United Technologies 2008 Annual Report Download - page 46

of higher commodity costs, net of pricing (approximately 20 basis points) and increased
restructuring costs (approximately 10 basis points) contributing to the remainder of the year-
over-year change.
In 2007, the gross margin decline as a percentage of sales compared with 2006, was primarily
the result of the adverse impact of the EU Fine, net of existing reserves, of approximately $216
million (approximately 40 basis points), the absence of an approximately $80 million benefit
(approximately 20 basis points) from a reserve reversal associated with the 2006 settlement of a
Department of Defense collaboration accounting claim against Pratt & Whitney, and higher
commodity costs in 2007. After partial recovery through pricing, the net adverse impact to
earnings of higher commodity costs in 2007 was approximately $290 million (approximately
50 basis points). All of these adverse impacts were partially offset by lower restructuring
charges in 2007 (approximately 20 basis points), higher volumes, the impact of acquisitions,
savings from previously initiated restructuring actions, net operational efficiencies and the
favorability of foreign exchange translation.
Research and Development
(in millions of dollars) 2008 2007 2006
Company-funded $1,771 $1,678 $1,529
Percentage of sales 3.1% 3.1% 3.2%
Customer-funded $2,008 $1,872 $1,621
Percentage of sales 3.5% 3.5% 3.4%
The increase in company-funded research and development in 2008, compared with 2007, was
led by continued investments in Pratt & Whitney’s next generation product family including
the PurePower™PW1000G (PurePower) engine, which features Geared Turbofan (GTF)
technology. General increases across the businesses comprised the remainder of the year-over-
year increase. The approximately 10% increase in company-funded research and development
in 2007, as compared with 2006, was driven largely by continued efforts on the Boeing 787
program at Hamilton Sundstrand (4%) and Pratt & Whitney’s next generation product family
(3%). Increases in company-funded research and development costs at Hamilton Sundstrand
on the Boeing 787 program in 2007 were primarily the result of 787 aircraft program delays.
Company-funded research and development spending is subject to the variable nature of
program development schedules.
The increase in customer-funded research and development spending in 2008, as compared
with 2007, relates largely to increased engineering effort in the J-2X propulsion program at
Pratt & Whitney Rocketdyne as well as various space programs at Hamilton Sundstrand, while
development spending on the Joint Strike Fighter program across the company decreased.
The 2007 increase in customer-funded research and development, as compared with 2006, is
primarily attributable to increased spending at Sikorsky on the CH-53K program.
Company-funded research and development spending for 2009 is expected to be consistent
with 2008 spending levels.
Selling, General and Administrative
(in millions of dollars) 2008 2007 2006
Selling, general and administrative $ 6,724 $ 6,109 $ 5,462
Percentage of sales 11.6% 11.3% 11.6%
Increases in selling, general and administrative expenses in both 2008 and 2007 were due
primarily to general increases across the businesses in support of higher volumes and the
adverse impact of foreign currency translation. The increase in 2008 was further impacted by
the effect of increased restructuring charges undertaken in anticipation of a tougher economic
climate in 2009, resulting in a 30 basis point increase in selling, general and administrative
expenses as a percentage of sales from 2007 to 2008. Strong control of spending in 2007,
coupled with the significant growth in revenues, led to a 30 basis point reduction in selling,
general and administrative expenses as a percentage of sales from 2006 to 2007.
Interest Expense
(in millions of dollars) 2008 2007 2006
Interest expense $ 689 $ 666 $ 606
Average interest rate during the year
Short-term borrowings 5.6% 6.2% 6.2%
Total debt 5.9% 6.2% 6.4%
Interest expense increased in 2008, as compared with 2007, primarily as a result of the
issuances of $1.0 billion of long-term debt in December 2007, bearing interest at 5.375%, and
$1.0 billion of long-term debt in May 2008, bearing interest at 6.125%. This increase was
partially offset by lower interest charges related to our deferred compensation plan and lower
interest accrued on unrecognized tax benefits. The issuance of $1.25 billion of long-term debt
in December 2008 bearing interest at 6.125% did not have a significant impact to interest
expense in 2008. Interest expense increased in 2007 primarily as a result of the full year impact
of the issuance of $1.1 billion of long-term debt in May 2006, an increase in short-term
borrowings to fund acquisition activity, and interest accrued on unrecognized tax benefits.
44 United Technologies Corporation