
reconciliation of the differences between the non-GAAP and GAAP measure, please refer
to page 71 in this Annual Report.

The Bombardier CS300 is powered by Pratt &
Whitney’s revolutionary Geared Turbofan engine.
Equipped with state-of-the-art technologies, every
engine is monitored every second from hundreds
of data parameters. Massive amounts of data are
generated, which are analyzed and used to predict
an aircraft’s performance and offer individualized
service to customers.

United Technologies Corporation | 07

UTC Aerospace Systems is one of the world’s largest suppliers of
advanced aerospace products and systems for commercial, military
and space customers.

UTC Aerospace Systems is on virtually every aircraft in service and is
well-positioned to support the extraordinary growth forecast for the
commercial aviation industry. During the year its advanced systems
enabled the first flights of the Embraer E2, the Boeing 737 MAX and the
Gulfstream G600 as well as the entry into service of the Airbus A320neo
and the Bombardier C Series.
This business is at the forefront of more electric, more intelligent
and more integrated aircraft. One example is the work it is doing for
Hawaiian Airlines. During the year it was chosen to provide state-of-the-
art electronic flight bag systems for enhanced functionality, greater safety
and stronger cybersecurity. For flight crews, the new electronic flight
bag systems enhance their ability to evaluate aircraft performance and
weather conditions in real time.
UTC Aerospace Systems also has developed a revolutionary
design approach to the secondary power distribution system, the
“nerve center” of an airplane’s power system. The patent-pending
process enables a rapid development cycle for managing and protecting
an aircraft’s electrically powered devices. The new technology has been
deployed on Embraer’s E190-E2 regional jets.
Work is underway on an advanced mobile app to bring preflight
and inflight information to a pilot’s tablet. Users will be able to access

intelligent analytics wherever they are, allowing them to adjust aircraft
operations based on real-time data. The easy access to information is
expected to improve fuel consumption, on-time departures and arrivals,
and eliminate paper-based processes.
Another major development is a lighter and more compact
advanced integrated drive generator to provide electrical inflight power
on Embraer’s new E190-E2. The new generator supplies the constant
frequency electric power needed for the aircraft — which is equivalent to
the amount of electricity needed to power 48 homes — and does so with
the added benefit of cost and fuel savings.
On the military front, UTC Aerospace Systems continues to
move its MS-177 multi-spectral and long-range imaging sensor system
to new heights. During the year the sensor completed a series of flight
demonstrations from a high-altitude, long-endurance unmanned aerial
system, performing successfully in both land and maritime mission
environments. The U.S. Air Force awarded UTC Aerospace Systems
a contract to expand and enhance the sensor’s multi-spectral
resolution reach.

UTC Aerospace Systems is advancing modern
flight with sophisticated systems that make aircraft
more electric, more intelligent and more integrated.
The vast amount of data generated by these
systems is gathered, analyzed and delivered in real
time to enhance the safety, efficiency and overall
performance of an aircraft.

MORE ELECTRIC

MORE INTEGRATED
MORE INTELLIGENT

UTC AEROSPACE
SYSTEMS

$14.5B
NET SALES

$2.3B*
ADJUSTED
OPERATING PROFIT

40,959
EMPLOYEES

1. Daniel Słowik Pratt & Whitney
POLAND

2. Shobha Guggari UTC Aerospace
Systems INDIA

3. George Deese UTC Climate,
Controls & Security
UNITED STATES

4. Sarah Dixon Otis
UNITED KINGDOM

5. Galina Dineva UTC Climate,
Controls & Security BELGIUM

6. Buyun Jing United Technologies
Research Center CHINA

7. Courtney Dornell Otis
UNITED STATES

8. Zhijun Ni Otis CHINA

9. Lily Fu Pratt & Whitney CHINA

10. John Sullivan UTC Aerospace
Systems UNITED STATES

1
5
8
2
6
9
3
7

08 | 2016 Annual Report

We take pride in being known as a company that sets big goals and
delivers big results. We do this by having a highly educated, engaged
and motivated workforce. The Employee Scholar Program helps
make that possible.

In 2016 we celebrated the 20th anniversary of the ESP, a program that
has been recognized by educators and media for its generosity — but
more important for its focus on helping employees stay abreast of their
current field or develop skills in new ones. In today’s highly competitive
business environment, it is essential that we have a workforce that can
adapt quickly and recognize the opportunities that a changing business
environment brings. By encouraging lifelong learning — and helping
employees achieve it — we build a high-performance culture that is never
satisfied with the status quo and is always looking for ways to improve.
That is the essence of UTC’s success.
We invite you to learn more about the ESP and read the personal
experiences of some of our recent alumni and participants by visiting
www.utc.com/ESP20.

EMPLOYEE
SCHOLAR
PROGRAM

$1.2B+
INVESTED

6,000+
EMPLOYEES CURRENTLY
ENROLLED

38,500+
DEGREES EARNED

“ At United Technologies we
understand that only a highly
educated, world-class workforce
will enable us to survive
and thrive in a competitive
world. Education will be the
differentiator of the future.”

GREG HAYES
CHAIRMAN & CEO

4Problem-solvingTeam player
Performance

Diversity
Inclusive

Trust

Risk-taking

Dynamic

Collaborative
Innovative

Five-Year Summary

Management’s Discussion and Analysis

32 Cautionary Note Concerning Factors That May

Affect Future Results
34 Management’s Report on Internal Control Over

Financial Reporting
35

Report of Independent Registered Public Accounting Firm

Consolidated Statement of Operations

Consolidated Statement of Comprehensive Income

Consolidated Balance Sheet

Consolidated Statement of Cash Flows

Consolidated Statement of Changes in Equity

Notes to Consolidated Financial Statements

70 Selected Quarterly Financial Data

FINANCIALS

United Technologies Corporation 09

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2016 2015 2014 2013 2012

For The Year

Net sales $ 57,244 $ 56,098 $ 57,900 $ 56,600 $ 51,101

Research and development 2,337 2,279 2,475 2,342 2,193

Restructuring costs 290 396 354 431 537

Net income from continuing operations 1 5,436 4,356 6,468 5,655 4,692
Net income from continuing operations attributable to common shareowners 1 5,065 3,996 6,066 5,265 4,337

Basic earnings per share — Net income from continuing operations attributable to common
shareowners 6.19 4.58 6.75 5.84 4.84
Diluted earnings per share — Net income from continuing operations attributable to common
shareowners 6.13 4.53 6.65 5.75 4.78
Cash dividends per common share 2.62 2.56 2.36 2.20 2.03

Average number of shares of Common Stock outstanding:
Basic 818 873 898 901 895
Diluted 826 883 912 915 907

Cash flows provided by operating activities of continuing operations 6,412 6,755 6,979 7,341 5,990
Capital expenditures 2,3 1,699 1,652 1,594 1,569 1,295
Acquisitions, including debt assumed 712 556 530 151 18,620
Repurchases of Common Stock 4 2,254 10,000 1,500 1,200 —
Dividends paid on Common Stock (excluding ESOP) 2,069 2,184 2,048 1,908 1,752

At Year End
Working capital 3,5 $ 6,644 $ 4,088 $ 5,921 $ 5,733 $ 3,948
Total assets 3 89,706 87,484 86,338 85,029 83,499
Long-term debt, including current portion 3,6 23,300 19,499 19,575 19,744 22,603
Total debt 3,6 23,901 20,425 19,701 20,132 23,106

Total debt to total capitalization 6 45% 41% 38% 38% 46%
Total equity 6,7 29,169 28,844 32,564 33,219 27,069
Number of employees 8 201,600 197,200 211,500 212,400 218,300

Note 1 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 UTC Aerospace Systems,
and $237 million related to pending and future asbestos claims.

Note 2 Capital expenditures increased from 2012 through 2016 as we expanded capacity to meet expected demand within our aerospace businesses for the next gen-
eration engine platforms.

Note 3 Excludes assets and liabilities of discontinued operations held for sale, for all periods presented.

Note 4 Share repurchases in 2015 include share repurchases under accelerated repurchase agreements of $2.6 billion in the first quarter of 2015 and $6.0 billion in the
fourth quarter of 2015. In connection with the acquisition of Goodrich, repurchases of common stock under our share repurchase program were suspended for
2012. We resumed our share repurchase program in 2013.

Note 5 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 6 The increase in the 2016 debt to total capitalization ratio primarily reflects additional borrowings in 2016 to fund share repurchases and for general corporate
purposes. The decrease in the 2013 debt to total capitalization ratio, as compared to 2012, reflects the repayment of approximately $2.9 billion of long-term debt,
most of which was used to finance the acquisition of Goodrich.

Note 7 The decrease in total equity in 2015, as compared with 2014, reflects the sale of Sikorsky and the share repurchase program. The decrease in total equity in 2014,
as compared with 2013, reflects unrealized losses of approximately $2.9 billion, net of taxes, associated with the effect of market conditions on our pension plans.

Note 8 The decrease in employees in 2015, as compared with 2014, primarily reflects the 2015 divestiture of Sikorsky.

Five-Year Summary

10 2016 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND

RESULTS OF OPERATIONS

BUSINESS OVERVIEW

We are a global provider of high technology products and services
to the building systems and aerospace industries. Our operations for
the periods presented herein are classified into four principal business
segments: Otis, UTC Climate, Controls & Security, Pratt & Whitney, and
UTC Aerospace Systems. Otis and UTC Climate, Controls & Security
are referred to as the “commercial businesses,” while Pratt &

Whitney

and UTC Aerospace Systems are referred to as the “aerospace
businesses.” On November 6, 2015, we completed the sale of the
Sikorsky Aircraft business (Sikorsky) to Lockheed Martin Corp. for
approximately $9.1 billion in cash. The results of operations and the
related cash flows of Sikorsky have been reclassified to Discontinued
Operations in our Consolidated Statements of Operations and Cash
Flows for all periods presented.

The commercial businesses generally serve customers in the
worldwide commercial and residential property industries, with
UTC Climate, Controls & Security also serving customers in the
commercial and transport refrigeration industries. The aerospace
businesses serve commercial and government aerospace customers
in both the original equipment and aftermarket parts and services
markets. Our consolidated net sales were derived from the commercial
and aerospace businesses as follows:

2016 2015 2014

Commercial and industrial 50% 52% 52%

Military aerospace and space 12% 12% 13%

Commercial aerospace 38% 36% 35%

100% 100% 100%

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

2016 2015 2014

OEM 54% 56% 56%

Aftermarket parts and services 46% 44% 44%

100% 100% 100%

Our worldwide operations can be affected by industrial, economic
and political factors on both a regional and global level. To limit the
impact of any one industry, or the economy of any single country on our
consolidated operating results, our strategy has been, and continues
to be, the maintenance of a balanced and diversified portfolio of busi-
nesses. Our operations include OEM and extensive related aftermarket
parts and services in both our commercial and aerospace businesses.
Our business mix also reflects the combination of shorter cycles at UTC
Climate, Controls & Security and in our commercial aerospace spares
businesses, and longer cycles at Otis and in our aerospace OEM and
aftermarket maintenance businesses. Our customers include com-
panies in both the public and private sectors, and our businesses reflect
an extensive geographic diversification that has evolved with the contin-
ued globalization of world economies. The composition of net sales

from outside the U.S., including U.S. export sales, as a percentage of
total segment sales, is as follows:

(DOLLARS IN MILLIONS) 2016 2015 2014 2016 2015 2014

Europe $ 11,151 $ 10,945 $ 12,587 19% 19% 22%

Asia Pacific 8,260 8,425 8,746 14% 15% 15%

Other Non-U.S. 5,479 5,584 5,511 9% 10% 9%

U.S. Exports 10,827 9,741 10,276 19% 17% 18%

International
segment sales $ 35,717 $ 34,695 $ 37,120 61% 61% 64%

As part of our growth strategy, we invest in businesses in certain
countries that carry high levels of currency, political and/or economic
risk, such as Argentina, Brazil, China, India, Indonesia, Mexico,
Poland, Russia, South Africa and countries in the Middle East. As
of December 31, 2016, the net assets in any one of these countries
did not exceed 7% 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). Since the vote, the pound sterling has weakened significantly,
but most financial markets have recovered to the levels prior to the vote.
However, the manner in which the U.K. decides to exit the EU could
have negative macroeconomic consequences. Our 2016 full year sales
in the U.K. were approximately $3 billion and represented less than
5 percent of our overall sales, and we do not believe the U.K.’s with-
drawal from the EU will significantly impact our businesses in the
near term.

Organic sales growth was 2% in 2016 representing:

• higher commercial aftermarket sales at Pratt & Whitney
• higher commercial OEM and aftermarket sales volume at UTC

Aerospace

Systems

• higher service sales in the Americas and Asia and higher new

equipment sales in North America, partially offset by lower new
equipment sales in China at Otis

• lower commercial HVAC sales in the Middle East, lower fire
products sales, and lower transport refrigeration sales partially
offset by higher North America residential HVAC sales at UTC
Climate, Controls & Security

Despite an uncertain global macro environment, we expect organic
sales growth in 2017 to be 2% to 4%, 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 for growth,
structural cost reduction, disciplined capital allocation and the execution
of customer and shareowner commitments.

As discussed below in “Results of Operations,” operating profit
in both 2016 and 2015 includes the impact from activities that are
not expected to recur often or that are not otherwise reflective of the
underlying operations, such as the adverse impact of asset impairment
charges, unfavorable impact of contract negotiations with customers,
the beneficial impact of net gains from business divestiture activities,

Management’s Discussion and Analysis

United Technologies Corporation 11

and other significant non-recurring and non-operational items dis-
cussed within the Results of Operations section, below. Our earnings
growth strategy contemplates earnings from organic sales growth,
including growth from new product development and product improve-
ments, structural cost reductions, operational improvements, and
incremental earnings from our investments in acquisitions.

Our investments in businesses in 2016 and 2015 totaled
$712 million (including debt assumed of $2 million) and $556 million
(including debt assumed of $18 million), respectively. Acquisitions
completed in 2016 include the acquisition of a majority interest in an
Italian-based heating products and services company by UTC Climate,
Controls & Security, the acquisition of a Japanese services company
by Otis and a number of small acquisitions primarily in our commercial
businesses. Our investment in businesses in 2015 consisted of the
acquisition of the majority interest in a UTC Climate, Controls & Security
business, the acquisition of an imaging technology company by UTC
Aerospace Systems, and a number of small acquisitions, primarily in
our commercial businesses.

Both acquisition and restructuring costs associated with business
combinations are expensed as incurred. Depending on the nature and
level of acquisition activity, earnings could be adversely impacted due
to acquisition and restructuring actions initiated in connection with
the integration of businesses acquired. For additional discussion of
acquisitions and restructuring, see “Liquidity and Financial Condition,”
“Restructuring Costs” and Notes 2 and 13 to the Consolidated Financial
Statements.

Discontinued Operations

On November 6, 2015, we completed the sale of Sikorsky to Lockheed
Martin Corp. for 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 have 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. Net income from discontinued
operations attributable to common shareowners for the year ended
December 31, 2015 includes the gain on the sale of Sikorsky, net of tax
expense, of $3.4 billion and includes $122 million of costs incurred in
connection with the sale. Net income from discontinued operations
attributable to common shareowners also includes income from
Sikorsky’s operations, net of tax expense, of $169 million, including
pension curtailment charges associated with our domestic pension
plans. Net income from discontinued operations attributable to com-
mon shareowners for 2014 includes a previously disclosed cumulative
adjustment related to a contract with the Canadian government for

the development by Sikorsky of the CH-148 derivative of the H-92
helicopter, a military variant of the S-92 helicopter. The cumulative
adjustment resulted in the recognition of losses, net of tax benefit,
of $277 million in 2014.

RESULTS OF OPERATIONS

Net Sales

(DOLLARS IN MILLIONS) 2016 2015 2014

Net sales $ 57,244 $ 56,098 $ 57,900

Percentage change year-over-year 2.0% (3.1)% 2.3%

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

2016 2015

Organic volume 2 % 1 %

Foreign currency translation (1)% (4)%

Acquisitions and divestitures, net 1 % 1 %

Other — (1)%

Total % change 2 % (3)%

Three of our four segments experienced organic sales growth
during 2016, as organic sales growth at Pratt & Whitney (6%), UTC
Aerospace Systems (2%), and Otis (1%), was partially offset by a
decline at UTC Climate, Controls & Security (1%). The organic sales
growth at Pratt & Whitney primarily reflects higher commercial aftermar-
ket sales. The organic sales growth at UTC Aerospace Systems was
primarily due to an increase in commercial OEM and aftermarket sales
volume. The organic sales growth at Otis was primarily driven by higher
service sales in the Americas and Asia and higher new equipment sales
in North America partially offset by lower new equipment sales in China.
The decline in sales at UTC Climate, Controls & Security was primarily
driven by declines in commercial HVAC sales in the Middle East and
lower fire products and transport refrigeration sales, partially offset by
growth in North America residential HVAC. The sales increase from net
acquisitions and divestitures was primarily a result of sales from newly
acquired businesses at UTC Climate, Controls & Security.

Three of our four segments experienced organic sales growth
during 2015, led by UTC Climate, Controls & Security (3%), UTC
Aerospace Systems (3%), and Otis (1%). Pratt & Whitney experienced
an organic sales decline (1%) during 2015. Organic sales growth at UTC
Climate, Controls & Security was driven by the U.S. commercial and
residential HVAC and transport refrigeration businesses. Organic sales
growth at UTC Aerospace Systems was primarily due to growth in
commercial aerospace OEM sales, while the organic sales growth at
Otis was primarily due to higher new equipment sales in North America
and Asia outside of China. The decline in sales at Pratt & Whitney was
due to lower commercial and military engine sales. The sales increase
from net acquisitions and divestitures was primarily a result of sales
from newly acquired businesses at UTC Climate, Controls & Security,
while the decrease in sales from Other is due to the unfavorable
impact of significant customer contract negotiations at UTC Aerospace
Systems.

Management’s Discussion and Analysis

12 2016 Annual Report

Cost of Products and Services Sold

(DOLLARS IN MILLIONS) 2016 2015 2014

Cost of products sold $ 30,325 $ 29,771 $ 30,367

Percentage of product sales 74.4% 74.8 % 73.1%

Cost of services sold $ 11,135 $ 10,660 $ 10,531

Percentage of service sales 67.4% 65.4 % 64.4%

Total cost of products and services sold $ 41,460 $ 40,431 $ 40,898

Percentage change year-over-year 2.5% (1.1)% 1.1%

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

2016 2015

Organic volume 3 % 3 %

Foreign currency translation (1)% (5)%

Acquisitions and divestitures, net 1 % 1 %

Restructuring — —

Other — —

Total % change 3 % (1)%

The organic increase in total cost of products and services sold
in 2016 was driven by the organic sales increase noted above, as
well as unfavorable year-over-year contract performance, contract
termination benefits and settlements at Pratt & Whitney, along with
unfavorable commercial OEM mix at UTC Aerospace Systems. This
adverse impact was partially offset by the impact of lower pension
expense across all of the segments and lower commodity costs at
UTC Climate, Controls & Security.

The organic increase in total cost of products and services sold of
3% in 2015 is attributable to the organic sales increase noted above
and the unfavorable OEM sales mix and the related losses on OEM
engine shipments, within Pratt & Whitney.

Gross Margin

(DOLLARS IN MILLIONS) 2016 2015 2014

Gross margin $ 15,784 $ 15,667 $ 17,002

Percentage of net sales 27.6% 27.9% 29.4%

The 30 basis point decrease in gross margin as a percentage of
sales in 2016, as compared with 2015, is primarily due to lower gross
margin at Pratt & Whitney (60 basis points) driven by unfavorable year-
over-year contract performance and contract termination benefits and
settlements, and an increase in negative engine margin, partially offset
by an increase in gross margin at UTC Aerospace Systems (30 basis
points) primarily attributable to the absence of the prior year unfavorable
impact of significant customer contract negotiations. Lower gross mar-
gin at Otis resulting from unfavorable pricing, was offset by higher gross
margin at UTC Climate, Controls & Security primarily driven by lower
commodities cost.

Gross margin as a percentage of sales declined 150 basis points
in 2015, as compared with 2014, driven by lower gross margin at
Pratt & Whitney related to a decline in the amount of favorable contract
performance adjustments (20 basis points) and an increase in unfavor-
able OEM sales mix and the related losses on OEM engine sales
(40 basis points), along with the unfavorable impact of significant

customer contract negotiations at UTC Aerospace Systems (40 basis
points). The remaining decline is primarily driven by higher pension
expense in 2015.

Research and Development

(DOLLARS IN MILLIONS) 2016 2015 2014

Company-funded $ 2,337 $ 2,279 $ 2,475

Percentage of net sales 4.1% 4.1% 4.3%

Customer-funded $ 1,389 $ 1,589 $ 1,997

Percentage of net sales 2.4% 2.8% 3.4%

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, Bombardier CSeries,
Mitsubishi Regional Jet, Airbus A320neo and Airbus A350 programs
at UTC Aerospace Systems. The year-over-year increase in company-
funded research and development (3%) is primarily driven by higher
research and development costs within Pratt & Whitney (2%) as devel-
opment programs progress towards certification, and higher spending
at Otis (2%). These increases were partially offset by lower spend within
UTC Aerospace Systems related to several commercial aerospace
programs (1%). Customer-funded research and development declined
(13%) due primarily to lower spending on U.S. Government and
commercial engine programs at Pratt & Whitney (4%), and lower spend
within UTC Aerospace Systems related to several commercial and
military aerospace programs (9%).

The year-over-year decrease in company-funded research and
development (8%) in 2015, compared with 2014, reflects lower
research and development within Pratt & Whitney (5%) primarily related
to lower development costs of multiple Geared TurboFan platforms as
development is completed and certain of these engines enter into ser-
vice, and within UTC Aerospace Systems related to several commercial
aerospace programs (3%). Customer-funded research and develop-
ment declined (20%) due to lower spending on U.S. Government and
commercial engine programs at Pratt & Whitney.

Selling, General and Administrative

(DOLLARS IN MILLIONS) 2016 2015 2014

Selling, general and administrative $ 6,060 $ 5,886 $ 6,172

Percentage of net sales 10.6% 10.5% 10.7%

Selling, general and administrative expenses increased 3% in

2016

largely driven by a pension settlement charge resulting from pension
de-risking actions (6%) and increased selling, general and administrative
expenses at Otis (2%) reflecting higher labor and information technology
costs. These increases were partially offset by lower spend at UTC
Aerospace Systems (2%) and at UTC Climate, Controls & Security (1%)
primarily driven by lower pension expense. Pratt & Whitney selling, gen-
eral and administrative expenses were flat relative to the prior year as
lower pension expense was largely offset by higher employee compen-
sation related expenses driven by increased hiring.

Management’s Discussion and Analysis

United Technologies Corporation 13

The decrease in selling, general and administrative expenses in
2015, as compared with 2014 (5%), is due to the benefit of foreign
exchange (5%), particularly within the commercial businesses. Higher
pension costs (1%) were offset by lower employee compensation
related expenses. The 20 basis point decrease in selling, general and
administrative expense as a percentage of sales reflects the impact of
organic sales growth, partially offset by higher pension expense across
our business units.

Other Income, Net

(DOLLARS IN MILLIONS) 2016 2015 2014

Other (expense) income, net

$ 785 $ (211) $ 1,238

Other (expense) income, net includes the operational impact of
equity earnings in unconsolidated entities, royalty income, foreign
exchange gains and losses as well as other ongoing and infrequently
occurring items including the following:

(DOLLARS IN MILLIONS) 2016 2015 2014

Joint venture income $ 230 $ 207 $ 284

Licensing and royalty income 98 122 158

Gain on sale of marketable equity securities 101 55 31

Charge related to a Canadian government
settlement — (867) —

Charge for pending and future asbestos
claims — (237) —

Impairment of certain UTC Aerospace
System assets held for sale (8) (61) —

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

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

Net gain primarily from fair value
adjustments related to acquisition of
majority interest in a Pratt & Whitney joint
venture — — 83

Charge to adjust the fair value of a Pratt &
Whitney joint venture investment — — (60)

UTC Climate, Controls, & Security portfolio
transformation gain — — 30

Other activity, net 364 471 492

$ 785 $ (211) $ 1,238

See Note 8 “Accrued Liabilities” of our Consolidated Financial
Statements for further discussion of the charge related to a Canadian
government settlement and Note 18 “Contingent Liabilities” for further
discussion of the charge for pending and future asbestos claims.

Interest Expense, Net

(DOLLARS IN MILLIONS) 2016 2015 2014

Interest expense $ 1,161 $ 945 $ 1,099

Interest income (122) (121) (218)

Interest expense, net $ 1,039 $ 824 $ 881

Average interest expense rate — average
outstanding borrowings during the year:

Short-term borrowings 1.3% 0.6% 0.8%

Total debt 4.1% 4.1% 4.3%

Average interest expense rate — outstanding
borrowings as of December 31:

Short-term borrowings 0.6% 0.8% 5.7%

Total debt 3.7% 4.4% 4.6%

The increase in interest expense during 2016, as compared with
2015, was primarily driven by a net extinguishment loss of approxi-
mately $164 million related to the December 1, 2016 redemption of
certain outstanding notes. See Note 9 “Borrowings and Lines of Credit”
of our Consolidated Financial Statements for further discussion. The
increase also includes additional interest expense on higher average
outstanding long-term debt, primarily driven by debt issued in 2016,
partially offset by lower average commercial paper balances and related
interest expense.

Interest expense was lower in 2015, as compared with 2014,
primarily due to the absence of approximately $143 million of unfavor-
able pre-tax interest accruals in 2014 related to the ongoing dispute
with German tax authorities concerning a 1998 reorganization of the
corporate structure of Otis operations in Germany. Interest income
declined in 2015, as compared with 2014, reflecting the absence of
$132 million favorable pre-tax interest adjustments in 2014 related to
the settlement of outstanding tax matters. See Note 11 “Income Taxes”
of our Consolidated Financial Statements for further discussion.

The increase in the weighted-average interest rates for short-term
borrowings for 2016 was primarily due to lower average commercial
paper borrowings as compared to 2015.

Income Taxes

2016 2015 2014

Effective income tax rate 23.8% 32.6% 25.8%

The effective income tax rates for 2016, 2015, and 2014 reflect tax
benefits associated with lower tax rates on international earnings for
which we intend to permanently reinvest outside the United States. 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 as well as the absence of 2015 items described
below. 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.

Management’s Discussion and Analysis

14 2016 Annual Report

The effective tax rate for 2015 includes a charge of approximately
$274 million related to the repatriation of certain foreign earnings, the
majority of which were current year earnings. It further includes a favor-
able impact of approximately $45 million related to a non-taxable gain
recorded in the first quarter. France, the U.K. and certain U.S. states
enacted tax law changes in the fourth quarter which resulted in a net
incremental cost of approximately $68 million in 2015.

The effective income tax rate for 2014 includes the favorable settle-
ment of certain tax matters during 2014 and the adverse impact of an
approximately $265 million income tax accrual related to the ongoing
dispute with German tax authorities concerning a 1998 reorganization
of the corporate structure of Otis operations in Germany, offset by the
benefit from repatriation of highly taxed earnings. See Note 18 to the
Consolidated Financial Statements for further discussion of the German
tax litigation.

We estimate our full year annual effective income tax rate in 2017
will be approximately 27%. This rate may be impacted by restructuring
and non-operational non-recurring items. We anticipate some variability
in the tax rate quarter to quarter in 2017 from potential discrete items.

For additional discussion of income taxes and the effective income
tax rate, see “Critical Accounting Estimates — Income Taxes” and Note
11 to the Consolidated Financial Statements.

Net Income Attributable to Common Shareowners from
Continuing Operations

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2016 2015 2014

Net income attributable to common
shareowners from continuing operations $ 5,065 $ 3,996 $ 6,066

Diluted earnings per share from continuing
operations $ 6.13 $ 4.53 $ 6.65

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 2016, foreign currency, including hedging at P&WC, had a
favorable impact on our consolidated operational results of $0.05 per
diluted share. In 2015, foreign currency generated a net adverse impact
on our consolidated operational results of $0.19 per diluted share and
did not result in a material impact on earnings per diluted share in 2014.
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, 2016 includes restruc-
turing charges, net of tax benefit, of $192 million as well as a net charge
for significant non-operational and/or non-recurring items, net of tax,
of $203 million. The effect of restructuring charges and non-recurring
items on diluted earnings per share for the year ended December 31,
2016 was $0.48 per share.

Net income attributable to common shareowners from continuing
operations in 2015 includes restructuring charges, net of tax benefit, of
$274 million as well as a net charge from significant non-recurring and
non-operational items, net of tax benefit, of $1,293 million, which have
been discussed above. The effect of restructuring charges on diluted
earnings per share for 2015 was a charge of $0.31 per share, while the

effect of significant non-operational items on diluted earnings per share
for 2015 was a charge of $1.46 per share.

Net income attributable to common shareowners from continuing
operations in 2014 includes restructuring charges, net of tax benefit, of
$247 million as well as a net benefit from infrequently occurring items,
net of tax expense, of $122 million. The effect of restructuring charges
on diluted earnings per share for 2014 was a charge of $0.27 per share,
which was offset by a net benefit from infrequently occurring items of
$0.13 per share.

Net (Loss) Income Attributable to Common Shareowners from
Discontinued Operations

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2016 2015 2014

Net (loss) income attributable to common
shareowners from discontinued operations $ (10) $ 3,612 $ 154

Diluted earnings per share from discontinued
operations $ (0.01) $ 4.09 $ 0.17

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. Net income from discontinued
operations attributable to common shareowners for the year ended
December 31, 2015 includes the gain on the sale of Sikorsky, net of tax
expense, of $3.4 billion and $122 million of costs incurred in connection
with the sale, as well as income from Sikorsky’s operations, net of tax
expense, of $169 million, including pension curtailment charges associ-
ated with our domestic pension plans. Net income from discontinued
operations attributable to common shareowners for 2014 includes
a previously disclosed cumulative adjustment related to a contract
with the Canadian government for the development by Sikorsky of
the CH-148 derivative of the H-92 helicopter, a military variant of the
S-92 helicopter. The cumulative adjustment resulted in the recognition
of losses, net of tax benefit, of $277 million in 2014.

RESTRUCTURING COSTS

(DOLLARS IN MILLIONS) 2016 2015 2014

Restructuring costs included within continuing
operations $ 290 $ 396 $ 354

Restructuring costs included within
discontinued operations — 139 14

Restructuring costs $ 290 $ 535 $ 368

Restructuring actions are an essential component of our operating
margin improvement efforts and relate to both existing operations and
those recently acquired. Charges generally relate to severance incurred
on workforce reductions and facility exit and lease termination costs
associated with the consolidation of field and manufacturing operations.
We expect to incur additional restructuring costs in 2017 of approxi-
mately $300 million, including trailing costs related to prior actions
associated with our continuing cost reduction efforts and the integration
of acquisitions. We continue to closely monitor the economic environ-
ment and may undertake further restructuring actions to keep our cost
structure aligned with the demands of the prevailing market conditions.
In 2015, restructuring costs included within discontinued operations

Management’s Discussion and Analysis

United Technologies Corporation 15

included approximately $109 million of net settlement and curtailment
losses for pension benefits.

2016 Actions. During 2016, we recorded net pre-tax restructuring
charges of $242 million relating to ongoing cost reduction actions initi-
ated in 2016. We are targeting to complete in 2017 and 2018 the
majority of the remaining workforce and facility related cost reduction
actions initiated in 2016. Approximately 64% of the total pre-tax charge
will require cash payments, which we have funded and expect to con-
tinue to fund with cash generated from operations. During 2016, we
had cash outflows of approximately $69 million related to the 2016
actions. We expect to incur additional restructuring and other charges
of $112 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 $170 million annually, of which, approximately
$42 million was realized in 2016.

2015 Actions. During 2016 and 2015, we recorded net pre-tax
restructuring charges of $40 million and $326 million, respectively, for
actions initiated in 2015. We are targeting to complete in 2017 the
majority of the remaining workforce and all facility related cost reduction
actions initiated in 2015. Approximately 71% 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 2016, we had cash
outflows of approximately $165 million related to the 2015 actions.
We expect to incur additional restructuring charges of $42 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 $395 million annually.

For additional discussion of restructuring, see Note 13 to the
Consolidated Financial Statements.

SEGMENT REVIEW

Net Sales Operating Profits Operating Profit Margin

(DOLLARS IN MILLIONS) 2016 2015 2014 2016 2015 2014 2016 2015 2014

Otis $ 11,893 $ 11,980 $ 12,982 $ 2,147 $ 2,338 $ 2,640 18.1% 19.5% 20.3%

UTC Climate, Controls & Security 16,851 16,707 16,823 2,956 2,936 2,782 17.5% 17.6% 16.5%

Pratt & Whitney 14,894 14,082 14,508 1,545 861 2,000 10.4% 6.1% 13.8%

UTC Aerospace Systems 14,465 14,094 14,215 2,298 1,888 2,355 15.9% 13.4% 16.6%

Total segment 58,103 56,863 58,528 8,946 8,023 9,777 15.4% 14.1% 16.7%

Eliminations and other (859) (765) (628) (368) (268) 304

General corporate expenses — — — (406) (464) (488)

Consolidated $ 57,244 $ 56,098 $ 57,900 $ 8,172 $ 7,291 $ 9,593 14.3% 13.0% 16.6%

Commercial Businesses

The financial performance of our commercial businesses can be
influenced by a number of external factors including fluctuations in resi-
dential and commercial construction activity, regulatory changes,
interest rates, labor costs, foreign currency exchange rates, customer
attrition, raw material and energy costs, credit markets and other global
and political factors. UTC Climate, Controls & Security’s financial per-
formance can also be influenced by production and utilization of
transport equipment, and weather conditions for its residential
business. Geographic and industry diversity across the commercial
businesses help to balance the impact of such factors on our consoli-
dated operating results, particularly in the face of uneven economic
growth. At constant currency and excluding the effect of acquisitions
and divestitures, UTC Climate, Controls & Security equipment orders
for 2016 declined 3% in comparison to 2015 as declines in transport
refrigeration (18%) and the commercial HVAC business in the Middle
East (40%)were partially offset by an increase in residential HVAC orders
(10%). Within the Otis segment, new equipment orders were flat in
comparison to the prior year as order growth in Europe (13%), the
Asia region excluding China (10%) and the Americas (2%) were offset
by order declines in China (9%) and the Middle East (28%).

Total commercial business sales generated outside the U.S.,
including U.S. export sales were 63% and 65% in 2016 and 2015,
respectively. The following table shows sales generated outside the
U.S., including U.S. export sales, for each of the commercial business
segments:

2016 2015

Otis 75% 77%

UTC Climate, Controls & Security 55% 56%

Otis is the world’s largest elevator and escalator manufacturing,
installation and service company. Otis designs, manufactures, sells
and installs a wide range of passenger and freight elevators for low-,
medium- and high-speed applications, as well as a broad line of escala-
tors and moving walkways. In addition to new equipment, Otis provides
modernization products to upgrade elevators and escalators, as well
as maintenance and repair services for both its products and those of
other manufacturers. Otis serves customers in the commercial and
residential property industries around the world. Otis sells directly to
the end customer and through sales representatives and distributors.

Management’s Discussion and Analysis

16 2016 Annual Report

Total Increase (Decrease) Year-Over-Year for:

(DOLLARS IN MILLIONS) 2016 2015 2014 2016 Compared with 2015 2015 Compared with 2014

Net Sales $ 11,893 $ 11,980 $ 12,982 $ (87) (1)% $ (1,002) (8)%

Cost of Sales 8,072 8,122 8,756 (50) (1)% (634) (7)%

3,821 3,858 4,226

Operating Expenses and Other 1,674 1,520 1,586

Operating Profits $ 2,147 $ 2,338 $ 2,640 $(191) (8)% $ (302) (11)%

Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:

2016 2015

Net Sales

Cost of
Sales

Operating
Profits Net Sales

Cost of
Sales

Operating
Profits

Organic / Operational 1 % 2 % (7)% 1 % 3 % (2)%

Foreign currency translation (2)% (3)% (2)% (9)% (10)% (9)%

Acquisitions and divestitures, net — — — — — —

Restructuring costs — — — — — 1 %

Other — — 1 % — — (1)%

Total % change (1)% (1)% (8)% (8)% (7)% (11)%

2016 Compared with 2015
The organic sales increase of 1% primarily reflects higher service sales
(1%), driven by growth in the Americas and Asia. New equipment sales
growth in the Americas (2%) was offset by a decline in China (2%).

The operational profit decrease of 7% was driven by unfavorable
price and mix (12%), primarily in China and Europe; higher selling,
general and administrative expenses (5%), driven by higher labor and
information technology costs; and higher research and development
spending (2%); partially offset by favorable productivity and commodity
costs (combined 8%) and higher volume (4%).

2015 Compared with 2014
Organic sales increased 1% primarily due to higher new equipment
sales (2%), with growth in North America (2%) and Asia outside of China
(1%), partially offset by a decline in China (1%), which was primarily
driven by new equipment pricing headwind and volume declines.
Service sales growth in the Americas and Asia (combined 1%) was
offset by declines in Europe (1%), on lower volumes and unfavorable
pricing and mix.

Operational profit decreased 2% primarily due to lower service
contribution (3%) predominantly in Europe and higher selling, general
and administrative expenses (1%), primarily due to sales growth in
Americas and Asia outside of China, partially offset by higher new
equipment contribution (3%).

UTC Climate, Controls & Security is a leading provider of HVAC
and refrigeration solutions, including controls for residential, commer-
cial, industrial and transportation applications. These products and
services are sold under the Carrier name and other brand names to
building contractors and owners, homeowners, transportation compa-
nies, retail stores and food service companies. UTC Climate, Controls &
Security is also a global provider of security and fire safety products and
services. UTC Climate, Controls & Security provides electronic security

products such as intruder alarms, access control systems and video
surveillance systems, and designs and manufactures a wide range of
fire safety products including specialty hazard detection and fixed sup-
pression products, portable fire extinguishers, fire detection and life
safety systems, and other firefighting equipment. Services provided to
the electronic security and fire safety industries include systems integra-
tion, video surveillance, installation, maintenance, and inspection. In
certain markets, UTC Climate, Controls & Security also provides moni-
toring and response services to complement its electronic security and
fire safety businesses. Through its venture with Watsco, Inc., UTC Cli-
mate, Controls & Security distributes Carrier, Bryant, Payne and
Totaline residential and light commercial HVAC products in the U.S. and
selected territories in the Caribbean and Latin America. UTC Climate,
Controls & Security sells directly to end customers and through manu-
facturers’ representatives, distributors, wholesalers, dealers and retail
outlets. Certain of UTC Climate, Controls & Security’s HVAC businesses
are seasonal and can be impacted by weather. UTC Climate, Controls &
Security customarily offers its customers incentives to purchase prod-
ucts to ensure an adequate supply in the distribution channels. The
principal incentive program provides reimbursements to distributors for
offering promotional pricing on UTC Climate, Controls & Security prod-
ucts. We account for incentive payments made as a reduction in sales.
UTC Climate, Controls & Security products and services are used by
governments, financial institutions, architects, building owners and
developers, security and fire consultants, homeowners and other end-
users requiring a high level of security and fire protection for their
businesses and residences. UTC Climate, Controls & Security provides
its security and fire safety products and services under Chubb, Kidde
and other brand names, and sells directly to customers as well as
through manufacturer representatives, distributors, dealers and
U.S. retail distribution.

Management’s Discussion and Analysis

United Technologies Corporation 17

Total Increase (Decrease) Year-Over-Year for:
(DOLLARS IN MILLIONS) 2016 2015 2014 2016 Compared with 2015 2015 Compared with 2014

Net Sales $ 16,851 $ 16,707 $ 16,823 $ 144 1% $ (116) (1)%

Cost of Sales 11,700 11,611 11,707 89 1% (96) (1)%

5,151 5,096 5,116

Operating Expenses and Other 2,195 2,160 2,334

Operating Profits $ 2,956 $ 2,936 $ 2,782 $ 20 1% $ 154 6 %

Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
2016 2015

Net Sales
Cost of
Sales

Operating
Profits Net Sales
Cost of
Sales
Operating
Profits

Organic / Operational (1)% (1)% 5 % 3 % 3 % 6 %

Foreign currency translation (1)% (1)% (1)% (6)% (6)% (5)%

Acquisitions and divestitures, net 3 % 3 % 1 % 2 % 2 % —

Restructuring costs — — 1 % — — —

Other — — (5)% — — 5 %

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

2016 Compared with 2015
Organic sales decreased by 1% driven by declines in commercial HVAC
sales in Europe and the Middle East, fire products, and transport refrig-
eration (combined 1%), partially offset by growth in North America
HVAC (1%).

The 5% operational profit increase was driven by lower commodities
cost (5%) and productivity and restructuring savings (combined 4%),
partly offset by the impact of lower sales volume and adverse sales mix
(combined 4%). The 5% decrease in “Other” is driven by the absence
of a prior year gain as a result of a fair value adjustment related to acqui-
sitions of a controlling interest in joint venture investments (5%). “Other”
also includes current year gains related to the acquisition of a controlling
interest in a joint venture investment in the Middle East and from the
sale of an investment in Australia (combined 1%), which were offset by
a prior year gain from an acquisition of a controlling interest in another
joint venture investment.

2015 Compared with 2014
The organic sales increase (3%) primarily reflects growth in Americas
(2%) driven by the U.S. commercial and residential HVAC businesses,
and growth in refrigeration (1%) driven by the transport refrigeration
business.

The 6% operational profit increase was primarily driven by favor-
able volume and price (combined 2%) on the sales increase noted
above. The beneficial impact from lower commodity costs (2%) and
net restructuring and cost productivity (2%) was partially offset by lower
joint venture income (1%). The 5% increase in “Other” was primarily
driven by a gain as a result of a fair value adjustment related to the
acquisition of a controlling interest in a joint venture investment (5%)
and a gain as a result of a fair value adjustment related to a separate
acquisition of a controlling interest in another joint venture investment
(1%), partially offset by the absence of a gain from UTC Climate,
Controls & Security’s portfolio transformation in 2014 (1%).

Aerospace Businesses

The financial performance of Pratt & Whitney and UTC Aerospace
Systems is directly tied to the economic conditions of the commercial
aerospace and defense aerospace industries. In particular, Pratt &
Whitney experiences intense competition for new commercial airframe/
engine combinations. Engine suppliers may offer substantial discounts
and other financial incentives, performance and operating cost guaran-
tees, 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 economi-
cally 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 improve-
ments, pricing, regulatory changes and the retirement of older aircraft.
Our commercial aftermarket businesses continue to evolve as an
increasing proportion of our aerospace businesses’ customers are
covered under Fleet Management Programs (FMPs). FMPs are compre-
hensive long-term spare part and maintenance agreements with our
customers. We expect a continued shift to FMPs in lieu of transactional
spare part sales as new engines enter customers’ fleets on FMP and
legacy fleets are retired. Performance in the general aviation sector is
closely tied to the overall health of the economy. In 2016, as compared
with 2015, total commercial aerospace aftermarket sales increased
10% at Pratt & Whitney and 2% at UTC Aerospace Systems.

Management’s Discussion and Analysis

18 2016 Annual Report

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 judg-
ments 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 sig-
nificant net unfavorable changes in aerospace contract estimates of
approximately $157 million in 2016 primarily the result of unexpected
increases in estimated costs related to Pratt & Whitney long term after-
market 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 2016 or 2015.

We continue to see growth in a strong commercial airline industry
which is benefiting from traffic growth and lower fuel costs. Airline traffic,
as measured by revenue passenger miles (RPMs), grew approximately
6% in the first eleven months of 2016, while jet fuel costs have declined
approximately 18% relative to prices one year ago. Pratt & Whitney
has developed the Geared TurboFan engine that will power currently-
proposed and future aircraft and is building capacity to meet demand
for orders of the new engines which are fuel efficient and have reduced
noise levels and exhaust emissions. The PurePowerT PW1100G-JM
engine completed Federal Aviation Agency (FAA) certification for the
Airbus A320neo platform on December 19, 2014, and entered into
service in January 2016.

Our military sales are affected by U.S. Department of Defense
spending levels. However, the sale of Sikorsky during 2015 reduced our
U.S. Government defense-spending exposure. Excluding Sikorsky, total
sales to the U.S. Government were $5.6 billion in 2016, $5.6 billion in
2015, and $5.9 billion in 2014, and were 10% of total UTC sales in each
year. 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 2016
and is expected to continue to benefit results in 2017.

As previously disclosed, Pratt & Whitney’s PurePower PW1500G
engine models have been selected by Bombardier to power the new
CSeries passenger aircraft, which entered into service on July 15, 2016.
There have been multi-year delays in the development of the CSeries
aircraft. Notwithstanding these delays, Bombardier reports that they
have received over 300 orders for the aircraft, have certified the initial
aircraft model and expect to close the certification process for all aircraft
models in early 2017. We have made various investments in support of
the production and delivery of our PW1500G engines and systems for

the CSeries program, which we currently expect to recover through
future deliveries of PW1500G powered CSeries aircraft. We will con-
tinue to monitor the progress of the program and our ability to recover
our investments.

Pratt & Whitney is among the world’s leading suppliers of aircraft
engines for the commercial, military, business jet and general aviation
markets. Pratt & Whitney also provides fleet management services and
aftermarket maintenance, repair and overhaul services, including the
sale of spare parts and auxiliary power units. 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. Pratt & Whitney
Canada (P&WC) is a world leader in the production of engines powering
general and business aviation, as well as regional airline, utility and
military, airplanes and helicopters. Pratt & Whitney’s products are sold
principally to aircraft manufacturers, airlines and other aircraft operators,
aircraft leasing companies, and the U.S. and foreign governments. Pratt
& Whitney’s products and services must adhere to strict regulatory
and market-driven safety and performance standards. The frequently
changing nature of these standards, along with the long duration of air-
craft engine development, production and support programs, creates
uncertainty regarding engine program profitability.

The development of new engines and improvements to current
production engines present important growth opportunities. Pratt &
Whitney is under contract with the U.S. Government’s F-35 Joint
Program Office to develop, produce and sustain the F135 engine, a
derivative of Pratt & Whitney’s F119 engine, to power the single-engine
F-35 Lightning II aircraft (commonly known as the Joint Strike Fighter)
being developed and produced by Lockheed Martin. The two F135
propulsion system configurations for the F-35A/F-35C and F-35B jets
are certified for production and in use by the U.S. Air Force and the
U.S. Marine Corps. F135 engines are also used on F-35 aircraft pur-
chased by Joint Strike Fighter partner countries and foreign military
sales countries.

In addition, Pratt & Whitney has developed the PurePowerT
PW1000G Geared TurboFan engine which entered into service in
January 2016 and is intended to enable it to power both currently-
proposed and future aircraft. The PurePowerT PW1000G engine has
demonstrated a significant reduction in fuel burn and noise levels with
lower environmental emissions and operating costs than current pro-
duction engines. Airbus has selected the PW1100G engine, a member
of the PurePowerT PW1000G engine family, as a new engine option
to power its A320neo family of aircraft. The PW1100G-JM entered
into service in January 2016, and is being developed as part of a col-
laboration with MTU Aero Engines (MTU) and Japanese Aero Engines
Corporation (JAEC). Additionally, PurePowerT PW1000G engine
models have been selected by Bombardier to power the new CSeries
passenger aircraft, Mitsubishi Aircraft Corporation to power the new
Mitsubishi Regional Jet, Irkut Corporation to power the proposed
new Irkut MC-21 passenger aircraft and Embraer to power the next
generation of Embraer’s E-Jet family of aircraft. In October 2014,
Gulfstream announced the selection of the PurePowerT PW800 engine

Management’s Discussion and Analysis

United Technologies Corporation 19

to exclusively power Gulfstream’s new G500 and G600 business jets
scheduled to enter service in 2018. The CSeries passenger aircraft
entered into service on July 15, 2016. The Irkut MC-21 and Embraer’s
next generation of E-Jet family aircraft are scheduled to enter into
service in 2018. The Mitsubishi Regional Jet is scheduled to enter into
service in 2020. The success of these aircraft and the PurePowerT fam-
ily of engines is dependent upon many factors including technological
accomplishments, program execution, aircraft demand, and regulatory
approval. Based on these factors, as well as the level of success of air-
craft program launches by aircraft manufacturers and other conditions,
additional investment in the PurePowerT program may be required.

In view of the risks and costs associated with developing new
engines, Pratt & Whitney has entered into collaboration arrangements
in which sales, costs and risks are shared. At December 31, 2016,
the interests of third party participants in Pratt & Whitney-directed

commercial jet engine programs ranged from 14% to 50%. In addition,
Pratt & Whitney has interests in other engine programs, including a
50% ownership interest in the Engine Alliance (EA), a joint venture with
GE Aviation, which markets and manufactures the GP7000 engine for
the Airbus A380 aircraft. Pratt & Whitney has entered into risk and rev-
enue sharing arrangements with third parties for 40% of the products
and services that Pratt & Whitney is responsible for providing to the EA.
Pratt & Whitney accounts for its interests in the EA joint venture under
the equity method of accounting. Pratt & Whitney holds a 61% net
program share interest in the IAE International Aero Engines AG (IAE)
collaboration with MTU and JAEC and a 49.5% ownership interest in
IAE. Additionally, Pratt & Whitney holds a 59% net program interest
in the International Aero Engines, LLC (IAE LLC) collaboration, and a
59% ownership interest in IAE LLC. Pratt & Whitney continues to pursue
additional collaboration partners.

Total Increase (Decrease) Year-Over-Year for:
(DOLLARS IN MILLIONS) 2016 2015 2014 2016 Compared with 2015 2015 Compared with 2014

Net Sales $ 14,894 $ 14,082 $ 14,508 $ 812 6% $ (426) (3)%

Cost of Sales 11,805 10,910 10,926 895 8% (16) —

3,089 3,172 3,582

Operating Expenses and Other 1,544 2,311 1,582

Operating Profits $ 1,545 $ 861 $ 2,000 $ 684 79% $ (1,139) (57)%

Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
2016 2015
Net Sales
Cost of
Sales
Operating
Profits Net Sales
Cost of
Sales
Operating
Profits

Organic* / Operational* 6% 9 % (28)% (1)% 2 % (12)%

Foreign currency (including P&WC net hedging)* — (1)% 10 % (1)% (2)% 3 %

Acquisitions and divestitures, net — — — — 1 % 1 %

Restructuring costs — — (1)% — — (2)%

Other — — 98 % (1)% (1)% (47)%

Total % change 6% 8 % 79 % (3)% — (57)%

* 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.

2016 Compared with 2015
The organic sales increase of 6% primarily reflects higher commercial
aftermarket sales (8%), and higher military engine and aftermarket sales
(2%), partially offset by unfavorable year-over-year contract performance,
contract termination benefits and contract settlements (2%) and lower
commercial engine sales volume (1%).

Pratt & Whitney’s operating profit includes lower pension cost and
restructuring savings across its businesses. The operational profit
decrease of 28% was primarily driven by:

• unfavorable year-over-year contract adjustments, contract
termination benefits and contract settlements (38%)

• higher research and development spending (6%)
• lower large commercial engine profit contribution (8%) primarily

driven by higher negative engine margin

• lower profit contribution at Pratt & Whitney Canada (3%) primar-
ily driven by lower volume

• the absence of prior year licensing arrangements (5%)
• lower military engine profit contribution (1%) driven by adverse

engine mix, partially offset by profit contribution from higher
military aftermarket sales

These decreases were partially offset by:

• profit contribution from strong commercial aftermarket
volume (33%)

• sales of legacy hardware (3%)

Management’s Discussion and Analysis

20 2016 Annual Report

“Other” primarily reflects the absence of a prior year charge
resulting from amendments to research and development support
arrangements previously entered into with federal and provincial
Canadian government agencies (101%) partially offset by the year-over-
year profit impact associated with customer contract negotiations (2%).

2015 Compared with 2014
The organic sales decrease (1%) reflects lower military engine volume
(1%) and lower commercial engine volume (2%), offset by higher com-
mercial engine aftermarket sales (2%). “Other” reflects a sales reduction
in connection with customer contract negotiations (1%).

Pratt & Whitney’s operating profit includes higher pension cost par-
tially offset by restructuring savings across its business. The operational
profit decrease (12%) was due to:

• higher negative engine margin within the Large Commercial
Engine business and lower volume within P&WC (15%)

• lower engine volume and unfavorable mix within the Military
Engine business (2%)

• unfavorable aftermarket mix and a decline in the amount of
favorable contract performance adjustments within the Military
Engine business (4%)

• lower commercial developmental profit (2%)

These decreases were partially offset by:

• lower research and development spending (5%)
• higher aftermarket profits at P&WC (4%)
• an increase in favorable contract termination benefits (3%)

Operating profit increased 1% as a result of the acquisition of a
majority interest in a joint venture in the third quarter of 2014. The
“Other” operating profit decline reflects a charge resulting from amend-
ments to research and development support arrangements previously
entered into with federal and provincial Canadian government agencies
(43%) and a charge resulting from customer contract negotiations (4%).

UTC Aerospace Systems is a leading global provider of techno-
logically advanced aerospace products and aftermarket service
solutions for aircraft manufacturers, airlines, regional, business and
general aviation markets, military, space and undersea operations.
UTC Aerospace Systems’ product portfolio includes electric power
generation, power management and distribution systems, air data and
aircraft sensing systems, engine control systems, intelligence, surveil-
lance and reconnaissance systems, engine components, environmental
control systems, fire and ice detection and protection systems, propel-
ler 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, wheels and brakes, and space products and subsystems.
Aftermarket services include spare parts, overhaul and repair,
engineering and technical support and fleet management solutions.
UTC Aerospace Systems sells aerospace products to aircraft manu-
facturers, 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) 2016 2015 2014 2016 Compared with 2015 2015 Compared with 2014

Net Sales $ 14,465 $ 14,094 $ 14,215 $ 371 3% $ (121) (1)%

Cost of Sales 10,607 10,533 10,192 74 1% 341 3 %

3,858 3,561 4,023

Operating Expenses and Other 1,560 1,673 1,668

Operating Profits $ 2,298 $ 1,888 $ 2,355 $ 410 22% $ (467) (20)%

Factors Contributing to Total % Increase (Decrease) Year-Over-Year in:
2016 2015
Net Sales
Cost of
Sales
Operating
Profits Net Sales
Cost of
Sales
Operating
Profits

Organic / Operational 2% 3 % (3)% 3 % 6 % (6)%

Foreign currency translation — (1)% 3 % (2)% (3)% 2 %

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

Restructuring costs — — 3 % — — (1)%

Other 1% (1)% 19 % (1)% 1 % (15)%

Total % change 3% 1 % 22 % (1)% 3 % (20)%

Management’s Discussion and Analysis

United Technologies Corporation 21

2016 Compared with 2015
The organic sales growth of 2% primarily reflects an increase in com-
mercial aerospace OEM and commercial aftermarket sales volume
(3%), partially offset by lower military OEM and military aftermarket
sales volume (1%). “Other” represents the absence of the prior year
unfavorable impact of significant customer contact negotiations (1%).

The organic decrease in operational profit of 3% primarily reflects:

• the absence of the favorable impact from prior year customer
contract negotiations, dispute resolution, contract terminations
and other settlements (8%)

• lower military profit contribution (4%) driven primarily by lower
sales volume

• lower commercial aerospace OEM profit contribution (4%),
primarily due to adverse mix

These decreases were partially offset by:

• lower pension costs (8%)
• higher commercial aftermarket profit contribution (5%)
• lower research and development costs (1%)

“Other” primarily represents the absence of the prior year unfavor-
able impact from significant customer contract negotiations (16%)
and the absence of a prior year impairment of certain assets held for
sale (3%).

2015 Compared with 2014
The organic sales growth (3%) primarily reflects an increase in commer-
cial aerospace OEM and commercial aftermarket sales volume (3%)
and a benefit from a change in a customer relationship (2%), partially
offset by the absence of the favorable impact of a prior year customer
contract settlement (1%) and lower military OEM sales volume (1%).
“Other” represents the unfavorable impact of significant customer
contract negotiations (1%).

The organic decrease in operational profit (6%) primarily reflects:

• lower commercial aerospace OEM profit contribution (6%)
primarily due to adverse mix

• higher pension costs (5%)
• lower military profit contribution (4%)
• the absence of the favorable impact of a prior year customer

contract settlement (2%), partially offset by
• the favorable impact of several customer contract negotiations,

dispute resolutions and other settlements (4%)
• lower research and development costs (3%)
• lower selling, general and administrative expenses (3%)
• the favorable impact of a contract termination (2%)

“Other” primarily represents the unfavorable impact of significant
customer contract negotiations (13%) and the impairment of certain
assets held for sale (2%).

Eliminations and other

Net Sales Operating Profits

(DOLLARS IN MILLIONS) 2016 2015 2014 2016 2015 2014

Eliminations and other $ (859) $ (765) $ (628) $ (368) $ (268) $ 304

General corporate expenses — — — (406) (464) (488)

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 the amount of sales eliminations in 2016 as compared with
2015 reflects an increase in the amount of inter-segment sales elimina-
tions, principally between our aerospace businesses. The year-over-
year decrease in operating profit for 2016 as compared with 2015 is
largely driven by a $423 million pension settlement charge resulting
from pension de-risking actions, partially offset by the absence of a
$237 million charge taken in 2015 for pending and future asbestos
claims and higher proceeds from the sale of marketable securities of
$47 million. The year-over-year decline in general corporate expenses
for 2016, as compared with 2015 primarily reflects lower expenses
related to salaries, wages and employee benefits.

The change in sales in 2015, as compared with 2014, reflects an
increase in the amount of inter-segment sales eliminations between our
aerospace business segments. The decline in operating profit in 2015,
as compared with 2014, reflects a $237 million charge for pending and
future asbestos claims through 2059, a $27 million charge related to
an agreement with a state taxing authority for the monetization of tax

credits, and the absence of a $220 million gain on an agreement with a
state taxing authority for the monetization of tax credits in 2014.

LIQUIDITY AND FINANCIAL CONDITION

(DOLLARS IN MILLIONS) 2016 2015

Cash and cash equivalents $ 7,157 $ 7,075

Total debt 23,901 20,425

Net debt (total debt less cash and cash equivalents) 16,744 13,350

Total equity 29,169 28,844

Total capitalization (total debt plus total equity) 53,070 49,269

Net capitalization (total debt plus total equity less cash and
cash equivalents) 45,913 42,194

Total debt to total capitalization 45% 41%

Net debt to net capitalization 36% 32%

We assess our liquidity in terms of our ability to generate cash to
fund our operating, investing and financing activities. Our principal
source of liquidity is operating cash flows from continuing operations,
which, after netting out capital expenditures, we target to equal or
exceed net income attributable to common shareowners from continu-
ing operations. For 2017, we expect this to approximate 90% to 100%

Management’s Discussion and Analysis

22 2016 Annual Report

of net income attributable to common shareowners from continuing
operations. In addition to operating cash flows, other significant factors
that affect our overall management of liquidity include: common stock
repurchases, capital expenditures, customer financing requirements,
investments in businesses, dividends, pension funding, access to the
commercial paper markets, adequacy of available bank lines of credit,
issuances and redemptions of debt, and the ability to attract long-term
capital at satisfactory terms.

As part of our long-term strategy to de-risk our defined benefit
pension plans, we entered into an agreement to purchase a group

annuity contract to transfer approximately $768 million of our outstand-
ing pension benefit obligations related to certain U.S. retirees or
beneficiaries, which was finalized on October 12, 2016. We also offered
certain former U.S. employees or beneficiaries (generally all former U.S.
participants not yet in receipt of their vested pension benefits) an option
to take a one-time lump-sum distribution in lieu of future monthly pen-
sion payments, which has reduced our pension benefit obligations
by approximately $935 million as of December 31, 2016. These trans-
actions reduced the assets of our defined benefit pension plans by
approximately $1.5 billion. As a result of these transactions, we recog-
nized a one-time pre-tax pension settlement charge of approximately
$423 million in the fourth quarter of 2016. See Note 12 to the
Consolidated Financial Statements for further discussion.

Our domestic pension funds experienced a positive return on
assets of approximately 11.6% during 2016. Approximately 88% of
these domestic pension plans are invested in readily-liquid investments,
including equity, fixed income, asset-backed receivables and structured
products. The balance of these domestic pension plans (12%) is
invested in less-liquid but market-valued investments, including real
estate and private equity. Across our global pension plans, the impact
of the continued recognition of prior pension investment gains, 2016
actual returns on plan assets and lower discount rates for interest costs,
offset by the lower discount rates for pension obligations, will result in a
net periodic pension benefit in 2017 consistent with 2016 amounts.

Historically, our strong debt ratings and financial position have
enabled us to issue long-term debt at favorable market rates. Our ability
to obtain debt financing at comparable risk-based interest rates is partly
a function of our existing debt-to-total-capitalization level as well as our
credit standing. In September 2015, several external rating agencies
downgraded our debt ratings (“A” to “A-”, and “A2” to “A3”) with a
stable ratings outlook, primarily attributing their actions to the level of
completed and projected share repurchase activity. Our debt-to-total-
capitalization increased 400 basis points from 41% at December 31,
2015 to 45% at December 31, 2016 primarily reflecting additional bor-
rowings in 2016 to fund share repurchases and for general corporate
purposes. The average maturity of our long-term debt at December 31,
2016 is approximately ten years. We use our commercial paper borrow-
ings for general corporate purposes, including the funding of potential
acquisitions, debt refinancing, and repurchases of our common stock.
The need for commercial paper borrowings arises when the use of
domestic cash for acquisitions, dividends, and share repurchases

exceeds the sum of domestic cash generation and foreign cash repatri-
ated to the U.S.

On December 1, 2016, we redeemed all outstanding 5.375%
notes due in 2017, representing $1.0 billion in aggregate principal, and
all outstanding 6.125% notes due in 2019, representing $1.25 billion
in aggregate principal, under our redemption notice issued on
November 1, 2016. A combined net extinguishment loss of approxi-
mately $164 million was recognized within Interest expense, net in
the accompanying Consolidated Statement of Operations.

On November 1, 2016, we issued $650 million aggregate
principal amount of 1.500% notes due 2019, $750 million aggregate
principal amount of 1.950% notes due 2021, $1,150 million aggregate
principal amount of 2.650% notes due 2026, $1,100 million aggregate
principal amount of 3.750% notes due 2046 and $350 million aggregate
principal amount of floating rate notes due 2019. We used the net
proceeds received from these issuances to fund the redemption price
of the 5.375% notes due 2017 and the 6.125% notes due 2019, to
fund the repayment of commercial paper, and for other general corpo-
rate purposes.

On February 22, 2016, we issued e950 million aggregate principal
amount of 1.125% notes due 2021, e500 million aggregate principal
amount of 1.875% notes due 2026 and e750 million aggregate princi-
pal amount of floating rate notes due 2018. The net proceeds from
these debt issuances were used for general corporate purposes.

On May 4, 2015, we completed the optional remarketing of the
1.550% junior subordinated notes, which were originally issued as part
of our equity units on June 18, 2012. As a result of the remarketing,
these notes were redesignated as our 1.778% junior subordinated
notes due May 4, 2018. On August 3, 2015, we received approximately
$1.1 billion from the proceeds of the remarketing, and issued approxi-
mately 11.3 million shares of Common Stock to settle the purchase
obligation of the holders of the equity units under the purchase contract
entered into at the time of the original issuance of the equity units.

During the quarter ended June 30, 2015, we repaid at maturity
all 4.875% notes due in 2015 and all floating rate notes due in 2015,
representing $1.7 billion in aggregate principal. On May 4, 2015, we
issued $850 million aggregate principal amount of 4.150% notes due
May 15, 2045. On May 22, 2015 we issued e750 million aggregate
principal amount of 1.250% notes due May 22, 2023. The net proceeds
from these debt issuances were used primarily to repay the 4.875%
notes and floating rate notes maturing during the quarter ended
June 30, 2015.

On March 13, 2015, we entered into accelerated share repurchase
(ASR) agreements to repurchase an aggregate of $2.65 billion of our
common stock, which was largely funded by our commercial paper
borrowings. Under the terms of the ASR agreements, we made the
aggregate payments and received an initial delivery of approximately
18.6 million shares of our common stock, representing approximately
85% of the shares expected to be repurchased. On July 31, 2015, the
shares associated with the remaining portion of the aggregate purchase
were settled upon final delivery of approximately 4.2 million additional
shares of common stock.

Management’s Discussion and Analysis

United Technologies Corporation 23

On November 6, 2015, we completed the sale of Sikorsky to
Lockheed Martin Corp. for approximately $9.1 billion in cash. In
connection with the sale of Sikorsky, we made tax payments of approxi-
mately $2.5 billion in 2016. On November 11, 2015, we entered into
ASR agreements to repurchase an aggregate of $6 billion of our com-
mon stock utilizing the net after-tax proceeds from the sale of Sikorsky.
Under the terms of the ASR agreements, we made the aggregate
payments and received an initial delivery of approximately 51.9 million
shares of our common stock, representing approximately 85% of the
shares expected to be repurchased. In 2016, the shares associated
with the remaining portion of the aggregate purchase were settled upon
final delivery to us of approximately 10.1 million additional shares of
common stock.

At December 31, 2016, approximately 93% of our cash was
held by UTC’s foreign subsidiaries, due to our extensive international
operations. We manage our worldwide cash requirements by reviewing
available funds among the many subsidiaries through which we conduct
our business and the cost effectiveness with which those funds can be
accessed. The repatriation of cash balances from certain of our subsid-
iaries could have adverse tax consequences or be subject to capital
controls; however, those balances are generally available without legal
restrictions to fund ordinary business operations. In the quarter ended
December 31, 2015, we recognized an income tax provision of approxi-
mately $274 million related to the intended repatriation of foreign cash,
the majority of which is from 2015 earnings of certain international sub-
sidiaries. As discussed in Note 11, with few other exceptions, U.S.
income taxes have not been provided on other undistributed earnings
of international subsidiaries. Our intention is to reinvest these earnings
permanently or to repatriate the earnings only when it is tax effective
to do so.

We continue to be involved in litigation with the German Tax Office
in the German Tax Court with respect to certain tax benefits that we
have claimed related to a 1998 reorganization of the corporate structure
of Otis operations in Germany. We made tax and interest payments of
approximately $300 million during 2015 to avoid additional interest
accruals while we continue to litigate this matter. We do not expect to
make significant additional tax or interest payments pending final resolu-
tion of this matter. See Note 18 for a further discussion of this German
tax litigation.

2015 and 2014, the amount of such restricted cash was approximately
$32 million, $45 million and $255 million, respectively. Approximately
$210 million of our restricted cash balance as of December 31, 2014
was utilized in cash investments in businesses in 2015.

We believe our future operating cash flows will be sufficient to meet
our future operating cash needs. Further, we continue to have access to
the commercial paper markets and our existing credit facilities, and our
ability to obtain debt or equity financing, as well as the availability under
committed credit lines, provides additional potential sources of liquidity
should they be required or appropriate.

Cash Flow — Operating Activities of Continuing Operations

(DOLLARS IN MILLIONS) 2016 2015 2014

Net cash flows provided by operating activities
of continuing operations $ 6,412 $ 6,755 $ 6,979

2016 Compared with 2015
Cash generated from operating activities of continuing operations in
2016 was approximately $343 million lower than 2015, driven primarily
by $392 million higher investment in working capital, $156 million higher
contributions to our global defined benefit pension plans, and the first
of four annual payments of $237 million related to the 2015 Canadian
government settlement; partially offset by the absence of the noncash
portion of other infrequently occurring items, as discussed in Results of
Operations, which are included in Other operating activities, net in the
Consolidated Statement of Cash Flows for the year ended
December 31, 2015. The 2016 cash outflows for working capital 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 percent-
age 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. Factoring activity in 2016 was
approximately $200 million lower than the prior year, excluding
customer-funded factoring at Pratt & Whitney related to certain exten-
sions of contractual payment terms. For 2015, cash outflows for
working capital were primarily driven by increases in inventory in our
aerospace businesses to support deliveries and other contractual
commitments, and were partially offset by increases in accounts
payable and accrued liabilities in these businesses. Increases in
accounts receivable in our commercial businesses were largely offset
by increases in accounts payable and customer advances in these
businesses. Reductions in accrued liabilities also include payments of
interest and taxes of approximately $300 million related to the German
tax matter, as discussed in Note 18.

The funded status of our defined benefit pension plans is depen-
dent 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

Management’s Discussion and Analysis

24 2016 Annual Report

benefit pension plans were $303 million, $147 million and $517 million
during 2016, 2015 and 2014, respectively. In 2015, we made noncash
contributions of $250 million in UTC common stock to our defined ben-
efit pension plans. As of December 31, 2016, the total investment by
the global defined benefit pension plans in our securities was approxi-
mately 1% of total plan assets. Although our domestic defined benefit
pension plans are approximately 90% funded on a projected benefit
obligation basis as of December 31, 2016, and we are not required to
make additional contributions through the end of 2021, we may elect
to make discretionary contributions in 2017. We expect to make total
contributions of approximately $300 million to our global defined benefit
pension plans in 2017, including discretionary contributions of approxi-
mately $150 million to our domestic defined benefit pension plans.
Contributions to our global defined benefit pension plans in 2017 are
expected to meet or exceed the current funding requirements.

2015 Compared with 2014
Cash generated from operating activities of continuing operations in
2015 was $224 million lower than 2014. Income from continuing opera-
tions and noncash deferred income tax provision and depreciation and
amortization charges were approximately $1.8 billion lower than 2014.
This decline includes the noncash expense related to the Canadian
government settlement of $867 million and the noncash portion of other
infrequently occurring items, as discussed in Results of Operations,
which are included in Other operating activities, net in the Consolidated
Statement of Cash Flows for the year ended December 31, 2015. The
2015 cash outflows for working capital were primarily driven by
increases in inventory in our aerospace businesses to support deliveries
and other contractual commitments, and were partially offset by
increases in accounts payable and accrued liabilities in these busi-
nesses. Increases in accounts receivable in our commercial businesses
were largely offset by increases in accounts payable and customer
advances in these businesses. Reductions in accrued liabilities also
include payments of interest and taxes of approximately $300 million
related to the German tax matter, as discussed in Note 18. For 2014,
cash outflows for working capital were driven by increases in inventory
to support deliveries and other contractual commitments across all
business segments. Reductions in accounts receivable in our aero-
space businesses, driven primarily by accelerated customer collections
and selected factoring primarily at Pratt & Whitney, were partially offset
by increases in accounts receivable in our commercial businesses.

Cash Flow — Investing Activities of Continuing Operations

(DOLLARS IN MILLIONS) 2016 2015 2014

Net cash flows used in investing activities of
continuing operations $ (2,509) $ (2,794) $ (1,967)

2016 Compared with 2015
Cash flows used in investing activities of continuing operations for 2016
and 2015 primarily reflect capital expenditures, cash investments in
businesses, and payments related to our collaboration intangible assets
and contractual rights to provide product on new aircraft platforms.

In 2016, we increased our collaboration intangible assets by
approximately $388 million, of which $345 million represented payments
made under our 2012 agreement to acquire Rolls-Royce’s ownership
and collaboration interests in IAE. Capital expenditures for 2016
($1,699 million) primarily relate to investments in new programs at
Pratt & Whitney and UTC Aerospace Systems, as well as new facilities
at Pratt & Whitney and UTC Climate, Controls & Security. Cash invest-
ments in businesses in 2016 ($710 million) consisted of the acquisition
of a majority interest in an Italian heating products and services
company by UTC Climate, Controls & Security, the acquisition of a
Japanese services company by Otis and a number of small acquisitions,
primarily in our commercial businesses. We expect total cash invest-
ments for acquisitions in 2017 to be $1 billion to $2 billion. However,
actual acquisition spending may vary depending upon the timing,
availability and appropriate value of acquisition opportunities. We expect
capital expenditures in 2017 to be approximately $1.8 billion.

As discussed in Note 14 to the Consolidated Financial Statements,
we enter into derivative instruments for risk management purposes only,
including derivatives designated as hedging instruments under the
Derivatives and Hedging Topic of the Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) and those
utilized as economic hedges. We operate internationally and, in the
normal course of business, are exposed to fluctuations in interest rates,
foreign exchange rates and commodity prices. These fluctuations can
increase the costs of financing, investing and operating the business.
We have used derivative instruments, including swaps, forward con-
tracts and options to manage certain foreign currency, interest rate and
commodity price exposures. During the years ended December 31,
2016 and 2015, we had net cash receipts of approximately $249 million
and $160 million, respectively, from the settlement of these derivative
instruments.

Customer financing activities were a net use of cash of $221 million
and $247 million in 2016 and 2015, respectively. We expect 2017
investments in customer financing assets to increase by approximately
$400 million, primarily due to increased levels of investment in commer-
cial aircraft engines and products under lease. While we expect that
2017 customer financing activity will be a net use of funds, actual fund-
ing is subject to usage under existing customer financing commitments
during the year. We may also arrange for third-party investors to
assume a portion of our commitments. At December 31, 2016, we had
commercial aerospace financing and other contractual commitments of
approximately $14.4 billion related to commercial aircraft and certain
contractual rights to provide product on new aircraft platforms, of which
as much as $1.3 billion may be required to be disbursed during 2017.
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, 2016, our collaborators’ share of these commitments
was approximately $4.6 billion of which as much as $386 million may
be required to be disbursed to us during 2017. Refer to Note 5 to the

Management’s Discussion and Analysis

United Technologies Corporation 25

Consolidated Financial Statements for additional discussion of our
commercial aerospace industry assets and commitments.

2015 Compared with 2014
Cash flows used in investing activities of continuing operations for 2015
and 2014 primarily reflect capital expenditures, cash investments in
businesses, and payments related to our collaboration intangible assets
and contractual rights to provide product on new aircraft platforms.
Investing cash outflows in 2014 were partially offset by net proceeds
of approximately $344 million from business dispositions, primarily a
number of small dispositions in our commercial businesses.

Cash investments in businesses in 2015 ($538 million) consisted
of the acquisition of the majority interest in a UTC Climate, Controls &
Security business, the acquisition of an imaging technology company
by UTC Aerospace Systems and a number of small acquisitions, pri-
marily in our commercial businesses, and were partially offset by net
proceeds of approximately $200 million from business dispositions.
Cash investments in businesses in 2014 ($402 million) included the
acquisition of the majority interest in a Pratt & Whitney joint venture and
a number of small acquisitions, primarily in our commercial businesses,
and were partially offset by net proceeds of approximately $344 million
from business dispositions, primarily a number of small dispositions
in our commercial businesses. Customer financing activities were a
net use of cash of $247 million in 2015 and a net source of cash of
$129 million in 2014.

Cash Flow — Financing Activities of Continuing Operations

(DOLLARS IN MILLIONS) 2016 2015 2014

Net cash flows used in financing activities of
continuing operations $ (1,188) $ (10,776) $ (4,249)

2016 Compared with 2015
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 $4 billion of net
long-term debt issuances in 2016. 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 $522 million and $727 million of outstand-
ing commercial paper at December 31, 2016 and 2015, respectively.
Commercial paper borrowings at December 31, 2016 were comprised
of approximately e500 million ($522 million) of Euro-denominated
commercial paper.

At December 31, 2016, management had remaining authority to
repurchase approximately $3.7 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 surren-
der of shares to cover taxes on vesting of restricted stock. In addition to
the transactions under the ASR agreements discussed above, we made

cash payments of approximately $2.25 billion to repurchase approxi-
mately 22 million shares of our common stock during the year ended
December 31, 2016, and we repurchased approximately 14 million
shares of our common stock for approximately $1.35 billion during the
year ended December 31, 2015.

We expect 2017 share repurchases to be approximately
$3.5 billion, which we expect to fund with cash generated from operat-
ing activities of continuing operations as well as additional borrowings.
Our share repurchases vary depending upon various factors including
the level of our other investing activities. In 2016 and 2015, we paid
aggregate dividends on common stock of approximately $2.1 billion
and $2.2 billion, respectively.

On April 29, 2016, we renewed our 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.

2015 Compared with 2014
In 2015, we completed the optional remarketing of the 1.550% junior
subordinated notes, which were originally issued as part of our equity
units on June 18, 2012. As a result of the remarketing, these notes were
redesignated as our 1.778% junior subordinated notes due May 4,
2018. We received approximately $1.1 billion from the proceeds of the
remarketing, and issued approximately 11.3 million shares of Common
Stock to settle the purchase obligation of the holders of the equity units
under the purchase contract entered into at the time of the original
issuance of the equity units.

We made net repayments of long-term debt of $20 million and
$206 million in 2015 and 2014, respectively. We had approximately
$727 million of outstanding commercial paper at December 31, 2015.
We had no commercial paper outstanding at December 31, 2014.
Financing cash outflows for 2014 included the repurchase of
13.5 million shares of our common stock for approximately $1.5 billion.

In 2015, we paid aggregate dividends on common stock of
approximately $2.2 billion. During 2014, an aggregate $2.0 billion of
cash dividends were paid to common stock shareowners.

Cash Flow — Discontinued Operations

(DOLLARS IN MILLIONS) 2016 2015 2014

Net cash flows (used in) provided by
discontinued operations $ (2,526) $ 8,619 $ 217

2016 Compared with 2015
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.

For the year ended December 31, 2015, cash flows provided by
discontinued operations primarily reflect those from investing activities,
which includes the proceeds of $9.1 billion from the sale of Sikorsky to
Lockheed Martin Corp. in November 2015, partially offset by capital
expenditures of Sikorsky in 2015. Cash outflows from operating activi-
ties of discontinued operations for the year ended December 31, 2015
primarily reflect operating income and noncash expenses, as well as

Management’s Discussion and Analysis

26 2016 Annual Report

net investments in working capital and other net operating assets
of Sikorsky.

2015 Compared with 2014
Cash flows from discontinued operations for the year ended
December 31, 2015 primarily reflect those from investing activities,
which includes the proceeds of $9.1 billion from the sale of Sikorsky
to Lockheed Martin Corp. in November 2015, as discussed above.

For the year ended December 31, 2014, cash flows provided by
discontinued operations primarily reflect cash provided by Sikorsky
operating income of approximately $150 million and noncash charges,
including $438 million of charges related to the change in estimate
resulting from contract amendments signed with the Canadian govern-
ment for the CH-148 derivative of the H-92 helicopter, a military variant
of the S-92 helicopter (the Cyclone Helicopter program), partially offset
by working capital investments in inventories. Cash flows used in invest-
ing activities of $113 million were primarily related to capital
expenditures of Sikorsky.

CRITICAL ACCOUNTING ESTIMATES

Preparation of our financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Note 1 to the Consolidated Financial
Statements describes the significant accounting policies used in
preparation of the Consolidated Financial Statements. Management
believes the most complex and sensitive judgments, because of their
significance to the Consolidated Financial Statements, result primarily
from the need to make estimates about the effects of matters that are
inherently uncertain. The most significant areas involving management
judgments and estimates are described below. Actual results in these
areas could differ from management’s estimates.

Long-Term Contract Accounting. We utilize percentage-of-
completion accounting on certain of our long-term contracts. The
percentage-of-completion method requires estimates of future
revenues and costs over the full term of product and/or service delivery.
We also utilize the completed-contract method of accounting on
certain lesser value commercial contracts. Under the completed-
contract method, sales and cost of sales are recognized when a
contract is completed.

Losses, if any, on long-term contracts are provided for when
anticipated. We recognize loss provisions on original equipment
contracts to the extent that estimated inventoriable manufacturing,
engineering, product warranty and product performance guarantee
costs, as appropriate, exceed the projected revenue from the products
and services contemplated under the contractual arrangement. For
new commitments, we generally record loss provisions at the earlier
of contract announcement or contract signing except for certain
requirements contracts under which losses are recorded based upon
receipt of the purchase order which obligates us to perform. For existing
commitments, anticipated losses on contracts are recognized in the
period in which losses become evident. Products contemplated under
the contractual arrangement include products purchased under the
contract and, in the large commercial engine and wheels and brakes

businesses, future highly probable sales of replacement parts required
by regulation that are expected to be purchased subsequently for
incorporation into the original equipment. Revenue projections used
in determining contract loss provisions are based upon estimates of
the quantity, pricing and timing of future product deliveries. We measure
the extent of progress toward completion on our long-term commercial
aerospace equipment contracts using units-of-delivery. In addition,
we use the cost-to-cost method for elevator and escalator sales,
installation and modernization contracts in the commercial businesses
and certain aerospace development contracts. For long-term
aftermarket contracts, we recognize revenue over the contract period
in proportion to the costs expected to be incurred in performing
services under the contract. Within commercial aerospace, inventory
costs attributable to new engine offerings are recognized based on
the average cost per unit expected over the life of each contract using
the units-of-delivery method of percentage of completion accounting.
Under this method, costs of initial engine deliveries in excess of the
projected contract per unit average cost are capitalized, and these
capitalized amounts are subsequently expensed as additional engine
deliveries occur for engines with costs below the projected contract
per unit average cost over the life of the contract. As of December 31,
2016 and 2015, inventories included $233 million and $13 million,
respectively, of such capitalized amounts. Contract accounting also
requires estimates of future costs over the performance period of
the contract as well as an estimate of award fees and other sources
of revenue.

Contract costs are incurred over a period of time, which can be
several years, and the estimation of these costs requires management’s
judgment. The long-term nature of these contracts, the complexity of
the products, and the strict safety and performance standards under
which they are regulated can affect our ability to estimate costs
precisely. As a result, we review and update our cost estimates on
significant contracts on a quarterly basis, and no less frequently than
annually for all others, and when circumstances change and warrant a
modification to a previous estimate. We record changes in contract
estimates primarily using the cumulative catch-up method in
accordance with the Revenue Recognition Topic of the FASB ASC.

Income Taxes. The future tax benefit arising from deductible
temporary differences and tax carryforwards was $5.7 billion at
December 31, 2016 and $6.2 billion at December 31, 2015.
Management believes that our earnings during the periods when the
temporary differences become deductible will be sufficient to realize
the related future income tax benefits, which may be realized over an
extended period of time. For those jurisdictions where the expiration
date of tax carryforwards or the projected operating results indicate
that realization is not likely, a valuation allowance is provided.

In assessing the need for a valuation allowance, we estimate future
taxable income, considering the feasibility of ongoing tax planning
strategies and the realizability of tax loss carryforwards. Valuation
allowances related to deferred tax assets can be affected by changes
to tax laws, changes to statutory tax rates and future taxable income
levels. In the event we were to determine that we would not be able to

Management’s Discussion and Analysis

United Technologies Corporation 27

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.

Goodwill and Intangible Assets. Our investments in businesses
in 2016 totaled $712 million (including debt assumed of $2 million).
The assets and liabilities of acquired businesses are recorded under
the acquisition method of accounting at their estimated fair values at
the dates of acquisition. Goodwill represents costs in excess of fair
values assigned to the underlying identifiable net assets of acquired
businesses. Intangible assets consist of service portfolios, patents,
trademarks/tradenames, customer relationships and other intangible
assets including a collaboration asset established in connection with 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.

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, 2016 was approximately
$10.8 billion, of which approximately $2.0 billion has been paid to date.
We record these payments as intangible assets when such payments

are no longer conditional. The recoverability of these intangibles is
dependent upon the future success and profitability of the underlying
aircraft platforms including the associated aftermarket revenue streams.

Goodwill and intangible assets deemed to have indefinite lives are
not amortized, but are subject to annual, or more frequent if necessary,
impairment testing using the guidance and criteria described in the
Intangibles — Goodwill and Other Topic of the FASB ASC. This testing
compares carrying values to fair values and, when appropriate, the
carrying values of these assets are reduced to fair value. In developing
our estimates for the fair value of our reporting units, significant
judgment is required in the determination of the appropriateness of
using a qualitative assessment or quantitative assessment. When
quantitative assessments are required or elected to be performed, fair
value is primarily based on income approaches using discounted cash
flow models which have significant assumptions. Such assumptions
are subject to variability from year to year and are directly impacted by
global market conditions. We completed our annual impairment testing
as of July 1, 2016 and determined that no significant adjustments to
the carrying value of goodwill or indefinite lived intangible assets were
necessary based on the results of the impairment tests. Although these
assets are not currently impaired, there can be no assurance that future
impairments will not occur. See Note 2 to the Consolidated Financial
Statements for further discussion.

Contingent Liabilities. Our operating units include businesses
which sell products and services and conduct operations throughout
the world. As described in Note 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. Additionally, we have significant
contracts with the U.S. Government, subject to government oversight
and audit, which may require significant adjustment of contract prices.
We accrue for liabilities associated with these matters when it is
probable that a liability has been incurred and the amount can be
reasonably estimated. The most likely cost to be incurred is accrued
based on an evaluation of then currently available facts with respect to
each matter. When no amount within a range of estimates is more likely,
the minimum is accrued. The inherent uncertainty related to the
outcome of these matters can result in amounts materially different from
any provisions made with respect to their resolution.

Employee Benefit Plans. We sponsor domestic and foreign
defined benefit pension and other postretirement plans. Major
assumptions used in the accounting for these employee benefit plans
include the discount rate, expected return on plan assets, rate of
increase in employee compensation levels, mortality rates, and health
care cost increase projections. Assumptions are determined based on
company data and appropriate market indicators, and are evaluated
each year at December 31. A change in any of these assumptions
would have an effect on net periodic pension and postretirement benefit
costs reported in the Consolidated Financial Statements.

In the following table, we show the sensitivity of our pension and
other postretirement benefit plan liabilities and net annual periodic cost

Management’s Discussion and Analysis

28 2016 Annual Report

to a 25 basis point change in the discount rates for benefit obligations,
interest cost and service cost as of December 31, 2016:

(DOLLARS IN MILLIONS)

Increase in
Discount Rate

of 25 bps

Decrease in
Discount Rate

of 25 bps

Pension plans

Projected benefit obligation $ (976) $ 1,029

Net periodic pension cost (70) 75

Other postretirement benefit plans

Accumulated postretirement benefit obligation (14) 15

Net periodic postretirement benefit cost (1) 1

These estimates assume no change in the shape or steepness of
the company-specific yield curve used to plot the individual spot rates
that will be applied to the future cash outflows for future benefit pay-
ments 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 2016 pension expense by approximately
$71 million.

The weighted-average discount rates used to measure pension
liabilities and costs is set by reference to UTC-specific analysis using
each plan’s specific cash flows and is then compared to high-quality
bond indices for reasonableness. For our significant plans, we utilize a
full yield curve approach in the estimation of the service cost and inter-
est 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 decreased in
2016 as compared with 2015 and, as a result, the weighted-average
discount rate used to measure pension liabilities decreased from 4.1%
in 2015 to 3.8% in 2016. The weighted-average discount rates used to
measure service cost and interest cost were 3.8% and 3.4% in 2016,
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 pen-
sion plan and will instead receive an enhanced benefit under the UTC
Savings Plan. As of July 26, 2012 the same amendment was applied to
legacy Goodrich salaried employees. Across our global pension plans,
the impact of the continued recognition of prior pension investment
gains, 2016 actual returns on plan assets and lower discount rates for
interest costs, offset by the lower discount rates for pension obligations,
will result in a net periodic pension benefit in 2017 consistent with
2016 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, 2016 is as follows:

Payments Due by Period

(DOLLARS IN MILLIONS) Total 2017 2018 – 2019 2020 – 2021 Thereafter

Long-term debt —
principal $ 23,299 $ 1,603 $ 3,311 $ 3,494 $ 14,891

Long-term debt —
future interest 13,287 855 1,637 1,424 9,371

Operating leases 2,094 462 640 354 638

Purchase
obligations 13,882 8,145 5,034 631 72

Other long-term
liabilities 3,731 1,126 1,382 404 819

Total contractual
obligations $ 56,293 $ 12,191 $ 12,004 $ 6,307 $ 25,791

Purchase obligations include amounts committed under legally
enforceable contracts or purchase orders for goods and services with
defined terms as to price, quantity, delivery and termination liability.
Approximately 14% of the purchase obligations disclosed above repre-
sent 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, 2016 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 manage-
ment’s estimates over the terms of these agreements and is largely
based upon historical experience.

In connection with the acquisition of Goodrich in 2012, we
recorded assumed liabilities of approximately $2.2 billion related to
customer contractual obligations on certain OEM development pro-
grams where the expected costs exceeded the expected revenue
under contract. These liabilities are being liquidated in accordance
with the underlying economic pattern of obligations, as reflected by
the net cash outflows incurred on the OEM contracts. Total consump-
tion of the contractual obligations for the year ended December 31, 2016

Management’s Discussion and Analysis

United Technologies Corporation 29

was approximately $213 million. Total future consumption of the con-
tractual obligations is expected to be as follows: $251 million in 2017,
$248 million in 2018, $222 million in 2019, $149 million in 2020,
$83 million in 2021 and $250 million thereafter. These amounts are
not included in the table above.

The above table also does not reflect unrecognized tax benefits
of $1,086 million, the timing of which is uncertain, except for approxi-
mately $9 million that may become payable during 2017. Refer to
Note 11 to the Consolidated Financial Statements for additional discus-
sion on unrecognized tax benefits.

COMMERCIAL COMMITMENTS

The following table summarizes our commercial commitments
outstanding as of December 31, 2016:

Amount of Commitment Expiration per Period

(DOLLARS IN MILLIONS) Committed 2017 2018 – 2019 2020 – 2021 Thereafter

Commercial aerospace
financing commitments $ 2,358 $ 435 $ 937 $ 641 $ 345

Other commercial
aerospace
commitments 12,063 860 1,711 1,436 8,056

Commercial aerospace
financing arrangements 348 8 2 21 317

Credit facilities and
debt obligations (expire
2017 to 2028) 270 252 6 — 12

Performance guarantees 55 7 — 39 9

Total commercial
commitments $ 15,094 $ 1,562 $ 2,656 $ 2,137 $ 8,739

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 aero-
space commitments” in the table above, are being capitalized as
collaboration intangible assets.

We also have other contractual commitments, including commit-
ments 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 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, 2016, 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, 2016 we have approximately e2.95 billion of
Euro-denominated long-term debt and e500 million of outstanding
Euro-denominated commercial paper borrowings, which qualify as
a net investment hedge against our investments in European
businesses. As of December 31, 2016, 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, there is a foreign currency
exchange impact and risk to operational results as U.S. Dollars must be
converted to local currencies such as the Canadian Dollar in order to
meet local currency cost obligations. In order to minimize the exposure
that exists from changes in the exchange rate of the U.S. Dollar against
these other currencies, we hedge a certain portion of sales to secure
the rates at which U.S. Dollars will be converted. The majority of this
hedging activity occurs at P&WC, and hedging activity also occurs
to a lesser extent at certain UTC Aerospace Systems businesses.
At P&WC, firm and forecasted sales for both engines and spare parts
are hedged at varying amounts for up to 48 months on the U.S. Dollar

Management’s Discussion and Analysis

30 2016 Annual Report

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, 2016.

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 725 locations, mostly in the United States, at
which we may have some liability for remediating contamination. We
have resolved our liability at 346 of these locations. We do not believe
that any individual location’s exposure will have a material effect on our
results of operations. Sites in the investigation, remediation or operation
and maintenance stage represent approximately 93% of our accrued
environmental remediation reserve.

We have been identified as a potentially responsible party under
the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA or Superfund) at 127 sites. The number of

Superfund sites, in and of itself, does not represent a relevant measure
of liability because the nature and extent of environmental concerns
vary from site to site and our share of responsibility varies from sole
responsibility to very little responsibility. In estimating our liability for
remediation, we consider our likely proportionate share of the
anticipated remediation expense and the ability of other potentially
responsible parties to fulfill their obligations.

At December 31, 2016 and 2015, we had $829 million and
$837 million reserved for environmental remediation, respectively.
Cash outflows for environmental remediation were $44 million in 2016,
$50 million in 2015 and $63 million in 2014. We estimate that ongoing
environmental remediation expenditures in each of the next two years
will not exceed approximately $84 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
$374 million and is principally recorded in Other long-term liabilities
on our Consolidated Balance Sheet as of December 31, 2016. 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 $124 million,
which is included primarily in Other assets on our Consolidated Balance
Sheet as of December 31, 2016. 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.

Management’s Discussion and Analysis

United Technologies Corporation 31

This 2016 Annual Report to Shareowners (2016 Annual Report)
contains statements which, to the extent they are not statements of his-
torical or present fact, constitute “forward-looking statements” under
the securities laws. From time to time, oral or written forward-looking
statements may also be included in other information released to the
public. These forward-looking statements are intended to provide
management’s current expectations or plans for our future operating
and financial performance, based on assumptions currently believed to
be valid. Forward-looking statements can be identified by the use of
words such as “believe,” “expect,” “expectations,” “plans,” “strategy,”
“prospects,” “estimate,” “project,” “target,” “anticipate,” “will,” “should,”
“see,” “guidance,” “confident” and other words of similar meaning in
connection with a discussion of future operating or financial perfor-
mance. Forward-looking statements may include, among other things,
statements relating to future sales, earnings, cash flow, results of opera-
tions, uses of cash, share repurchases and other measures of financial
performance or potential future plans, strategies or transactions. All
forward-looking statements involve risks, uncertainties and other factors
that may cause actual results to differ materially from those expressed
or implied in the forward-looking statements. For those statements, we
claim the protection of the safe harbor for forward-looking statements
contained in the U.S. Private Securities Litigation Reform Act of 1995.
Such risks, uncertainties and other factors include, without limitation:

• the effect of economic conditions in the industries and markets in
which we operate in the U.S. and globally and any changes therein,
including financial market conditions, fluctuations in commodity
prices, interest rates and foreign currency exchange rates, levels of
end market demand in construction and in both the commercial
and defense segments of the aerospace industry, levels of air travel,
financial condition of commercial airlines, the impact of weather con-
ditions and natural disasters and the financial condition of our
customers and suppliers;

• challenges in the development, production, delivery, support,
performance and realization of the anticipated benefits of advanced
technologies and new products and services;

• future levels of indebtedness and capital spending and research and
development spending;

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

• 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 restruc-
turing costs and savings and other consequences thereof;

• the scope, nature, impact or timing of acquisition and divestiture
activity, including among other things integration of acquired
businesses into our existing businesses and realization of synergies
and opportunities for growth and innovation;

• new business opportunities;
• our ability to realize the intended benefits of organizational changes;
• the anticipated benefits of diversification and balance of operations

across product lines, regions and industries;
• the 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 EU,
on general market conditions, global trade policies and currency
exchange rates in the near term and beyond; and

• the effect of changes in tax, environmental, regulatory (including
among other things import/export) and other laws and regulations in
the U.S. and other countries in which we operate.

In addition, our Annual Report on Form 10-K for 2016 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 2016
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 2016 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.

Cautionary Note Concerning Factors That May Affect Future Results

32 2016 Annual Report

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United Technologies Corporation 33

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 assur-
ance 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 finan-
cial reporting may not prevent or detect misstatements. Management
has assessed the effectiveness of UTC’s internal control over financial
reporting as of December 31, 2016. In making its assessment, manage-
ment 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, 2016. The effectiveness of UTC’s
internal control over financial reporting, as of December 31, 2016, has
been audited by PricewaterhouseCoopers LLP, an independent regis-
tered public accounting firm, as stated in their report which is included
herein.

Gregory J. Hayes
Chairman, President and Chief Executive Officer

Akhil Johri
Executive Vice President & Chief Financial Officer

Robert J. Bailey
Corporate Vice President, Controller

Management’s Report on Internal Control over Financial Reporting

34 2016 Annual Report

TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF
UNITED TECHNOLOGIES CORPORATION:

In our opinion, the accompanying consolidated balance sheets and
the related consolidated statement of operations, of comprehensive
income, of cash flows and of changes in equity present fairly, in all
material respects, the financial position of United Technologies
Corporation and its subsidiaries at December 31, 2016 and
December 31, 2015, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
2016 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, 2016 based on criteria
established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in 2013. The Corporation’s management is responsible for
these financial statements, for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express opinions on these financial statements and
on the Corporation’s internal control over financial reporting based on
our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of
the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the

circumstances. We believe that our audits provide a reasonable basis
for our opinions.

As disclosed in Note 1 to the consolidated financial statements,
the Corporation changed the presentation and classification of certain
cash receipts and cash payments and the presentation of restricted
cash in the statement of cash flows, as well as the classification and
presentation of certain employee share-based payment transactions
and the tax-related cash flows resulting from these payments.

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.

Hartford, Connecticut
February 9, 2017

Report of Independent Registered Public Accounting Firm

United Technologies Corporation 35

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS; SHARES IN MILLIONS) 2016 2015 2014

Net Sales:

Product sales $ 40,735 $ 39,801 $ 41,545

Service sales 16,509 16,297 16,355

57,244 56,098 57,900

Costs and Expenses:

Cost of products sold 30,325 29,771 30,367

Cost of services sold 11,135 10,660 10,531

Research and development 2,337 2,279 2,475

Selling, general and administrative 6,060 5,886 6,172

49,857 48,596 49,545

Other income (expense), net 785 (211) 1,238

Operating profit 8,172 7,291 9,593

Interest expense, net 1,039 824 881

Income from continuing operations before income taxes 7,133 6,467 8,712

Income tax expense 1,697 2,111 2,244

Net income from continuing operations 5,436 4,356 6,468

Less: Noncontrolling interest in subsidiaries’ earnings from continuing operations 371 360 402

Income from continuing operations attributable to common shareowners 5,065 3,996 6,066

Discontinued operations (Note 3):

Income from operations 1 252 175

Gain on disposal 13 6,042 —

Income tax expense (24) (2,684) (20)

Net (loss) income from discontinued operations (10) 3,610 155

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

(Loss) Income from discontinued operations attributable to common shareowners (10) 3,612 154

Net income attributable to common shareowners $ 5,055 $ 7,608 $ 6,220

Earnings Per Share of Common Stock — Basic:

Net income from continuing operations attributable to common shareowners $ 6.19 $ 4.58 $ 6.75

Net income attributable to common shareowners $ 6.18 $ 8.72 $ 6.92

Earnings Per Share of Common Stock — Diluted:

Net income from continuing operations attributable to common shareowners $ 6.13 $ 4.53 $ 6.65

Net income attributable to common shareowners $ 6.12 $ 8.61 $ 6.82

Dividends Per Share of Common Stock $ 2.62 $ 2.56 $ 2.36

Weighted average number of shares outstanding:

Basic shares 818.2 872.7 898.3

Diluted shares 826.1 883.2 911.6

See accompanying Notes to Consolidated Financial Statements

Consolidated Statement of Operations

36 2016 Annual Report

(DOLLARS IN MILLIONS) 2016 2015 2014

Net income from continuing operations $ 5,436 $ 4,356 $ 6,468

Net (loss) income from discontinued operations (10) 3,610 155

Net income 5,426 7,966 6,623

Other comprehensive loss, net of tax

Foreign currency translation adjustments

Foreign currency translation adjustments arising during period (1,089) (1,502) (1,302)

Reclassification adjustments from sale of an investment in a foreign entity recognized in net income — 42 7

(1,089) (1,460) (1,295)

Pension and postretirement benefit plans

Net actuarial loss arising during period (785) (284) (4,362)

Prior service cost arising during period (13) (37) (5)

Other 542 326 121

Amortization of actuarial loss and prior service cost 535 867 416

279 872 (3,830)

Tax (expense) benefit (189) (298) 1,388

90 574 (2,442)

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

Unrealized holding gain arising during period 190 28 35

Reclassification adjustments for gain included in Other income, net (94) (54) (20)

96 (26) 15

Tax (expense) benefit (36) 11 (3)

60 (15) 12

Change in unrealized cash flow hedging

Unrealized cash flow hedging gain (loss) arising during period 75 (415) (263)

Loss reclassified into Product sales 171 234 96

246 (181) (167)

Tax (expense) benefit (69) 51 37

177 (130) (130)

Other comprehensive loss, net of tax (762) (1,031) (3,855)

Comprehensive income 4,664 6,935 2,768

Less: comprehensive income attributable to noncontrolling interest (324) (285) (329)

Comprehensive income attributable to common shareowners $ 4,340 $ 6,650 $ 2,439

See accompanying Notes to Consolidated Financial Statements
Consolidated Statement of Comprehensive Income

United Technologies Corporation 37

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS; SHARES IN THOUSANDS) 2016 2015

Assets
Cash and cash equivalents $ 7,157 $ 7,075

Accounts receivable (net of allowance for doubtful accounts of $450 and $504) 11,481 10,653

Inventories and contracts in progress, net 8,704 8,135

Other assets, current 1,208 843

Total Current Assets 28,550 26,706

Customer financing assets 1,398 1,018

Future income tax benefits 1,809 1,961

Fixed assets, net 9,158 8,732

Goodwill 27,059 27,301

Intangible assets, net 15,684 15,603

Other assets 6,048 6,163

Total Assets $ 89,706 $ 87,484

Liabilities and Equity
Short-term borrowings $ 601 $ 926

Accounts payable 7,483 6,875

Accrued liabilities 12,219 14,638

Long-term debt currently due 1,603 179

Total Current Liabilities 21,906 22,618

Long-term debt 21,697 19,320

Future pension and postretirement benefit obligations 5,612 6,022

Other long-term liabilities 11,026 10,558

Total Liabilities 60,241 58,518

Commitments and contingent liabilities (Notes 5 and 18)

Redeemable noncontrolling interest 296 122

Shareowners’ Equity:

Capital Stock:

Preferred Stock, $1 par value; 250,000 shares authorized; None issued or outstanding — —

Common Stock, $1 par value; 4,000,000 shares authorized; 1,440,982 and 1,438,497 shares issued 17,285 16,033

Treasury Stock — 632,281 and 600,153 common shares at average cost (34,150) (30,907)

Retained earnings 52,873 49,956

Unearned ESOP shares (95) (105)

Total Accumulated other comprehensive loss (8,334) (7,619)

Total Shareowners’ Equity 27,579 27,358

Noncontrolling interest 1,590 1,486

Total Equity 29,169 28,844

Total Liabilities and Equity $ 89,706 $ 87,484

See accompanying Notes to Consolidated Financial Statements
Consolidated Balance Sheet

38 2016 Annual Report

(DOLLARS IN MILLIONS) 2016 2015 2014

Operating Activities of Continuing Operations:
Income from continuing operations $ 5,436 $ 4,356 $ 6,468
Adjustments to reconcile income from continuing operations to net cash flows provided by operating activities
of continuing operations:

Depreciation and amortization 1,962 1,863 1,820
Deferred income tax provision

398 662 403

Stock compensation cost 152 158 219
Canadian government settlement (237) 867 —

Change in:
Accounts receivable (941) (438) 111
Inventories and contracts in progress (719) (766) (636)
Other current assets 49 (55) (115)
Accounts payable and accrued liabilities 450 490 (89)

Global pension contributions (303) (147) (517)
Other operating activities, net 165 (235) (685)

Net cash flows provided by operating activities of continuing operations 6,412 6,755 6,979
Investing Activities of Continuing Operations:

Capital expenditures (1,699) (1,652) (1,594)
Increase in customer financing assets (438) (364) (202)
Decrease in customer financing assets 217 117 331
Investments in businesses (710) (538) (402)
Dispositions of businesses 211 200 344
Increase in collaboration intangible assets (388) (437) (593)
Receipts from settlements of derivative contracts 249 160 93
Other investing activities, net 49 (280) 56

Net cash flows used in investing activities of continuing operations (2,509) (2,794) (1,967)
Financing Activities of Continuing Operations:

Issuance of long-term debt 6,469 1,744 98
Repayment of long-term debt (2,452) (1,764) (304)
(Decrease) increase in short-term borrowings, net (331) 795 (346)
Proceeds from Common Stock issuance — equity unit settlement — 1,100 —
Proceeds from Common Stock issued under employee stock plans 13 41 187
Dividends paid on Common Stock (2,069) (2,184) (2,048)
Repurchase of Common Stock (2,254) (10,000) (1,500)
Other financing activities, net (564) (508) (336)

Net cash flows used in financing activities of continuing operations (1,188) (10,776) (4,249)

Discontinued Operations:

Net cash (used in) provided by operating activities (2,532) (372) 342
Net cash provided by (used in) investing activities 6 9,000 (113)
Net cash used in financing activities — (9) (12)

Net cash flows (used in) provided by discontinued operations (2,526) 8,619 217
Effect of foreign exchange rate changes on cash and cash equivalents (120) (174) (156)

Net increase in cash, cash equivalents and restricted cash 69 1,630 824
Cash, cash equivalents and restricted cash, beginning of year 7,120 5,490 4,666
Cash, cash equivalents and restricted cash, end of year 7,189 7,120 5,490

Less: Cash and cash equivalents of businesses held for sale — — 6
Less: Restricted cash, included in Other assets 32 45 255

Cash and cash equivalents of continuing operations, end of year $ 7,157 $ 7,075 $ 5,229

Supplemental Disclosure of Cash Flow Information:
Interest paid, net of amounts capitalized $ 1,157 $ 1,057 $ 1,076
Income taxes paid, net of refunds $ 4,096 $ 2,060 $ 2,024

Noncash investing and financing activities include:
Contributions of UTC Common Stock to domestic defined benefit pension plans $ — $ 250 $ —

See accompanying Notes to Consolidated Financial Statements
Consolidated Statement of Cash Flows

United Technologies Corporation 39

(DOLLARS IN MILLIONS) Common Stock

Balance at December 31, 2013 $ 14,764

Comprehensive income (loss):
Net income
Redeemable noncontrolling interest in subsidiaries’ earnings
Other comprehensive loss, net of tax

Common Stock issued under employee plans (6.2 million shares), net of tax benefit of $103 607
Common Stock repurchased (13.5 million shares)
Dividends on Common Stock
Dividends on ESOP Common Stock
Dividends attributable to noncontrolling interest
Purchase of subsidiary shares from noncontrolling interest (75)
Sale of subsidiary shares in noncontrolling interest 4
Redeemable noncontrolling interest reclassification to noncontrolling interest
Other
Balance at December 31, 2014 $ 15,300

Comprehensive income (loss):
Net income
Redeemable noncontrolling interest in subsidiaries’ earnings
Other comprehensive loss, net of tax

Common Stock issued — equity unit settlement (11.3 million shares) 1,100
Common Stock issued under employee plans (3.7 million shares), net of tax benefit of $64 379
Common Stock contributed to defined benefit pension plans (2.7 million shares) 112
Common Stock repurchased (88.7 million shares) (870)
Dividends on Common Stock
Dividends on ESOP Common Stock
Dividends attributable to noncontrolling interest
Purchase of subsidiary shares from noncontrolling interest (12)
Sale of subsidiary shares in noncontrolling interest 24
Acquisition of noncontrolling interest
Disposition of noncontrolling interest
Redeemable noncontrolling interest fair value adjustment
Balance at December 31, 2015 $ 16,033

Comprehensive income (loss):
Net income
Redeemable noncontrolling interest in subsidiaries’ earnings
Other comprehensive loss, net of tax

Common Stock issued under employee plans (2.5 million shares) 262
Common Stock repurchased (32.3 million shares) 998
Dividends on Common Stock
Dividends on ESOP Common Stock
Dividends attributable to noncontrolling interest
Purchase of subsidiary shares from noncontrolling interest (8)
Sale of subsidiary shares in noncontrolling interest
Acquisition of noncontrolling interest
Redeemable noncontrolling interest fair value adjustment
Redeemable noncontrolling interest reclassification to noncontrolling interest
Other
Balance at December 31, 2016 $ 17,285

See accompanying Notes to Consolidated Financial Statements
Consolidated Statement of Changes in Equity

40 2016 Annual Report

Shareowners’ Equity

Treasury Stock Retained Earnings Unearned ESOP Shares

Accumulated Other
Comprehensive

(Loss) Income
Noncontrolling

Interest Total Equity

Redeemable
Noncontrolling

Interest

$ (20,431) $ 40,539 $ (126) $ (2,880) $ 1,353 $ 33,219 $ 111

6,220 403 6,623
(9) (9) 9

(3,781) (67) (3,848) (7)
9 (29) 11 598

(1,500) (1,500)
(2,048) (2,048)

(71) (71)
(318) (318) (3)
(18) (93)
11 15
(16) (16) 16
12 12 14

$ (21,922) $ 44,611 $ (115) $ (6,661) $ 1,351 $ 32,564 $ 140

7,608 358 7,966
(4) (4) 4

(958) (61) (1,019) (12)
1,100

7 (2) 10 394
138 250

(9,130) (10,000)
(2,184) (2,184)

(75) (75)
(337) (337) (3)

(5) (17) (9)
15 39

173 173
(4) (4)

(2) (2) 2
$ (30,907) $ 49,956 $ (105) $ (7,619) $ 1,486 $ 28,844 $ 122

5,055 371 5,426
(6) (6) 6

(715) (27) (742) (20)
9 10 281

(3,252) (2,254)
(2,069) (2,069)

(74) (74)
(345) (345) (2)

(1) (9) (4)
25 25
98 98 189

(1) (1) 1
(12) (12) 12

6 1 7 (8)
$ (34,150) $ 52,873 $ (95) $ (8,334) $ 1,590 $ 29,169 $ 296

Consolidated Statement of Changes in Equity

United Technologies Corporation 41

NOTE 1: SUMMARY OF ACCOUNTING PRINCIPLES

The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates. Certain reclassifications have been made to the prior year
amounts to conform to the current year presentation.

Consolidation. The Consolidated Financial Statements include
the accounts of United Technologies Corporation (UTC) and its con-
trolled subsidiaries. Intercompany transactions have been eliminated.

Cash and Cash Equivalents. Cash and cash equivalents
includes cash on hand, demand deposits and short-term cash invest-
ments that are highly liquid in nature and have original maturities of
three months or less.

On occasion, we are required to maintain cash deposits with cer-
tain banks with respect to contractual obligations related to acquisitions
or divestitures or other legal obligations. As of December 31, 2016 and
2015, the amount of such restricted cash was approximately $32 million
and $45 million, respectively.

Accounts Receivable. Current and long-term accounts receiv-
able as of December 31, 2016 include retainage of $106 million and
unbilled receivables of $2,786 million, which includes approximately
$1,169 million of unbilled receivables under commercial aerospace
long-term aftermarket contracts. Current and long-term accounts
receivable as of December 31, 2015 include retainage of $141 million
and unbilled receivables of $2,318 million, which includes approximately
$1,091 million of unbilled receivables under commercial aerospace
long-term aftermarket contracts. See Note 5 for discussion of commer-
cial aerospace industry assets and commitments.

Retainage represents amounts that, pursuant to the applicable
contract, are not due until project completion and acceptance by the
customer. Unbilled receivables represent revenues that are not currently
billable to the customer under the terms of the contract. These items
are expected to be billed and collected in the normal course of business.

Marketable Equity Securities. Equity securities that have a
readily determinable fair value and that we do not intend to trade are
classified as available-for-sale and carried at fair value. Unrealized
holding gains and losses are recorded as a separate component of
shareowners’ equity, net of deferred income taxes.

In June 2016, the FASB issued Accounting Standards Update
(ASU) 2016-13, Financial Instruments — Credit Losses (Topic 328):
Measurement of Credit Losses on Financial Instruments. This ASU
requires that certain financial assets, including those measured at
amortized cost basis, be presented at the net amount expected to be
collected, utilizing an impairment model known as the current expected
credit loss model. In addition, available-for-sale debt securities will no
longer use the concept of “other than temporary” when considering
credit losses. Under this ASU, entities must use an allowance approach
for credit losses on available-for-sale debt securities, and the allowance
must be limited to the amount at which a security’s fair value is below
the amortized cost of the asset. The provisions of this ASU are effective
for years beginning after December 15, 2019, with early adoption
permitted. We are currently evaluating the impact of this ASU.

In January 2016, the FASB issued ASU 2016-01, Financial
Instruments — Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities. This ASU modifies how entities measure
equity investments and present changes in the fair value of financial
liabilities. Upon adoption, investments that do not result in consolidation
and are not accounted for under the equity method generally must
be carried at fair value, with changes in fair value recognized in net
income. As discussed in Note 10, we have approximately $353 million
of unrealized gains on these securities recorded in Accumulated
other comprehensive loss in our Consolidated Balance Sheet as of
December 31, 2016. To the extent currently unrealized gains or losses
on these investments are not realized through sale or other actions prior
to the date of adoption, these amounts would be recorded directly to
retained earnings upon adoption. The provisions of this ASU are
effective for years beginning after December 15, 2017.

Inventories and Contracts in Progress. Inventories and con-
tracts in progress are stated at the lower of cost or estimated realizable
value and are primarily based on first-in, first-out (FIFO) or average cost
methods; however, certain UTC Aerospace Systems and UTC Climate,
Controls & Security entities use the last-in, first-out (LIFO) method. If
inventories that were valued using the LIFO method had been valued
under the FIFO method, they would have been higher by $114 million
and $127 million at December 31, 2016 and 2015, respectively.

Costs accumulated against specific contracts or orders are at
actual cost. Valuation reserves for excess, obsolete, and slow-moving
inventory are estimated by comparing the inventory levels of individual
parts to both future sales forecasts or production requirements and
historical usage rates in order to identify inventory where the resale
value or replacement value is less than inventoriable cost. Other factors
that management considers in determining the adequacy of these
reserves include whether individual inventory parts meet current specifi-
cations and cannot be substituted for a part currently being sold or
used as a service part, overall market conditions, and other inventory
management initiatives. Manufacturing costs are allocated to current
production and firm contracts. Within commercial aerospace, inventory
costs attributable to new engine offerings are recognized based on the
average cost per unit expected over the life of each contract using the
units-of-delivery method of percentage of completion accounting.
Under this method, costs of initial engine deliveries in excess of the
projected contract per unit average cost are capitalized, and these
capitalized amounts are subsequently expensed as additional engine
deliveries occur for engines with costs below the projected contract
per unit average cost over the life of the contract.

Equity Method Investments. Investments in which we have
the ability to exercise significant influence, but do not control, are
accounted for under the equity method of accounting and are included
in Other assets on the Consolidated Balance Sheet. Under this method
of accounting, our share of the net earnings or losses of the investee
is included in Other income, net on the Consolidated Statement of
Operations since the activities of the investee are closely aligned with
the operations of the business segment holding the investment. We
evaluate our equity method investments whenever events or changes

Notes to Consolidated Financial Statements

42 2016 Annual Report

in circumstance indicate that the carrying amounts of such investments
may be impaired. If a decline in the value of an equity method invest-
ment is determined to be other than temporary, a loss is recorded in
earnings in the current period.

Goodwill and Intangible Assets. Goodwill represents costs in
excess of fair values assigned to the underlying net assets of acquired
businesses. Goodwill and intangible assets deemed to have indefinite
lives are not amortized. Goodwill and indefinite-lived intangible assets
are subject to annual impairment testing using the guidance and criteria
described in the Intangibles — Goodwill and Other Topic of the FASB
ASC. This testing compares carrying values to fair values and, when
appropriate, the carrying value of these assets is reduced to fair value.

Intangible assets consist of service portfolios, patents, trademarks/
tradenames, customer relationships and other intangible assets
including a collaboration asset, as discussed further in Note 2. Acquired
intangible assets are recognized at fair value in purchase accounting
and then amortized to cost of sales and selling, general & administrative
expenses over the applicable useful lives. Also included within other
intangible assets are commercial aerospace payments made to secure
certain contractual rights to provide product on new aircraft platforms.
We classify amortization of such payments as a reduction of sales. 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 pay-
ments are expensed. Consideration paid on these contractual
commitments is capitalized when it is no longer conditional.

Useful lives of finite-lived intangible assets are estimated based
upon the nature of the intangible asset and the industry in which the
intangible asset is used. These intangible assets are amortized based
on the pattern in which the economic benefits of the intangible assets
are consumed. For both our commercial aerospace collaboration
assets and exclusivity arrangements, the pattern of economic benefit
generally results in lower amortization during the development period
with increasing amortization as programs enter full rate production and
aftermarket cycles. If a pattern of economic benefit cannot be reliably
determined, a straight-line amortization method is used. The range of
estimated useful lives is as follows:

Collaboration assets 30 years

Customer relationships and related programs 1 to 50 years

Purchased service contracts 5 to 25 years

Patents & trademarks 4 to 40 years

Exclusivity assets 5 to 25 years

Other Long-Lived Assets. We evaluate the potential impairment
of other long-lived assets when appropriate. If the carrying value of
other long-lived assets held and used exceeds the sum of the undis-
counted expected future cash flows, the carrying value is written down
to fair value.

Long-Term Financing Receivables. Our long-term financing
receivables primarily represent balances related to the aerospace busi-
nesses such as long-term trade accounts receivable, leases, and notes
receivable. We also have other long-term receivables in our commercial
businesses; however, both the individual and aggregate amounts of
those other receivables are not significant.

Long-term trade accounts receivable, including unbilled receivables
related to long-term aftermarket contracts, are principally amounts
arising from the sale of goods and services with a contractual maturity
date or realization period of greater than one year and are recognized as
“Other assets” in our Consolidated Balance Sheet. Notes and leases
receivable represent notes and lease receivables other than receivables
related to operating leases, and are recognized as “Customer financing
assets” in our Consolidated Balance Sheet. The following table summa-
rizes the balance by class of aerospace business-related long-term
receivables as of December 31, 2016 and 2015:

(DOLLARS IN MILLIONS) 2016 2015

Long-term trade accounts receivable $ 926 $ 903

Notes and leases receivable 430 451

Total long-term receivables $ 1,356 $ 1,354

We determine a receivable is impaired when, based on current
information and events, it is probable that we will be unable to collect
amounts due according to the contractual terms of the receivable
agreement. Factors considered in assessing collectability and risk
include, but are not limited to, examination of credit quality indicators
and other evaluation measures, underlying value of any collateral or
security interests, significant past due balances, historical losses, and
existing economic conditions.

We determine credit ratings for each customer in our portfolio
based upon public information and information obtained directly from
our customers. We conduct a review of customer credit ratings, pub-
lished historical credit default rates for different rating categories, and
multiple third party aircraft value publications as a basis to validate the
reasonableness of the allowance for losses on these balances quarterly
or when events and circumstances warrant. Customer credit ratings
range from customers with an extremely strong capacity to meet
financial obligations, to customers whose uncollateralized receivable is
in default. There can be no assurance that actual results will not differ
from estimates or that consideration of these factors in the future will
not result in an increase or decrease to the allowance for credit losses
on long-term receivables. Based upon the customer credit ratings,
approximately 13% of our long-term receivables were considered to
bear high credit risk as of both December 31, 2016 and 2015. See
Note 5 for further discussion of commercial aerospace industry assets
and commitments.

Reserves for credit losses on receivables relate to specifically
identified receivables that are evaluated individually for impairment.
For notes and leases receivable, we determine a specific reserve for

Notes to Consolidated Financial Statements

United Technologies Corporation 43

exposure based on the difference between the carrying value of the
receivable and the estimated fair value of the related collateral in con-
nection with the evaluation of credit risk and collectability. For long-term
trade accounts receivable, we evaluate credit risk and collectability
individually to determine if an allowance is necessary. Our long-term
receivables reflected in the table above, which include reserves of
$17 million and $18 million as of December 31, 2016 and 2015, respec-
tively, are individually evaluated for impairment. At both December 31,
2016 and 2015, we did not have any significant balances that are con-
sidered to be delinquent, on non-accrual status, past due 90 days or
more, or considered to be impaired.

Income Taxes. 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, circum-
stances, 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. Where applicable, associated interest expense has
also been recognized. We recognize accrued interest related to unrec-
ognized tax benefits in interest expense. Penalties, if incurred, would be
recognized as a component of income tax expense.

Revenue Recognition. As a result of our diverse product and
service mix and customer base, we use multiple revenue recognition
practices. We recognize sales for products and services in accordance
with the provisions of Staff Accounting Bulletin (SAB) Topic 13, Revenue
Recognition, as applicable. Products and services included within the
scope of this SAB Topic include heating, ventilating, air-conditioning
and refrigeration systems, certain alarm and fire detection and suppres-
sion systems, commercially funded research and development
contracts and certain aerospace components. Sales within the scope
of this SAB Topic are recognized when persuasive evidence of an
arrangement exists, product delivery has occurred or services have
been rendered, pricing is fixed or determinable and collectability is
reasonably assured. Subsequent changes in service contracts are
accounted for prospectively.

Contract Accounting and Separately Priced Maintenance and
Extended Warranty Aftermarket Contracts: For our construction-type
and certain production-type contracts, sales are recognized on a
percentage-of-completion basis following contract accounting meth-
ods. Contracts consist of enforceable agreements which form the basis
of our unit of accounting for measuring sales, accumulating costs and
recording loss provisions as necessary. Contract accounting requires
estimates of award fees and other sources of variable consideration as
well as future costs over the performance period of the contract. Cost
estimates also include the estimated cost of satisfying our offset obliga-
tions required under certain contracts. Cost estimates are subject to
change and result in adjustments to margins on contracts in progress.

The extent of progress toward completion on our long-term commercial
aerospace equipment is measured using units of delivery or other con-
tractual milestones. The extent of progress towards completion on our
development and other cost reimbursement contracts in our aerospace
businesses and elevator and escalator sales, installation, modernization
and other construction contracts in our commercial businesses is mea-
sured using cost-to-cost based input measures. Contract costs include
estimated inventoriable manufacturing, engineering, product warranty
and product performance guarantee costs, as appropriate.

For separately priced product maintenance and extended warranty
aftermarket contracts, sales are recognized over the contract period. In
the commercial businesses, sales are primarily recognized on a straight-
line basis. In the aerospace businesses, sales are primarily recognized
in proportion to cost as sufficient historical evidence indicates that costs
of performing services under the contract are incurred on an other than
straight-line basis.

Loss provisions on original equipment contracts are recognized
to the extent that estimated contract costs exceed the estimated
consideration from the products contemplated under the contractual
arrangement. For new commitments, we generally record loss provi-
sions at the earlier of contract announcement or contract signing except
for certain requirements contracts under which losses are recorded
upon receipt of the purchase order which obligates us to perform. For
existing commitments, anticipated losses on contracts are recognized
in the period in which losses become evident. Products contemplated
under contractual arrangements include firm quantities of products sold
under contract and, in the large commercial engine and wheels and
brakes businesses, future highly probable sales of replacement parts
required by regulation that are expected to be sold subsequently for
incorporation into the original equipment. In the large commercial
engine and wheels and brakes businesses, when the combined original
equipment and aftermarket arrangements for each individual sales
campaign are profitable, we record original equipment product losses,
as applicable, at the time of delivery.

We review our cost estimates on significant contracts on a quar-
terly basis, and for others, no less frequently than annually or when
circumstances change and warrant a modification to a previous esti-
mate. We record changes in contract estimates using the cumulative
catch-up method in accordance with the Revenue Recognition Topic
of the FASB ASC. Operating profits included significant net unfavorable
changes in aerospace contract estimates of approximately $157 million
in 2016, primarily the result of unexpected increases in estimated costs
related to Pratt & Whitney long term aftermarket contracts.

Collaborations: Sales generated from engine programs, spare
parts sales, and aftermarket business under collaboration arrangements
are recorded consistent with our revenue recognition policies in our
consolidated financial statements. Amounts attributable to our collabo-
rators for their share of sales are recorded as cost of sales in our
financial statements based upon the terms and nature of the arrange-
ment. Costs associated with engine programs under collaborative
arrangements are expensed as incurred. Under these arrangements,
collaborators contribute their program share of engine parts, incur their

Notes to Consolidated Financial Statements

44 2016 Annual Report

own production costs and make certain payments to Pratt & Whitney
for shared or joint program costs. The reimbursement of a collabora-
tor’s share of program costs is recorded as a reduction of the related
expense item at that time.

Cash Payments to Customers: UTC Climate, Controls & Security
customarily offers its customers incentives to purchase products to
ensure an adequate supply of its products in the distribution channels.
The principal incentive program provides reimbursements to distributors
for offering promotional pricing for our products. We account for
incentive payments made as a reduction in sales. In our aerospace
businesses, we may make participation payments to certain customers
to secure certain contractual rights. To the extent these rights are incre-
mental and are supported by the incremental cash flows obtained,
they are capitalized as intangible assets. Otherwise, such payments are
expensed. We classify the subsequent amortization of the capitalized
acquired intangible assets from our customers as a reduction in sales.
Contractually stated prices in arrangements with our customers that
include the acquisition of intangible rights within the scope of the
Intangibles — Goodwill and Other Topic of the FASB ASC and deliver-
ables within the scope of the Revenue Recognition Topic of the FASB
ASC are not presumed to be representative of fair value for determining
the amounts to allocate to each element of an arrangement.

Accounting Standards Update (ASU) 2014-09, Revenue from
Contracts with Customers: In May 2014, the FASB issued Accounting
Standards Update (ASU) 2014-09, Revenue from Contracts with
Customers. In 2015 and 2016, the FASB issued various updates to
this ASU as follows:

• ASU 2015-14, Revenue from Contracts with Customers
(Topic 606): Deferral of the Effective Date — delays the effective
date of ASU 2014-09 by one year.

• ASU 2016-08, Revenue from Contracts with Customers
(Topic 606), Principal versus Agent Considerations (Reporting
Revenue Gross versus Net) — clarifies how an entity should
identify the unit of accounting (i.e. the specified good or service)
for the principal versus agent evaluation and how it should apply
the control principle to certain types of arrangements.

• ASU 2016-10, Revenue from Contracts with Customers
(Topic 606), Identifying Performance Obligations and
Licensing — clarifies the guidance surrounding licensing
arrangements and the identification of performance obligations.

• ASU 2016-12, Revenue from Contracts with Customers
(Topic 606), Narrow-Scope Improvements and Practical
Expedients — addresses implementation issues raised by
stakeholders concerning collectability, noncash consideration,
presentation of sales tax, and transition.

• ASU 2016-20, Revenue from Contracts with Customers
(Topic 606), Technical Corrections and Improvements —
addresses loan guarantee fees, impairment testing of contract
costs, provisions for losses on certain contracts, and various
disclosures.

ASU 2014-09 and its related amendments (collectively, the
New Revenue Standard) are effective for reporting periods beginning
after December 15, 2017, and interim periods therein, using either of
the following transition methods; (i) a full retrospective adoption reflect-
ing the application of the standard in each prior reporting period, or
(ii) a modified retrospective approach with the cumulative effect of
adopting recognized through retained earnings at the date of adoption.

The New Revenue Standard is expected to change the revenue
recognition practices for a number of revenue streams across our
businesses, although the most significant impacts will be concentrated
within our aerospace units. Several businesses, which currently account
for revenue on a “point-in-time basis,” will be required to use an “over
time” model as they meet one or more of the mandatory criteria estab-
lished in the New Revenue Standard. Revenue will be recognized based
on percentage-of-completion for repair contracts within both Otis and
UTC Climate, Controls & Security; certain U.S. Government aerospace
contracts; and aerospace aftermarket service work performed on a time
and materials basis. For these businesses, unrecognized sales and
operating profits related to the satisfied portion of the performance
obligations of contracts in process as of the date of adoption will be
recorded through retained earnings. The ongoing effect of recording
revenue on a percentage-of-completion basis within these businesses
is not expected to be material.

In addition to the forgoing, our aerospace businesses will also incur
changes related to the timing of manufacturing cost recognition and
certain engineering and development costs. In most circumstances,
our commercial aerospace businesses will identify the performance
obligation, or the unit of accounting, as the individual original equipment
(OEM) unit; revenues and costs to manufacture each unit will be recog-
nized upon OEM unit delivery. Under current practice, the unit of
accounting is the contract, and early-contract OEM unit costs in excess
of the average expected over the contact are capitalized and amortized
over lower-cost units later in the contract. With the adoption of the New
Revenue Standard, any deferred unit costs in excess of the contract
average will be eliminated through retained earnings and will not be
amortized into future earnings. As of December 31, 2016, capitalized
deferred unit costs in excess of the contract average are $233 million,
which is expected to increase in 2017 prior to adoption of the New
Revenue Standard.

In regards to costs incurred for the engineering and development
of aerospace products under contract with customers, we generally
expense as incurred unless there is a contractually guaranteed right of
recovery. Any customer funding received for such efforts is recognized
when earned, with the corresponding costs recognized as cost of sales.
Under the New Revenue Standard, customer funding of OEM product
engineering and development must be deferred and recognized as
revenue as the OEM products are delivered to the customer. There is
currently less clarity regarding the accounting for the associated prod-
uct engineering and development costs. As such, we are continuing
to evaluate whether such costs should continue to be expensed or

Notes to Consolidated Financial Statements

United Technologies Corporation 45

capitalized as contract fulfillment costs and subsequently amortized. For
contracts that are open as of the adoption date, previously recognized
customer funding will be established as a contract liability.

We continue to evaluate the implications of the standard change.
We intend to adopt the New Revenue Standard effective January 1,
2018 using the modified retrospective approach.

Research and Development. Research and development costs
not specifically covered by contracts and those related to the company
sponsored share of research and development activity in connection
with cost-sharing arrangements are charged to expense as incurred.
Government research and development support, not associated with
specific contracts, is recorded as a reduction to research and develop-
ment expense in the period earned. See Note 8 for a discussion of
amendments of certain government research and development support
arrangements concluded in December 2015 between Pratt & Whitney
Canada and the Canadian government.

Research and development costs incurred under contracts with
customers are included as a contract cost and reported as a compo-
nent of cost of products sold when revenue from such contracts is
recognized. Research and development costs in excess of contractual
consideration is expensed as incurred.

Foreign Exchange. We conduct business in many different cur-
rencies and, accordingly, are subject to the inherent risks associated
with foreign exchange rate movements. The financial position and
results of operations of substantially all of our foreign subsidiaries are
measured using the local currency as the functional currency. Foreign
currency denominated assets and liabilities are translated into U.S.
Dollars at the exchange rates existing at the respective balance sheet
dates, and income and expense items are translated at the average
exchange rates during the respective periods. The aggregate effects
of translating the balance sheets of these subsidiaries are deferred as
a separate component of shareowners’ equity.

Derivatives and Hedging Activity. We have used derivative
instruments, including swaps, forward contracts and options, to help
manage certain foreign currency, interest rate and commodity price
exposures. Derivative instruments are viewed as risk management tools
by us and are not used for trading or speculative purposes. By their
nature, all financial instruments involve market and credit risks. We enter
into derivative and other financial instruments with major investment
grade financial institutions and have policies to monitor the credit risk of
those counterparties. We limit counterparty exposure and concentration
of risk by diversifying counterparties. While there can be no assurance,
we do not anticipate any material non-performance by any of these
counterparties. We enter into transactions that are subject to enforce-
able master netting arrangements or other similar agreements with
various counterparties. However, we have not elected to offset multiple
contracts with a single counterparty and, as a result, the fair value of the
derivative instruments in a loss position is not offset against the fair
value of derivative instruments in a gain position.

Derivatives used for hedging purposes may be designated and
effective as a hedge of the identified risk exposure at the inception of

the contract. All derivative instruments are recorded on the balance
sheet at fair value. Derivatives used to hedge foreign-currency-
denominated balance sheet items are reported directly in earnings
along with offsetting transaction gains and losses on the items being
hedged. Derivatives used to hedge forecasted cash flows associated
with foreign currency commitments or forecasted commodity pur-
chases may be accounted for as cash flow hedges, as deemed
appropriate. Gains and losses on derivatives designated as cash flow
hedges are recorded in other comprehensive income and reclassified to
earnings as a component of product sales or expenses, as applicable,
when the hedged transaction occurs. To the extent that a previously
designated hedging transaction is no longer an effective hedge, any
ineffectiveness measured in the hedging relationship is recorded
currently in earnings in the period it occurs. As discussed in Note 14,
at December 31, 2016 we have approximately e2.95 billion of
Euro-denominated long-term debt and e500 million of outstanding
Euro-denominated commercial paper borrowings, which qualify as a
net investment hedge against our investments in European businesses.

To the extent the hedge accounting criteria are not met, the foreign
currency forward contracts are utilized as economic hedges and
changes in the fair value of these contracts are recorded currently in
earnings in the period in which they occur. Additional information per-
taining to foreign currency forward contracts and net investment
hedging is included in Note 14.

Environmental. Environmental investigatory, remediation,
operating and maintenance costs are accrued 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
currently available facts with respect to each individual site, including
existing technology, current laws and regulations and prior remediation
experience. Where no amount within a range of estimates is more likely,
the minimum is accrued. For sites with multiple responsible parties, we
consider our likely proportionate share of the anticipated remediation
costs and the ability of the other parties to fulfill their obligations in
establishing a provision for those costs. Liabilities with fixed or reliably
determinable future cash payments are discounted. Accrued environ-
mental liabilities are not reduced by potential insurance reimbursements.
See Note 18 for additional details on the environmental remediation
activities.

Pension and Postretirement Obligations. Guidance under the
Compensation — Retirement Benefits Topic of the FASB ASC requires
balance sheet recognition of the overfunded or underfunded status of
pension and postretirement benefit plans. Under this guidance, actuarial
gains and losses, prior service costs or credits, and any remaining
transition assets or obligations that have not been recognized under
previous accounting standards must be recognized in other compre-
hensive income, net of tax effects, until they are amortized as a
component of net periodic benefit cost.

Notes to Consolidated Financial Statements

46 2016 Annual Report

Product Performance Obligations. We extend performance
and operating cost guarantees beyond our normal service and warranty
policies for extended periods on some of our products, particularly
commercial aircraft engines. Liability under such guarantees is based
upon future product performance and durability. We accrue for such
costs that are probable and can be reasonably estimated. In addition,
we incur discretionary costs to service our products in connection with
product performance issues. The costs associated with these product
performance and operating cost guarantees require estimates over the
full terms of the agreements, and require management to consider fac-
tors such as the extent of future maintenance requirements and the
future cost of material and labor to perform the services. These cost
estimates are largely based upon historical experience. See Note 17 for
further discussion.

Collaborative Arrangements. In view of the risks and costs
associated with developing new engines, Pratt & Whitney has entered
into certain collaboration arrangements in which sales, costs and risks
are shared. Sales generated from engine programs, spare parts, and
aftermarket business under collaboration arrangements are recorded as
earned in our financial statements. Amounts attributable to our collabo-
rators for their share of sales are recorded as an expense in our financial
statements based upon the terms and nature of the arrangement.
Costs associated with engine programs under collaborative arrange-
ments are expensed as incurred. Under these arrangements,
collaborators contribute their program share of engine parts, incur their
own production costs and make certain payments to Pratt & Whitney
for shared or joint program costs. The reimbursement of the collabora-
tors’ share of program costs is recorded as a reduction of the related
expense item at that time. As of December 31, 2016, the collaborators’
interests in all commercial engine programs ranged from 14% to 50%,
inclusive of a portion of Pratt & Whitney’s interests held by other
participants. Pratt & Whitney is the principal participant in all existing
collaborative arrangements. There are no individually significant collab-
orative arrangements and none of the collaborators exceed a 31%
share in an individual program. The following table illustrates the income
statement classification and amounts attributable to transactions arising
from the collaborative arrangements between participants for each
period presented:

(DOLLARS IN MILLIONS) 2016 2015 2014

Collaborator share of sales:

Cost of products sold $ 1,700 $ 1,547 $ 1,778

Cost of services sold 675 652 354

Collaborator share of program costs
(reimbursement of expenses incurred):

Cost of products sold (108) (104) (103)

Research and development (184) (248) (122)

Selling, general and administrative (5) (5) (4)

Accounting Pronouncements. In October 2016, the FASB
issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers
of Assets Other Than Inventory. This ASU requires the income tax con-
sequences of an intra-entity transfer of an asset, other than inventory, to
be recognized when the transfer occurs. Two common examples of

assets included in the scope of this update are intellectual property and
property, plant, and equipment. The provisions of this ASU are effective
for years beginning after December 15, 2017, with early adoption per-
mitted. We are currently evaluating the impact of this ASU.

In August 2016, the FASB issued ASU 2016-15, Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments. This ASU is intended to reduce diversity in practice
in presentation and classification of certain cash receipts and cash
payments by providing guidance on eight specific cash flow issues,
including requirements that 1) cash payments for debt prepayment or
debt extinguishment costs be classified as cash outflows for financing
activities; and 2) for cash receipts and payments that have aspects of
more than one class of cash flows, each separately identifiable source
or use within the cash receipts and payments should be classified
on the basis of their underlying nature in financing, investing, or operat-
ing activities. In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash. This ASU
requires that restricted cash be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. The provisions of
ASU 2016-15 and ASU 2016-18 are effective for years beginning after
December 15, 2017, with early adoption permitted. We have elected to
early adopt the requirements of these ASUs effective December 31,
2016. Cash flow amounts for all periods presented have been updated
to comply with the retrospective transition method, required by these
ASUs upon adoption. As discussed in Note 9, for the year ended
December 31, 2016, approximately $164 million in debt extinguishment
costs have been classified as financing cash outflows in accordance
with these updates. Additionally, cash flows provided by operating
activities of continuing operations, attributable to changes in inventories
and contracts in progress, and cash flows used in investing activities of
continuing operations attributable to increases in customer financing
assets for the year ended December 31, 2015 increased by approxi-
mately $78 million as a result of the required retrospective transition
method of these updates. Other updates made as a result of adoption
of these ASUs had an immaterial impact to the Consolidated Statement
of Cash Flows.

In March 2016, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) 2016-09, Compensation —
Stock Compensation (Topic 718): Improvements to Employee Share-
Based Payment Accounting, which amends the accounting for
employee share-based payment transactions to require recognition of
the tax effects resulting from the settlement of stock-based awards as
income tax expense or benefit in the income statement in the reporting
period in which they occur. The ASU also requires that all tax-related
cash flows resulting from share-based payments, including the excess
tax benefits related to the settlement of stock-based awards, be
classified as cash flows from operating activities, and that cash paid by
directly withholding shares for tax withholding purposes be classified
as a financing activity in the statement of cash flows. In addition, the
ASU also allows companies to make an accounting policy election
to either estimate the number of awards that are expected to vest,

Notes to Consolidated Financial Statements

United Technologies Corporation 47

consistent with current U.S. GAAP, or account for forfeitures when
they occur. The new standard is effective for annual reporting periods
beginning after December 15, 2016 with early adoption permitted. We
elected to early adopt the requirements of the amended standard in the
third quarter of 2016 and are therefore required to report the impacts
as though adopted on January 1, 2016. Accordingly, we recognized
additional income tax benefits of approximately $22 million for the year
ended December 31, 2016. In addition, we recognized the additional
income tax benefits and cash paid by directly withholding shares for tax
withholding purposes of approximately $19 million for the year ended
December 31, 2016 as an increase in net cash flows provided by oper-
ating activities of continuing operations, and an increase in net cash
flows used in financing activities of continuing operations. There is no
change to our accounting policy with respect to estimation of forfeitures.

In February 2016, the FASB issued ASU 2016- 02, Leases
(Topic 842). The new standard establishes a right-of-use (ROU) model
that requires a lessee to record a ROU asset and a lease liability on the
balance sheet for all leases with terms longer than 12 months. Leases
will be classified as either finance or operating, with classification affect-
ing the pattern of expense recognition in the Consolidated Statement of
Operations. In addition, this standard requires a lessor to classify leases
as either sales-type, finance or operating. A lease will be treated as a
sale if it transfers all of the risks and rewards, as well as control of the
underlying asset, to the lessee. If risks and rewards are conveyed
without the transfer of control, the lease is treated as financing. If the
lessor doesn’t convey risks and rewards or control, the lease is treated
as operating.

The new standard is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years.
A modified retrospective transition approach is required for lessees for
capital and operating leases and lessors for sales-type, direct financing,
and operating leases existing at, or entered into after, the beginning of
the earliest comparative period presented in the financial statements,
with certain practical expedients available. While we are still evaluating
the impact of our pending adoption of the new standard on our con-
solidated financial statements, we expect that upon adoption we will
recognize ROU assets and lease liabilities and that the amounts could
be material. We do not expect the ASU to have a material impact on our
cash flows or results of operations.

NOTE 2: BUSINESS ACQUISITIONS, DISPOSITIONS, GOODWILL AND
INTANGIBLE ASSETS

Business Acquisitions and Dispositions. As discussed further in
Note 3, on November 6, 2015, we completed the sale of Sikorsky to
Lockheed Martin Corp. for approximately $9.1 billion in cash.

Our investments in businesses in 2016, 2015 and 2014 totaled
$712 million (including debt assumed of $2 million), $556 million
(including debt assumed of $18 million) and $530 million (including
debt assumed of $128 million), respectively. Our investments in busi-
nesses in 2016 consisted of the acquisition of a majority interest in an
Italian heating products and services company by UTC Climate,
Controls & Security, the acquisition of a Japanese services company
by Otis and a number of small acquisitions, primarily in our commercial
businesses. Our investments in businesses in 2015 consisted of the
acquisition of the majority interest in a UTC Climate, Controls & Security
business, the acquisition of an imaging technology company by UTC
Aerospace Systems, and a number of small acquisitions, primarily in
our commercial businesses. Our investments in businesses in 2014
consisted of the acquisition of the majority interest in a Pratt & Whitney
joint venture and a number of small acquisitions, primarily in our com-
mercial businesses.

Goodwill. The changes in the carrying amount of goodwill, by
segment, in 2016 are as follows:

(DOLLARS IN MILLIONS)

Balance as of
January 1,

2016

Goodwill
resulting from

business
combinations

Foreign
currency

translation
and other

Balance as of
December 31,

2016

Otis $ 1,566 $ 60 $ (51) $ 1,575

UTC Climate, Controls &
Security 9,458 473 (444) 9,487

Pratt & Whitney 1,515 — (4) 1,511

UTC Aerospace Systems 14,759 35 (311) 14,483

Total Segments 27,298 568 (810) 27,056

Eliminations and other 3 — — 3

Total $ 27,301 $ 568 $ (810) $ 27,059

Intangible Assets. Identifiable intangible assets are comprised of
the following:

2016 2015

(DOLLARS IN MILLIONS)
Gross

Amount

Accumulated
Amortization

Gross
Amount

Accumulated
Amortization

Amortized:

Service portfolios $ 1,995 $ (1,344) $ 1,977 $ (1,307)

Patents and trademarks 378 (201) 361 (189)

Collaboration intangible
assets 3,724 (211) 3,336 (86)

Customer relationships
and other 12,798 (3,480) 12,430 (2,988)

18,895 (5,236) 18,104 (4,570)

Unamortized:

Trademarks and other 2,025 — 2,069 —

Total $ 20,920 $ (5,236) $ 20,173 $ (4,570)

Notes to Consolidated Financial Statements

48 2016 Annual Report

Customer relationship intangible assets include payments made to
our customers to secure certain contractual rights. Such payments are
capitalized when there are distinct rights obtained and there are suffi-
cient incremental cash flows to support the recoverability of the assets
established. Otherwise, the applicable portion of the payments are
expensed. We amortize these intangible assets based on the underlying
pattern of economic benefit, which typically results in an amortization
method other than straight-line. We classify amortization of such pay-
ments as a reduction of sales. Amortization of intangible assets was
$778 million, $722 million and $713 million in 2016, 2015 and 2014,
respectively. The collaboration intangible assets are amortized based
upon the economic pattern of benefits as represented by the underlying
cash flows. The following is the expected amortization of intangible
assets for 2017 through 2021, which reflects the pattern of economic
benefit on certain aerospace intangible assets:

(DOLLARS IN MILLIONS) 2017 2018 2019 2020 2021

Amortization expense $ 809 $ 865 $ 878 $ 859 $ 829

NOTE 3: DISCONTINUED OPERATIONS

On November 6, 2015 we completed the sale of Sikorsky to Lockheed
Martin Corp. for $9.1 billion in cash. Accordingly, the results of opera-
tions and the cash flows related to Sikorsky have been classified in
Discontinued Operations in our Consolidated Statements of Operations,
Comprehensive Income and Cash Flows for all periods presented. In
2016, we recognized approximately $13 million of additional gain on
the disposal, primarily resulting from the settlement of working capital
adjustments. In 2016, we recognized approximately $24 million of
income tax expense, including the impacts related to filing Sikorsky’s
2015 tax returns. Net cash outflows from discontinued operations of
approximately $2.5 billion for the year ended December 31, 2016 were
primarily due to the payment of taxes related to the 2015 gain realized
on the sale of Sikorsky.

The following summarized financial information has been segre-
gated from continuing operations and reported as Discontinued
Operations:

INCOME (EXPENSE) (DOLLARS IN MILLIONS) 2016 2015 2014

Discontinued Operations:

Net Sales $ — $ 4,949 $ 7,452

Cost of Sales — (4,152) (6,801)

Research and development — (150) (160)

Selling, general and administrative 1 (315) (328)

Pension curtailment — (110) —

Other income, net — 30 12

Income from operations 1 252 175
Gain on disposal 13 6,042 —
Income tax expense (24) (2,684) (20)

(Loss) income from discontinued operations $ (10) $ 3,610 $ 155

UTC and its business segments have historically had sales to
Sikorsky and purchases from Sikorsky, in the normal course of busi-
ness, which were eliminated in consolidation. Net sales to Sikorsky
were $138 million and $235 million for the years ended December 31,
2015 and 2014, respectively. Purchases from Sikorsky included in cost
of products and services sold were $25 million and $17 million for the
years ended December 31, 2015 and 2014, respectively.

NOTE 4: EARNINGS PER SHARE

(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS; SHARES IN MILLIONS) 2016 2015 2014

Net income attributable to common
shareowners:

Net income from continuing operations $ 5,065 $ 3,996 $ 6,066

Net (loss) income from discontinued
operations (10) 3,612 154

Net income attributable to common
shareowners $ 5,055 $ 7,608 $ 6,220

Basic weighted average number of shares
outstanding 818.2 872.7 898.3

Stock awards 7.9 10.5 13.3

Diluted weighted average number of shares
outstanding 826.1 883.2 911.6

Earnings Per Share of Common Stock — Basic:

Net income from continuing operations $ 6.19 $ 4.58 $ 6.75

Net (loss) income from discontinued
operations (0.01) 4.14 0.17

Net income attributable to common
shareowners 6.18 8.72 6.92

Earnings Per Share of Common Stock — Diluted:

Net income from continuing operations $ 6.13 $ 4.53 $ 6.65

Net (loss) income from discontinued
operations (0.01) 4.09 0.17

Net income attributable to common
shareowners 6.12 8.61 6.82

The computation of diluted earnings per share excludes the effect
of the potential exercise of stock awards, including stock appreciation
rights and stock options, when the average market price of the com-
mon stock is lower than the exercise price of the related stock awards
during the period. These outstanding stock awards are not included
in the computation of diluted earnings per share because the effect
would have been anti-dilutive. For 2016, 2015 and 2014, there were
14.5 million, 9.7 million and 3.5 million anti-dilutive stock awards
excluded from the computation, respectively.

Notes to Consolidated Financial Statements

United Technologies Corporation 49

NOTE 5: COMMERCIAL AEROSPACE INDUSTRY ASSETS AND
COMMITMENTS

We have receivables and other financing assets with commercial aero-
space industry customers totaling $7,222 million and $6,143 million at
December 31, 2016 and 2015, respectively. These include customer
financing assets related to commercial aerospace industry customers,
consisting of products under lease of $939 million and $537 million, and
notes and leases receivable of $497 million and $566 million, at
December 31, 2016 and 2015, respectively.

Aircraft financing commitments, in the form of debt, guarantees or
lease financing, are provided to commercial aerospace customers. The
extent to which the financing commitments will be utilized is not cur-
rently known, since customers may be able to obtain more favorable
terms from other financing sources. We may also arrange for third-party
investors to assume a portion of these commitments. If financing com-
mitments are exercised, debt financing is generally secured by assets
with fair market values equal to or exceeding the financed amounts
consistent with market terms and conditions. We may also lease aircraft
and subsequently sublease the aircraft to customers under long-term
non-cancelable operating leases. Lastly, we have made residual value

and other guarantees related to various commercial aerospace cus-
tomer financing arrangements. The estimated fair market values of the
guaranteed assets equal or exceed the value of the related guarantees,
net of existing reserves.

We also have other contractual commitments, including commit-
ments to secure certain contractual rights to provide products on new
aircraft platforms, which are included in “Other commercial aerospace
commitments” in the table below. 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. Payments capitalized are included in intangible assets
and are amortized over the term of underlying economic benefit. Our
commercial aerospace financing and other contractual commitments
as of December 31, 2016 were approximately $14.4 billion. We
have entered into certain collaboration arrangements, which
may include participation by our collaboration partners in these
commitments.

The following is the expected maturity of commercial aerospace
industry assets and commitments as of December 31, 2016:

(DOLLARS IN MILLIONS) Committed 2017 2018 2019 2020 2021 Thereafter

Notes and leases receivable $ 497 $ 51 $ 24 $ 47 $ 79 $ 32 $ 264

Commercial aerospace financing commitments $ 2,358 $ 435 $ 521 $ 416 $ 354 $ 287 $ 345

Other commercial aerospace commitments 12,063 860 973 738 706 730 8,056

Collaboration partners’ share (4,608) (386) (479) (322) (271) (250) (2,900)

Total commercial commitments $ 9,813 $ 909 $ 1,015 $ 832 $ 789 $ 767 $ 5,501

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 aero-
space commitments” in the table above, are being capitalized as
collaboration intangible assets.

Our financing commitments with customers are contingent upon
maintenance of certain levels of financial condition by the customers.
In addition, we have residual value and other guarantees of $348 million
as of December 31, 2016.

We have long-term aftermarket maintenance contracts with com-
mercial aerospace industry customers for which revenue is recognized
in proportion to actual costs incurred relative to total expected costs
to be incurred over the respective contract periods. Billings, however,
are typically based on factors such as engine flight hours. The timing
differences between the billings and the maintenance costs incurred
generates both unbilled receivables and deferred revenues. Unbilled
receivables under these long-term aftermarket contracts totaled
$1,169 million and $1,091 million at December 31, 2016 and 2015,
respectively, and are included in Accounts receivable and Other assets
in the accompanying Consolidated Balance Sheet. Deferred revenues
totaled $4,288 million and $3,502 million at December 31, 2016 and

2015, respectively, and are included in Accrued liabilities and Other
long-term liabilities in the accompanying Consolidated Balance Sheet.

Reserves related to aerospace notes and leases receivable were
$16 million and $17 million at December 31, 2016 and 2015, respec-
tively. Reserves related to aerospace receivables and other financing
assets were $157 million and $200 million at December 31, 2016 and
2015, respectively. Reserves related to financing commitments and
guarantees were $36 million and $47 million at December 31, 2016
and 2015, respectively.

In addition, in connection with the 2012 Goodrich acquisition, we
recorded assumed liabilities of approximately $2.2 billion related to
customer contractual obligations on certain OEM development
programs where the expected costs exceeded the expected revenue
under contract. These liabilities are being liquidated in accordance with
the underlying economic pattern of obligations, as reflected by the net
cash outflows incurred on the OEM contracts. Total consumption of the
contractual obligations was approximately $213 million and $193 million
in 2016 and 2015, respectively. Expected consumption of the contrac-
tual obligations is as follows: $251 million in 2017, $248 million in 2018,
$222 million in 2019, $149 million in 2020, $83 million in 2021 and
$250 million thereafter.

Notes to Consolidated Financial Statements

50 2016 Annual Report

NOTE 6: INVENTORIES & CONTRACTS IN PROGRESS

(DOLLARS IN MILLIONS) 2016 2015

Raw materials $ 2,040 $ 2,037

Work-in-process 2,787 2,422

Finished goods 3,305 3,183

Contracts in progress 9,395 8,668

17,527 16,310

Less:

Progress payments, secured by lien, on U.S.
Government contracts (130) (239)

Billings on contracts in progress (8,693) (7,936)

$ 8,704 $ 8,135

Raw materials, work-in-process and finished goods are net of valuation
reserves of $877 million and $760 million as of December 31, 2016 and
2015, respectively. Contracts in progress principally relate to elevator
and escalator contracts and include costs of manufactured compo-
nents, accumulated installation costs and estimated earnings on
incomplete contracts.

Inventories also include capitalized contract development costs
related to certain aerospace programs at UTC Aerospace Systems.
As of December 31, 2016 and 2015, these capitalized costs were
$140 million and $152 million, respectively, which are being liquidated
as production units are delivered to the customer. In addition, within
commercial aerospace, inventory costs attributable to new engine offer-
ings are recognized based on the average cost per unit expected over
the life of each contract using the units-of-delivery method of percent-
age of completion accounting. Under this method, costs of initial engine
deliveries in excess of the projected contract per unit average cost are
capitalized, and these capitalized amounts are subsequently expensed
as additional engine deliveries occur for engines with costs below the
projected contract per unit average cost over the life of the contract. As
of December 31, 2016 and 2015, inventories included $233 million and
$13 million, respectively, of such capitalized amounts.

Our sales contracts in many cases are long-term contracts
expected to be performed over periods exceeding twelve months. At
December 31, 2016 and 2015, approximately 68% and 67% respec-
tively, of total inventories and contracts in progress have been acquired
or manufactured under such long-term contracts, with approximately
41% scheduled for delivery within the succeeding twelve months for
both 2016 and 2015.

NOTE 7: FIXED ASSETS

(DOLLARS IN MILLIONS)
Estimated

Useful Lives 2016 2015

Land $ 392 $ 384

Buildings and improvements 12 – 40 years 5,180 5,030

Machinery, tools and equipment 3 – 20 years 12,471 11,717

Other, including assets under construction 1,426 1,363

19,469 18,494

Accumulated depreciation (10,311) (9,762)

$ 9,158 $ 8,732

Depreciation expense was $1,105 million in 2016, $1,068 million in
2015 and $1,043 million in 2014.

NOTE 8: ACCRUED LIABILITIES

(DOLLARS IN MILLIONS) 2016 2015

Advances on sales contracts and service billings $ 4,217 $ 3,952

Accrued salaries, wages and employee benefits 1,608 1,543

Service and warranty accruals 555 546

Litigation and contract matters 488 482

Interest payable 395 391

Income taxes payable 382 2,498

Accrued property, sales and use taxes 289 292

Canadian government settlement — current portion 245 241

Insurance accruals 217 204

Accrued restructuring costs 210 334

Accrued workers compensation 208 212

Other 3,405 3,943

$ 12,219 $ 14,638

Income taxes payable as of December 31, 2015 includes taxes payable
related to the gain on the sale of Sikorsky, which were substantially paid
in 2016.

The Canadian government has historically provided research and
development support under certain Pratt & Whitney Canada programs,
where repayment, if any, is made in the form of royalties, conditioned
upon the achievement of certain financial targets including specific air-
craft engine sales, total aircraft engine sales volume and total year-over-
year sales growth of the entity receiving the government funding. On
December 30, 2015, Pratt & Whitney Canada and federal and provincial
Canadian government agencies entered into amendments of certain
government research and development support arrangements. Under
the amendments, Pratt & Whitney Canada agreed to make four annual
payments of approximately $327 million Canadian (approximately
$245 million at December 2016) each, commencing in the first quarter
of 2016, to fully settle and terminate Pratt & Whitney Canada’s future
contractual obligations to pay royalties to these agencies that had previ-
ously been contingent upon future engine deliveries and Pratt & Whitney
Canada sales; to maintain its commitments to perform certain assem-
bly, test and manufacturing operations in Canada; and to provide
support of innovation and research and development through initiatives
with post-secondary institutions and key industry associations in
Canada over a fourteen year period. As a result of the amendments to
these contractual arrangements, Pratt & Whitney recorded a charge
and related discounted obligation of $867 million in the fourth quarter
of 2015.

The Canadian government settlement included in the table above
represents amounts expected to be paid under this agreement in
2017, with the remaining provision of approximately $477 million and
$626 million included in Other long-term liabilities in the accompanying
Consolidated Balance Sheet as of December 31, 2016 and 2015,
respectively.

Notes to Consolidated Financial Statements

United Technologies Corporation 51

NOTE 9: BORROWINGS AND LINES OF CREDIT

(DOLLARS IN MILLIONS) 2016 2015

Short-term borrowings:

Commercial paper $ 522 $ 727

Other borrowings 79 199

Total short-term borrowings $ 601 $ 926

At December 31, 2016, we had revolving credit agreements with
various banks permitting aggregate borrowings of up to $4.35 billion
pursuant to a $2.20 billion revolving credit agreement and a $2.15 billion
multicurrency revolving credit agreement, both of which expire in
August 2021. As of December 31, 2016, there were no borrowings
under either of these revolving credit agreements. The undrawn portions
of these revolving credit agreements are also available to serve as
backup facilities for the issuance of commercial paper. As of
December 31, 2016, our maximum commercial paper borrowing limit
was $4.35 billion. Commercial paper borrowings at December 31, 2016
reflect approximately e500 million ($522 million) of Euro-denominated
commercial paper. We use our commercial paper borrowings for gen-
eral corporate purposes, including the funding of potential acquisitions
and repurchases of our common stock. The need for commercial paper
borrowings arises when the use of domestic cash for acquisitions, divi-
dends, and share repurchases exceeds the sum of domestic cash
generation and foreign cash repatriated to the U.S.

At December 31, 2016, approximately $1.5 billion was available
under short-term lines of credit with local banks at our various domestic
and international subsidiaries. The weighted-average interest rates
applicable to short-term borrowings and total debt were as follows:

2016 2015

Average interest expense rate — average outstanding
borrowings during the year:

Short-term borrowings 1.3% 0.6%

Total debt 4.1% 4.1%

Average interest expense rate — outstanding borrowings as
of December 31:

Short-term borrowings 0.6% 0.8%

Total debt 3.7% 4.4%

Long-term debt consisted of the following as of December 31:

(DOLLARS IN MILLIONS) 2016 2015

5.375% notes due 20171 $ — $ 1,000

1.800% notes due 20171 1,500 1,500

EURIBOR plus 0.80% floating rate notes due 2018 (e750
million principal value)2 783 —

1.778% junior subordinated notes due 2018 1,100 1,100

6.800% notes due 2018 99 99

LIBOR plus 0.350% floating rate notes due 20193 350 —

1.500% notes due 20191 650 —

6.125% notes due 20191 — 1,250

8.875% notes due 2019 271 271

4.500% notes due 20201 1,250 1,250

4.875% notes due 2020 171 171

1.950% notes due 20211 750 —

1.125% notes due 2021 (e950 million principal value)4 992 —

8.750% notes due 2021 250 250

3.100% notes due 20221 2,300 2,300

1.250% notes due 2023 (e750 million principal value)4 783 817

1.875% notes due 2026 (e500 million principal value)4 522 —

2.650% notes due 20261 1,150 —

7.100% notes due 2027 141 141

6.700% notes due 2028 400 400

7.500% notes due 20291 550 550

5.400% notes due 20351 600 600

6.050% notes due 20361 600 600

6.800% notes due 2036 134 134

7.000% notes due 2038 159 159

6.125% notes due 20381 1,000 1,000

5.700% notes due 20401 1,000 1,000

4.500% notes due 20421 3,500 3,500

4.150% notes due 20451 850 850

3.750% notes due 20461 1,100 —

Project financing obligations 155 191

Other (including capitalized leases) 189 306

Total principal long-term debt 23,299 19,439

Other (fair market value adjustments, discounts and debt
issuance costs) 1 60

Total long-term debt 23,300 19,499

Less: current portion 1,603 179

Long-term debt, net of current portion $ 21,697 $ 19,320

1 We may redeem the above notes, in whole or in part, at our option at any time at a redemp-
tion price in U.S. Dollars equal to the greater of 100% of the principal amount of the notes
to be redeemed or the sum of the present values of the remaining scheduled payments of
principal and interest on the notes to be redeemed, discounted to the redemption date on
a semiannual basis at the adjusted treasury rate plus 10-50 basis points. The redemption
price will also include interest accrued to the date of redemption on the principal balance of
the notes being redeemed.

2 The three-month EURIBOR rate as of December 30, 2016 was approximately -0.319%.
The notes may be redeemed at our option in whole, but not in part, at any time in the event
of certain developments affecting U.S. taxation.

3 The three-month LIBOR rate as of December 30, 2016 was approximately 0.998%.
4 We may redeem these notes, in whole or in part, at our option at any time. If redeemed

earlier than three months prior to the stated maturity date, the redemption price in Euro
shall equal the greater of 100% of the principal amount of the notes to be redeemed or the
sum of the present values of the remaining scheduled payments of principal and interest on
the notes to be redeemed, discounted to the redemption date on an annual basis at a rate
based upon a comparable German federal government bond whose maturity is closest to
the maturity of the notes plus 15-30 basis points. In addition, the notes may be redeemed
at our option in whole, but not in part, at any time in the event of certain developments
affecting U.S. taxation.

Notes to Consolidated Financial Statements

52 2016 Annual Report

On December 1, 2016, we redeemed all outstanding 5.375%
notes due in 2017, representing $1.0 billion in aggregate principal, and
all outstanding 6.125% notes due in 2019, representing $1.25 billion in
aggregate principal, under our redemption notice issued on
November 1, 2016. A combined net extinguishment loss of approxi-
mately $164 million was recognized within Interest expense, net in the
accompanying Consolidated Statement of Operations.

On November 1, 2016, we issued $650 million aggregate principal
amount of 1.500% notes due 2019, $750 million aggregate principal
amount of 1.950% notes due 2021, $1,150 million aggregate principal
amount of 2.650% notes due 2026, $1,100 million aggregate principal
amount of 3.750% notes due 2046 and $350 million aggregate principal
amount of floating rate notes due 2019. We used the net proceeds
received from these issuances to fund the redemption price of the
5.375% notes due 2017 and the 6.125% notes due 2019, to fund the
repayment of commercial paper, and for other general corporate
purposes.

On May 4, 2015, we completed the previously announced optional
remarketing of the 1.550% junior subordinated notes, which were origi-
nally issued as part of our equity units on June 18, 2012. As a result of
the remarketing, these notes were redesignated as our 1.778% junior
subordinated notes due May 4, 2018. The 1.778% junior subordinated
notes are effectively subordinated to existing or future preferred stock
and indebtedness, guarantees and other liabilities, and are not redeem-
able prior to maturity. On August 3, 2015, we received approximately
$1.1 billion from the proceeds of the remarketing, and issued approxi-
mately 11.3 million shares of Common Stock to settle the purchase
obligation of the holders of the equity units under the purchase contract
entered into at the time of the original issuance of the equity units.

On May 1, 2015, we repaid all 4.875% notes due in 2015, repre-
senting $1.2 billion in aggregate principal. On June 1, 2015, we repaid
all floating rate notes due in 2015, representing $500 million in aggre-
gate principal. On May 4, 2015, we issued $850 million aggregate
principal amount of 4.150% notes due May 15, 2045. On May 22, 2015
we issued e750 million aggregate principal amount of 1.250% notes
due May 22, 2023. The net proceeds from these debt issuances were
used primarily to repay the 4.875% notes and floating rate notes that
matured during the quarter ended June 30, 2015.

The project financing obligations included in the table above
are associated with the sale of rights to unbilled revenues related to
the ongoing activity of an entity owned by UTC Climate, Controls &
Security. The percentage of total short-term borrowings and long-term
debt at variable interest rates was 7% and 5% at December 31, 2016
and 2015, respectively. Interest rates on our commercial paper

borrowings are considered variable due to their short-term duration
and high-frequency of turnover.

The average maturity of our long-term debt at December 31, 2016
is approximately ten years. The schedule of principal payments required
on long-term debt for the next five years and thereafter is:

(DOLLARS IN MILLIONS)

2017 $ 1,603

2018 2,012

2019 1,299

2020 1,460

2021 2,034

Thereafter 14,891

Total $ 23,299

On April 29, 2016, we renewed our universal shelf registration
statement filed with the Securities and Exchange Commission (SEC)
for an indeterminate amount of equity and debt securities for future
issuance, subject to our internal limitations on the amount of equity and
debt to be issued under this shelf registration statement.

NOTE 10: EQUITY

On November 11, 2015, we entered into ASR agreements to repurchase
an aggregate of $6.0 billion of our common stock utilizing the net after-
tax proceeds from the sale of Sikorsky. Under the terms of the ASR
agreements, we made the aggregate payments and received an initial
delivery of approximately 51.9 million shares of our common stock,
representing approximately 85% of the shares expected to be repur-
chased. In 2016, the shares associated with the remaining portion
of the aggregate purchase were settled upon final delivery to us of
approximately 10.1 million additional shares of common stock. Includ-
ing the remaining shares settled in 2016, the final price under the
November 11, 2015 ASR was $96.74 per share.

On March 13, 2015, we entered into ASR agreements to repur-
chase an aggregate of $2.65 billion of our common stock. Under the
terms of the ASR agreements, we made the aggregate payments and
received an initial delivery of approximately 18.6 million shares of our
common stock, representing approximately 85% of the shares
expected to be repurchased. On July 31, 2015, the shares associated
with the remaining portion of the aggregate purchase were settled upon
final delivery of approximately 4.2 million additional shares of common
stock. Including the remaining shares settled on July 31, 2015, the final
price under the ASR was $116.11 per share.

As discussed in Note 9, on August 3, 2015, we received approxi-
mately $1.1 billion from the proceeds of the remarketing of our 1.550%
junior subordinated notes, which were originally issued as part of our
equity units on June 18, 2012, and issued approximately 11.3 million
shares of common stock to settle the purchase obligation of the holders
of the equity units under the purchase contract entered into at the time
of the original issuance of the equity units.

Notes to Consolidated Financial Statements

United Technologies Corporation 53

A summary of the changes in each component of accumulated other comprehensive (loss) income, net of tax for the years ended
December 31, 2016 and 2015 is provided below:

(DOLLARS IN MILLIONS)

Foreign
Currency

Translation

Defined Benefit
Pension and

Postretirement
Plans

Unrealized

Gains

(Losses) on

Available-for-
Sale Securities

Unrealized
Hedging
(Losses)

Gains

Accumulated
Other

Comprehensive
(Loss) Income

Balance at December 31, 2014 $ (1,051) $ (5,709) $ 308 $ (209) $ (6,661)

Other comprehensive (loss) income before reclassifications, net (1,429) 32 16 (298) (1,679)

Amounts reclassified, pre-tax 42 867 (54) 234 1,089

Tax (benefit) expense reclassified — (325) 23 (66) (368)

Balance at December 31, 2015 $ (2,438) $ (5,135) $ 293 $ (339) $ (7,619)

Other comprehensive (loss) income before reclassifications, net (1,042) (247) 119 54 (1,116)

Amounts reclassified, pre-tax — 535 (94) 171 612

Tax (benefit) expense reclassified — (198) 35 (48) (211)

Balance at December 31, 2016 $ (3,480) $ (5,045) $ 353 $ (162) $ (8,334)

Amounts reclassified related to our defined benefit pension and
postretirement plans include amortization of prior service costs and
actuarial net losses recognized during each period presented. These
costs are recorded as components of net periodic pension cost for
each period presented (see Note 12 for additional details).

Changes in noncontrolling interests that do not result in a change
of control, and where there is a difference between fair value and carry-
ing value, are accounted for as equity transactions. The pro-forma
(decrease) increase in Net income attributable to common shareowners
would have been $(8) million, $12 million and $(71) million for the years
ended December 31, 2016, 2015 and 2014, respectively, had they
been recorded through net income.

NOTE 11: INCOME TAXES

Income Before Income Taxes. The sources of income from continu-
ing operations before income taxes are:

(DOLLARS IN MILLIONS) 2016 2015 2014

United States $ 2,534 $ 2,782 $ 4,165

Foreign 4,599 3,685 4,547

$ 7,133 $ 6,467 $ 8,712

With few exceptions, U.S. income taxes have not been provided
on undistributed earnings of UTC’s international subsidiaries. These
earnings relate to ongoing operations and were approximately
$31 billion as of December 31, 2016. It is not practicable to estimate
the amount of tax that might be payable. We intend to reinvest these
earnings permanently outside the U.S. or to repatriate the earnings only
when it is tax effective to do so.

Provision for Income Taxes. The income tax expense (benefit)
for the years ended December 31, 2016, 2015 and 2014 consisted of
the following components:

(DOLLARS IN MILLIONS) 2016 2015 2014

Current:

United States:

Federal $ 30 $ 328 $ 319

State (21) (37) 38

Foreign 1,290 1,158 1,484

1,299 1,449 1,841

Future:

United States:

Federal 318 712 421

State 134 109 (23)

Foreign (54) (159) 5

398 662 403

Income tax expense $ 1,697 $ 2,111 $ 2,244

Attributable to items credited (charged)
to equity $ (299) $ (114) $ 1,535

Reconciliation of Effective Income Tax Rate. Differences
between effective income tax rates and the statutory U.S. federal
income tax rate are as follows:

2016 2015 2014

Statutory U.S. federal income tax rate 35.0 % 35.0 % 35.0 %

Tax on international activities (8.1)% (2.0)% (3.3)%

Tax audit settlements (2.9)% — (4.3)%

Other (0.2)% (0.4)% (1.6)%

Effective income tax rate 23.8 % 32.6 % 25.8 %

Notes to Consolidated Financial Statements

54 2016 Annual Report

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 as well as the absence of 2015 items
described below. 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.

The 2015 effective tax rate reflects an unfavorable tax adjustment
of $274 million related to the repatriation of certain foreign earnings, the
majority of which were 2015 current year earnings, and a favorable
adjustment of approximately $45 million related to a non-taxable gain
recorded in the first quarter. France, the U.K. and certain U.S. states
enacted tax law changes in the fourth quarter which resulted in a net
incremental cost of approximately $68 million in 2015.

The 2014 effective tax rate reflects favorable tax adjustments of
$371 million related to the conclusion of the examination of UTC’s
2009–2010 tax years, the resolution of disputed tax matters with the
Appeals Division of the IRS for UTC’s 2006–2008 tax years, the conclu-
sion of the State of Connecticut’s review of UTC’s 2010–2012 tax years
and the conclusion of the Canada Revenue Agency’s examination of the
company’s research credits claimed in 2006–2012. Also included was a
favorable tax adjustment of $175 million associated with management’s
decision to repatriate additional high taxed dividends from the current
year. These were partially offset by an unfavorable tax adjustment of
approximately $265 million related to the 1998 reorganization of the
corporate structure of Otis operations in Germany, a matter which is
currently in litigation. This is reported in the table above in tax on inter-
national activities.

Deferred Tax Assets and Liabilities. Future income taxes
represent the tax effects of transactions which are reported in different
periods for tax and financial reporting purposes. These amounts consist
of the tax effects of temporary differences between the tax and financial
reporting balance sheets and tax carryforwards. Future income tax
benefits and payables within the same tax paying component of a
particular jurisdiction are offset for presentation in the Consolidated
Balance Sheet.

The tax effects of temporary differences and tax carryforwards
which gave rise to future income tax benefits and payables at
December 31, 2016 and 2015 are as follows:

(DOLLARS IN MILLIONS) 2016 2015

Future income tax benefits:

Insurance and employee benefits $ 2,382 $ 2,650

Other asset basis differences 1,098 1,199

Other liability basis differences 1,403 1,543

Tax loss carryforwards 494 528

Tax credit carryforwards 873 872

Valuation allowances (545) (591)

$ 5,705 $ 6,201

Future income taxes payable:

Other asset basis differences $ 5,376 $ 5,324

Other items, net 364 531

$ 5,740 $ 5,855

Valuation allowances have been established primarily for tax credit
carryforwards, tax loss carryforwards, and certain foreign temporary
differences to reduce the future income tax benefits to expected
realizable amounts.

Tax Credit and Loss Carryforwards. At December 31, 2016,
tax credit carryforwards, principally state and foreign, and tax loss
carryforwards, principally state and foreign, were as follows:

(DOLLARS IN MILLIONS)
Tax Credit

Carryforwards

Tax Loss

Carryforwards

Expiration period:

2017-2021 $ 12 $ 317

2022-2026 13 187

2027-2036 219 363

Indefinite 629 1,780

Total $ 873 $ 2,647

Unrecognized Tax Benefits. At December 31, 2016, we had
gross tax-effected unrecognized tax benefits of $1,086 million, all of
which, if recognized, would impact the effective tax rate. A reconciliation
of the beginning and ending amounts of unrecognized tax benefits and
interest expense related to unrecognized tax benefits for the years
ended December 31, 2016, 2015 and 2014 is as follows:

(DOLLARS IN MILLIONS) 2016 2015 2014

Balance at January 1 $ 1,169 $ 1,089 $ 1,223

Additions for tax positions related to the
current year 69 206 164

Additions for tax positions of prior years 167 99 435

Reductions for tax positions of prior years (61) (101) (47)

Settlements (258) (124) (686)

Balance at December 31 $ 1,086 $ 1,169 $ 1,089

Gross interest expense related to
unrecognized tax benefits $ 41 $ 39 $ 180

Total accrued interest balance at
December 31 $ 185 $ 176 $ 292

Notes to Consolidated Financial Statements

United Technologies Corporation 55

Included in the balance at December 31, 2014 is $87 million of tax
positions whose tax characterization is highly certain but for which there
is uncertainty about the timing of tax return inclusion. Because of the
impact of deferred tax accounting, other than interest and penalties, the
timing would not impact the annual effective tax rate but could acceler-
ate the payment of cash to the taxing authority to an earlier period.

We conduct business globally and, as a result, UTC or one or more
of our subsidiaries files income tax returns in the U.S. federal jurisdiction
and various state and foreign jurisdictions. In the normal course of busi-
ness we are subject to examination by taxing authorities throughout the
world, including such major jurisdictions as Australia, Belgium, Brazil,
Canada, China, France, Germany, Hong Kong, India, Italy, Japan,
Mexico, Netherlands, Poland, Singapore, South Korea, Spain,
Switzerland, and the United Kingdom and the United States. With few
exceptions, we are no longer subject to U.S. federal, state and local,
or non-U.S. income tax examinations for years before 2005.

During the quarter ended December 31, 2016, the Company
recognized a noncash gain of approximately $172 million, including a
pre-tax interest adjustment of $22 million, as a result of the closure of
the audit by the Examination Division of the Internal Revenue Service
(IRS) of UTC tax years 2011 and 2012. The IRS has notified the
Company of its intention to begin an audit of tax year 2014 during the
first quarter of 2017.

During the quarter ended September 30, 2016, the Company rec-
ognized a noncash gain of approximately $58 million, primarily tax, as a
result of the closure of the audit by the Examination Division of the IRS
of Goodrich Corporation tax years 2011 and 2012 through the date of
acquisition by UTC.

During 2014, the Company resolved various tax audit, appeal and
litigation activity with the IRS, Connecticut Department of Revenue,
and French and Canadian taxing authorities resulting in approximately
$508 million of primarily noncash tax gains, including pre-tax interest
adjustments of $132 million. During 2014, the Company also reached
an agreement with a state taxing authority for the monetization of
tax credits resulting in a gain of approximately $220 million through
Other Income.

It is reasonably possible that over the next 12 months the amount
of unrecognized tax benefits may change within a range of a net
increase of $50 million to a net decrease of $495 million as a result of
additional worldwide uncertain tax positions, the revaluation of current
uncertain tax positions arising from developments in examinations, in
appeals, or in the courts, or the closure of tax statutes.

See Note 18 “Contingent Liabilities” for discussion regarding
uncertain tax positions, included in the above range, related to pending
litigation with respect to certain deductions claimed in Germany.

NOTE 12: EMPLOYEE BENEFIT PLANS

We sponsor numerous domestic and foreign employee benefit plans,
which are discussed below.

Employee Savings Plans. We sponsor various employee savings
plans. Our contributions to employer sponsored defined contribution
plans were $318 million, $356 million and $330 million for 2016, 2015
and 2014, respectively.

Our non-union domestic employee savings plan uses an Employee
Stock Ownership Plan (ESOP) for employer matching contributions.
External borrowings were used by the ESOP to fund a portion of its
purchase of ESOP stock from us. The external borrowings have been
extinguished and only re-amortized loans remain between UTC and the
ESOP Trust. As ESOP debt service payments are made, common stock
is released from an unreleased shares account. ESOP debt may be
prepaid or re-amortized to either increase or decrease the number of
shares released so that the value of released shares equals the value of
plan benefit. We may also, at our option, contribute additional common
stock or cash to the ESOP.

Shares of common stock are allocated to employees’ ESOP
accounts at fair value on the date earned. Cash dividends on common
stock held by the ESOP are used for debt service payments. Participants
may choose to have their ESOP dividends reinvested or distributed in
cash. Common stock allocated to ESOP participants is included in the
average number of common shares outstanding for both basic and
diluted earnings per share. At December 31, 2016, 27.8 million com-
mon shares had been allocated to employees, leaving 11.7 million
unallocated common shares in the ESOP Trust, with an approximate
fair value of $1.3 billion.

Pension Plans. We sponsor both funded and unfunded domestic
and foreign defined benefit pension plans that cover a large number of
our employees. Our largest plans are generally closed to new partici-
pants. Our plans use a December 31 measurement date consistent
with our fiscal year.

Notes to Consolidated Financial Statements

56 2016 Annual Report

(DOLLARS IN MILLIONS) 2016 2015

Change in Benefit Obligation:

Beginning balance $ 35,428 $ 37,853

Service cost 383 493

Interest cost 1,183 1,399

Actuarial loss (gain) 1,831 (1,716)

Total benefits paid (1,660) (1,796)

Net settlement, curtailment and special termination benefits (1,566) (55)

Plan amendments 17 39

Other (693) (789)

Ending balance $ 34,923 $ 35,428

Change in Plan Assets:

Beginning balance $ 31,011 $ 32,738

Actual return on plan assets 3,202 265

Employer contributions 384 520

Benefits paid (1,660) (1,796)

Settlements (1,632) (59)

Other (750) (657)

Ending balance $ 30,555 $ 31,011

Funded Status:

Fair value of plan assets $ 30,555 $ 31,011

Benefit obligations (34,923) (35,428)

Funded status of plan $ (4,368) $ (4,417)

Amounts Recognized in the Consolidated Balance
Sheet Consist of:

Noncurrent assets $ 451 $ 742

Current liability (72) (71)

Noncurrent liability (4,747) (5,088)

Net amount recognized $ (4,368) $ (4,417)

Amounts Recognized in Accumulated Other
Comprehensive Loss Consist of:

Net actuarial loss $ 7,941 $ 8,224

Prior service credit (6) (57)

Net amount recognized $ 7,935 $ 8,167

At the end of fiscal 2015, we changed the approach we use to
estimate the service and interest components of net periodic pension
cost for our significant pension plans. This change compared to the pre-
vious approach resulted in a net decrease in the service and interest
components of our annual net periodic pension cost of approximately
$215 million for 2016. Historically, we estimated the service and interest
cost components utilizing a single-weighted average discount rate
derived from the yield curve used to measure the benefit obligation at
the beginning of the period. We have elected to utilize a full yield curve
approach in the estimation of these components by applying the spe-
cific spot rates along the yield curve used in determination of the benefit
obligation to the relevant projected cash flows. We have made this
change to provide a more precise measurement of service and interest
costs by improving the correlation between projected benefit cash flows
to the corresponding spot yield curve rates. This change does not
materially affect the measurement of our total benefit obligations.

As part of our long-term strategy to de-risk our defined benefit
pension plans, we entered into an agreement to purchase a group

annuity contract to transfer approximately $768 million of our outstand-
ing pension benefit obligations related to certain U.S. retirees or
beneficiaries, which was finalized on October 12, 2016. We also offered
certain former U.S. employees or beneficiaries (generally all former
U.S. participants not yet in receipt of their vested pension benefits) an
option to take a one-time lump-sum distribution in lieu of future monthly
pension payments, which reduced our pension benefit obligations by
approximately $935 million. These transactions reduced the assets of
our defined benefit pension plans by approximately $1.5 billion. As a
result of these transactions, we recognized a one-time pre-tax pension
settlement charge of approximately $423 million in the fourth quarter
of 2016.

The amounts included in “Other” in the above table primarily reflect
the impact of foreign exchange translation, primarily for plans in the U.K.
and Canada.

As approved in 2016, effective January 1, 2017, a voluntary lump-
sum option is available for the frozen final average earnings benefits of
certain U.S. salaried employees upon termination of employment after
2016. This option provides participants with the choice of electing to
receive a lump-sum payment in lieu of receiving a future monthly pen-
sion benefit. This plan change reduced the projected benefit obligation
by $170 million.

In 2014, we offered a voluntary lump-sum pension payout program
to certain eligible terminated vested participants (generally any termi-
nated vested participant with a lump-sum value of $50,000 or less) that
settled our obligation to those participants who accepted the offer.
The program provided participants with a one-time choice of electing
to receive a lump-sum settlement in lieu of receiving a future monthly
pension benefit. Payments to participants who accepted the offer
began in 2014 and were completed in 2015. As part of this voluntary
lump-sum program, the Company settled $147 million and $311 million
of its projected benefit obligation in 2015 and 2014, respectively.

Qualified domestic pension plan benefits comprise approximately
75% of the projected benefit obligation. Benefits for union employees
are generally based on a stated amount for each year of service. For
non-union employees, benefits for service up to December 31, 2014 are
generally based on an employee’s years of service and compensation
through December 31, 2014. Benefits for service after December 31,
2014 are based on 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 ben-
efit accruals determined under this formula. Certain foreign plans, which
comprise approximately 24% of the projected benefit obligation, are
considered defined benefit plans for accounting purposes. Nonqualified
domestic pension plans provide supplementary retirement benefits to
certain employees and are not a material component of the projected
benefit obligation.

We made $100 million of cash contributions to our domestic
defined benefit pension plans and made $203 million of cash contribu-
tions to our foreign defined benefit pension plans in 2016. In 2015, we
contributed $250 million in UTC common stock to our domestic defined

Notes to Consolidated Financial Statements

United Technologies Corporation 57

benefit pension plans and made $147 million of cash contributions to
our foreign defined benefit pension plans.

Information for pension plans with accumulated benefit obligations
in excess of plan assets:

(DOLLARS IN MILLIONS) 2016 2015

Projected benefit obligation $ 32,732 $ 30,915

Accumulated benefit obligation 32,095 30,362

Fair value of plan assets 27,943 25,827

The accumulated benefit obligation for all defined benefit pension
plans was $34.2 billion and $34.6 billion at December 31, 2016 and
2015, respectively.

The components of the net periodic pension cost are as follows:

(DOLLARS IN MILLIONS) 2016 2015 2014

Pension Benefits:

Service cost $ 383 $ 493 $ 487

Interest cost 1,183 1,399 1,517

Expected return on plan assets (2,202) (2,264) (2,215)

Amortization of prior service credit (33) (11) (8)

Recognized actuarial net loss 572 882 429

Net settlement, curtailment and special
termination benefits loss 498 150 13

Net periodic pension cost — employer $ 401 $ 649 $ 223

Net settlement and curtailment losses for pension benefits includes
curtailment losses of approximately $109 million and $1 million related
to, and recorded in, discontinued operations for the years ended
December 31, 2015 and 2014, respectively. In addition, total net peri-
odic pension cost includes approximately $98 million and $96 million
related to, and recorded in, discontinued operations for the years ended
December 31, 2015 and 2014, respectively.

Other changes in plan assets and benefit obligations recognized in
other comprehensive loss in 2016 are as follows:

(DOLLARS IN MILLIONS)

Current year actuarial loss $ 831

Amortization of actuarial loss (572)

Current year prior service cost 17

Amortization of prior service credit 33

Net settlement and curtailment loss (436)

Other (105)

Total recognized in other comprehensive loss $ (232)

Net recognized in net periodic pension cost and other
comprehensive loss $ 169

The estimated amount that will be amortized from accumulated
other comprehensive loss into net periodic pension cost in 2017 is
as follows:

(DOLLARS IN MILLIONS)

Net actuarial loss $ 571

Prior service credit (36)

$ 535

Major assumptions used in determining the benefit obligation and
net cost for pension plans are presented in the following table as
weighted-averages:

Benefit Obligation Net Cost

2016 2015 2016 2015 2014

Discount rate

PBO 3.8% 4.1% 4.1% 3.8% 4.7%

Interest cost1 — — 3.4% — —

Service cost1 — — 3.8% — —

Salary scale 4.1% 4.2% 4.2% 4.2% 4.2%

Expected return on plan assets — — 7.3% 7.6% 7.6%

Note 1 The 2016 discount rates used to measure the service cost and interest cost applies to
our significant plans. The PBO discount rate is used for the service cost and interest
cost measurements for non-significant plans.

In determining the expected return on plan assets, we consider the
relative weighting of plan assets, the historical performance of total plan
assets and individual asset classes, and economic and other indicators
of future performance. In addition, we may consult with and consider
the opinions of financial and other professionals in developing appropri-
ate capital market assumptions. Return projections are also validated
using a simulation model that incorporates yield curves, credit spreads
and risk premiums to project long-term prospective returns.

The plans’ investment management objectives include providing
the liquidity and asset levels needed to meet current and future benefit
payments while maintaining a prudent degree of portfolio diversification
considering interest rate risk and market volatility. Globally, investment
strategies target a mix of 55% to 65% of growth seeking assets and
35% to 45% income generating and hedging assets using a wide diver-
sification of asset types, fund strategies and investment managers. The
growth seeking allocation consists of global public equities in developed
and emerging countries, private equity, real estate and balanced market
risk strategies. Within public equities, approximately 11% of the total
investment portfolio is an enhanced equity strategy that invests in pub-
licly traded equity and fixed income securities, derivatives and foreign
currency. Investments in private equity are primarily via limited partner-
ship interests in buy-out strategies with smaller allocations to distressed
debt funds. The real estate strategy is principally concentrated in
directly held U.S. core investments with some smaller investments in
international, value-added and opportunistic strategies. Within the
income generating assets, the fixed income portfolio consists of mainly
government and broadly diversified high quality corporate bonds.

The plans have continued their pension risk management tech-
niques designed to reduce the plans’ interest rate risk. More specifically,
the plans have incorporated liability hedging programs that include
the adoption of a risk reduction objective as part of the long-term
investment strategy. Under this objective the interest rate hedge is
dynamically increased as funded status improves. The hedging pro-
grams incorporate a range of assets and investment tools, each with
ranging interest rate sensitivity. The investment portfolios are currently
hedging approximately 35% to 45% of the interest rate sensitivity of
the pension plan liabilities.

Notes to Consolidated Financial Statements

58 2016 Annual Report

The fair values of pension plan assets at December 31, 2016 and 2015 by asset category are as follows:

(DOLLARS IN MILLIONS)

Quoted Prices in
Active Markets

For Identical Assets
(Level 1)

Significant
Observable Inputs

(Level 2)

Significant
Unobservable

Inputs
(Level 3)

Not Subject to
Leveling Total

Asset Category:

Public Equities

Global Equities $ 4,682 $ 3 $ — $ — $ 4,685

Global Equity Commingled Funds 1 — 367 — — 367

Enhanced Global Equities 2 168 1,494 — — 1,662

Global Equity Funds at net asset value 8 — — — 7,090 7,090

Private Equities 3,8 — — 122 1,239 1,361

Fixed Income Securities

Governments 260 54 — — 314

Corporate Bonds — 7,637 — — 7,637

Fixed Income Securities 8 — — — 2,788 2,788

Real Estate 4,8 — 17 1,285 513 1,815

Other 5,8 — 289 — 1,819 2,108

Cash & Cash Equivalents 6,8 100 75 — 121 296

Subtotal $ 5,210 $ 9,936 $ 1,407 $ 13,570 30,123

Other Assets & Liabilities 7 432

Total at December 31, 2016 $ 30,555

Public Equities

Global Equities $ 5,884 $ — $ — $ — $ 5,884

Global Equity Commingled Funds 1 — 779 — — 779

Enhanced Global Equities 2 237 616 — — 853

Global Equity Funds at net asset value 8 — — — 6,475 6,475

Private Equities 3,8 — — 182 1,335 1,517

Fixed Income Securities

Governments 365 53 — — 418

Corporate Bonds — 7,013 — — 7,013

Fixed Income Securities 8 — — — 2,992 2,992

Real Estate 4,8 — 10 1,165 1,079 2,254

Other 5,8 — 334 — 1,706 2,040

Cash & Cash Equivalents 6,8 — 159 — 334 493

Subtotal $ 6,486 $ 8,964 $ 1,347 $ 13,921 30,718

Other Assets & Liabilities 7 293

Total at December 31, 2015 $ 31,011

Note 1 Represents commingled funds that invest primarily in common stocks.

Note 2 Represents enhanced equity separate account and commingled fund portfolios. A portion of the portfolio may include long-short market neutral
and relative value strategies that invest in publicly traded, equity and fixed income securities, as well as derivatives of equity and fixed income
securities and foreign currency.

Note 3 Represents limited partner investments with general partners that primarily invest in debt and equity.

Note 4 Represents investments in real estate including commingled funds and directly held properties.

Note 5 Represents insurance contracts and global balanced risk commingled funds consisting mainly of equity, bonds and some commodities.

Note 6 Represents short-term commercial paper, bonds and other cash or cash-like instruments.

Note 7 Represents trust receivables and payables that are not leveled.

Note 8 In accordance with ASU 2015-07, Fair Value Measurement (Topic 820), certain investments that are measured at fair value using the net asset
value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this
table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total pension benefits plan assets.

Notes to Consolidated Financial Statements

United Technologies Corporation 59

Derivatives in the plan are primarily used to manage risk and gain
asset class exposure while still maintaining liquidity. Derivative instru-
ments mainly consist of equity futures, interest rate futures, interest rate
swaps and currency forward contracts.

Our common stock represents approximately 1% and 3% of total
plan assets at December 31, 2016 and 2015, respectively. We review
our assets at least quarterly to ensure we are within the targeted asset
allocation ranges and, if necessary, asset balances are adjusted back
within target allocations. We employ a broadly diversified investment
manager structure that includes diversification by active and passive
management, style, capitalization, country, sector, industry and number
of investment managers.

The fair value measurement of plan assets using significant unob-
servable inputs (Level 3) changed due to the following:

(DOLLARS IN MILLIONS)
Private

Equities
Real

Estate Total

Balance, December 31, 2014 $ 145 $ 975 $ 1,120

Realized gains (losses) 3 (4) (1)

Unrealized gains relating to instruments still
held in the reporting period 42 105 147

Purchases, sales, and settlements, net (8) 89 81

Balance, December 31, 2015 182 1,165 1,347

Realized gains 46 19 65

Unrealized gains relating to instruments still
held in the reporting period 5 18 23

Purchases, sales, and settlements, net (111) 83 (28)

Balance, December 31, 2016 $ 122 $ 1,285 $ 1,407

Quoted market prices are used to value investments when avail-
able. Investments in securities traded on exchanges, including listed
futures and options, are valued at the last reported sale prices on the
last business day of the year or, if not available, the last reported bid
prices. Fixed income securities are primarily measured using a market
approach pricing methodology, where observable prices are obtained
by market transactions involving identical or comparable securities of
issuers with similar credit ratings. Mortgages have been valued on the
basis of their future principal and interest payments discounted at pre-
vailing interest rates for similar investments. Investment contracts are
valued at fair value by discounting the related cash flows based on cur-
rent yields of similar instruments with comparable durations. Real estate
investments are valued on a quarterly basis using discounted cash flow
models which consider long-term lease estimates, future rental receipts
and estimated residual values. Valuation estimates are supplemented
by third-party appraisals on an annual basis.

Private equity limited partnerships are valued quarterly using dis-
counted cash flows, earnings multiples and market multiples. Valuation
adjustments reflect changes in operating results, financial condition,
or prospects of the applicable portfolio company. Over-the-counter
securities and government obligations are valued at the bid prices or
the average of the bid and ask prices on the last business day of the
year from published sources or, if not available, from other sources con-
sidered reliable, generally broker quotes. Temporary cash investments
are stated at cost, which approximates fair value.

Although we are not required to make additional contributions to
our domestic defined benefit pension plans through the end of 2021,
we may elect to make discretionary contributions in 2017. We expect
to make total contributions of approximately $300 million to our global
defined benefit pension plans in 2017, including discretionary contribu-
tions of approximately $150 million to our domestic defined benefit
pension plans. Contributions do not reflect benefits to be paid directly
from corporate assets.

Benefit payments, including amounts to be paid from corporate
assets, and reflecting expected future service, as appropriate, are
expected to be paid as follows: $1,930 million in 2017, $1,847 million
in 2018, $1,896 million in 2019, $1,948 million in 2020, $1,994 million
in 2021, and $10,545 million from 2022 through 2026.

Postretirement Benefit Plans. We sponsor a number of postre-
tirement benefit plans that provide health and life benefits to eligible
retirees. Such benefits are provided primarily from domestic plans,
which comprise approximately 87% of the benefit obligation. The
postretirement plans are unfunded.

(DOLLARS IN MILLIONS) 2016 2015
Change in Benefit Obligation:

Beginning balance $ 890 $ 952

Service cost 3 3

Interest cost 34 34

Actuarial gain (48) —

Total benefits paid (97) (104)

Other 23 5

Ending balance $ 805 $ 890

Change in Plan Assets:

Beginning balance $ — $ —

Employer contributions 80 84

Benefits paid (97) (104)

Other 17 20

Ending balance $ — $ —

Funded Status:

Fair value of plan assets $ — $ —

Benefit obligations (805) (890)

Funded status of plan $ (805) $ (890)

Amounts Recognized in the Consolidated Balance
Sheet Consist of:

Current liability $ (78) $ (84)

Noncurrent liability (727) (806)

Net amount recognized $ (805) $ (890)

Amounts Recognized in Accumulated Other
Comprehensive Loss Consist of:

Net actuarial gain $ (152) $ (109)

Prior service credit (5) (1)

Net amount recognized $ (157) $ (110)

Notes to Consolidated Financial Statements

60 2016 Annual Report

The components of net periodic benefit cost are as follows:

(DOLLARS IN MILLIONS) 2016 2015 2014

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