United Technologies 2008 Annual Report Download - page 44

On a global basis, Otis’ new equipment orders were up 8% and Carrier’s commercial heating,
ventilating, and air conditioning (HVAC) new equipment orders grew approximately 9% in
2008, as compared with 2007. These growth rates reflect increases for most of the year partially
offset by declines in the fourth quarter. Although commercial HVAC revenue grew in 2008,
commercial refrigeration revenues declined as a result of the current economic conditions. As
with the prior year, the weakness in the U.S. residential market continued to affect Carrier’s
North American residential business where unit shipments declined 7%, however the broader
market declined further. UTC Fire & Security experienced 3% organic revenue growth in 2008
with strength in the fire safety businesses being partially offset by the adverse impact of the U.S.
and international banking industry downturn on its electronic security businesses. The growth
in the fire safety businesses resulted largely from increased activity in the oil & gas and marine
industries as well as growth in Asia.
Although the price of oil has retreated significantly from record prices experienced early in
2008, the commercial aerospace industry continues to engage in capacity reductions and airline
carrier consolidations to help offset the significant decline in passenger and cargo traffic levels
experienced across the industry in 2008. Worldwide revenue passenger miles (RPMs) were
essentially flat in 2008 as compared to 2007, and lower than initially expected as a result of the
worldwide economic slowdown. Consistent with expectations, we saw a leveling off of Pratt &
Whitney’s commercial aerospace aftermarket business in 2008 compared to 2007, which
reflected sales growth in the first half of the year offset by declines in the second half of 2008.
However, also consistent with expectations, we experienced growth in the commercial
aerospace original equipment manufacturer (OEM) markets at both Pratt & Whitney and
Hamilton Sundstrand, as well as continued strong demand for military helicopters at Sikorsky.
With the increasingly tough economic environment, we expect revenues to decline in 2009 to
approximately $57 billion reflecting lower organic growth levels and a significant unfavorable
impact from foreign currency translation due to the recent strengthening of the U.S. dollar as
compared with currencies such as the Euro. Although the disruption in the financial markets
did not have a significant impact on our results in 2008, it continues to present a risk as we
enter 2009. In addition to managing any potential impact to our financial results, we continue
to monitor and address the potential impact to our customers and suppliers, which to date has
been limited.
The increase in revenue in 2008 was accompanied by improvements in operational efficiencies,
including savings from previously initiated restructuring actions, the benefit of cost
containment efforts and the favorable impact of foreign currency translation. These operating
profit improvements were partially offset by the adverse impact of higher restructuring
charges, research and development spending and commodity costs, to generate a net 8%
increase in operating profit in 2008, as compared with 2007. Although commodity prices
declined in the second half of 2008, we still experienced overall cost increases for the year, in
part due to certain existing long-term supplier agreements. After partial recovery through
pricing, the net adverse impact to earnings of higher commodity costs in 2008 was
approximately $115 million. As a result of the recent declines in commodity pricing, we are
now expecting the lower costs to provide a benefit to operating results in 2009 of about $150
million.
To help generate future margin growth, and in anticipation of a difficult economic
environment in 2009, we invested $357 million in restructuring actions across our businesses
in 2008. While restructuring efforts have been undertaken across the company, the majority of
the charges were incurred at Carrier and Pratt & Whitney as we focus on lowering our overall
cost structure.
In 2008, operating profit benefited from various gains related to business divestiture activity
during the year ($129 million), the sale of marketable securities ($38 million) and a favorable
pre-tax interest adjustment ($12 million) as discussed below in “Results of Operations.”
Operating profit for 2007 was adversely impacted by a civil fine, net of existing reserves, of
$216 million levied against Otis. The European Commission’s Competition Directorate
assessed a civil fine of approximately $300 million (EU Fine) against Otis, its relevant local
entities and UTC, as a result of certain Otis subsidiaries in Europe violating European Union
competition rules. Gains from the sale of marketable securities and certain non-core assets and
lower restructuring charges in 2007 helped to offset the adverse impact of this fine, as discussed
further in “Results of Operations.”
In addition to the earnings generated from organic revenue growth, including the growth from
new product development and product improvements, our earnings growth strategy also
contemplates investments in acquisitions. We invested $1.4 billion and $2.3 billion, including
debt assumed of $196 million and $300 million, in the acquisition of businesses across all of
our operations in 2008 and 2007, respectively. Acquisitions in 2008 consisted principally of a
number of small acquisitions in our commercial businesses. Acquisitions in 2007 consisted
principally of investments in the UTC Fire & Security segment including the acquisitions of
Initial Electronic Security Group (IESG) for approximately $1.2 billion and Marioff
Corporation, Oy (Marioff) for approximately $348 million. The remaining investments in
2007 included a number of smaller acquisitions across our businesses.
For additional discussion of acquisitions and restructuring, see “Liquidity and Financing
Commitments,” “Restructuring and Other Costs” and Notes 2 and 11 to the Consolidated
Financial Statements.
42 United Technologies Corporation