United Technologies 2011 Annual Report Download - page 31

MANAGEMENT’S DISCUSSION AND ANALYSIS
currencies. As noted above, we generated approximately 61%
of our sales from outside the U.S., including U.S. export sales,
in 2011. Exchange rates therefore could have a significant
impact on sales and operating profits as foreign currency
results are translated into U.S. Dollars for financial reporting.
In line with the slowing world economy in 2011, our short
cycle shipments and order rates were mixed across our
businesses. In 2011, as compared with 2010, commercial
aerospace spares orders at Pratt & Whitney increased 8%
while Hamilton Sundstrand’s commercial aerospace orders
grew 22%. Conversely, Carrier’s North American residential
HVAC orders declined approximately 3% in 2011, yet within
our longer cycle business, Otis’ new equipment orders grew
15% in 2011 as compared with 2010, despite declines in North
America and slower growth in China late in 2011. Although
economies in China, India and Brazil have recently shown
signs of slowing, growth rates in these and other emerging
markets generally remain well above those of developed
economies.
Led by strength in Carrier’s transportation refrigeration
business and improved aftermarket volume in the aerospace
businesses, our sales grew 6% organically in 2011. We expect
organic sales growth in 2012 to be 2% to 4% reflecting a
strong opening backlog and continued strength in the
aerospace businesses, tempered by generally lower order
growth rates in our commercial businesses.
Although we expect an increase in organic growth, which, if
realized, would contribute to operating profit growth, we also
continue to invest in new platforms and new markets to
position us for additional growth, while remaining focused on
structural cost reduction, operational improvements and
disciplined cash redeployment. These actions contributed to
our earnings growth and operating profit margin expansion
during 2011 and positioned us for future earnings growth as
the global economy recovers. We undertook a significant
restructuring initiative in early 2009 to reduce structural and
overhead costs across all of our businesses in order to help
mitigate the adverse volume impact that resulted from the
global economic crisis. Restructuring costs totaled $336
million, $443 million and $830 million in 2011, 2010 and 2009,
respectively. As a result of these restructuring actions,
continued focus on cost reductions and increasing sales
volumes, segment operating margin increased 80 basis
points from 14.6% in 2010 to 15.4% in 2011. This year-over-year
increase includes a 30 basis point net benefit from lower
restructuring charges and non-recurring items. While we
expect to benefit in 2012 from cost reductions realized on the
restructuring actions undertaken in prior years, we also
expect an adverse impact on operating profits in 2012 from
net commodity cost increases of approximately $50 million
and incremental research and development investment of
approximately $150 million.
As discussed below in “Results of Operations,” operating
profit in each of 2011 and 2010 includes the impact from
non-recurring items such as the adverse effect of asset
impairment charges, and the beneficial impact of gains from
business divestiture activities, primarily those related to
Carrier’s ongoing portfolio transformation. Our earnings
growth strategy contemplates earnings from organic sales
growth, including growth from new product development
and product improvements, structural cost reductions,
operational improvements, and incremental earnings from our
investments in acquisitions. We invested $372 million
(including debt assumed of $15 million) and $2.8 billion
(including debt assumed of $39 million) in the acquisition of
businesses across the entire company in 2011 and 2010,
respectively. Acquisitions completed in 2011 consisted
principally of a number of smaller acquisitions in both our
aerospace and commercial businesses. Our investment in
businesses in 2010 principally reflected the acquisitions of the
General Electric (GE) Security business and Clipper
Windpower Plc (Clipper).
On September 21, 2011, we announced an agreement to
acquire Goodrich Corporation (Goodrich), a global supplier of
systems and services to the aerospace and defense industry
with 2010 sales of $7 billion. Under the terms of the
agreement, Goodrich shareholders will receive $127.50 in cash
for each share of Goodrich common stock they own at the
time of the closing of the transaction. This equates to a total
estimated enterprise value of $18.4 billion, including $1.9
billion in net debt to be assumed. The transaction is subject
to customary closing conditions, including regulatory
approvals and Goodrich shareholder approval. We expect
that this acquisition will close in mid-2012. Goodrich products
include aircraft nacelles and interior systems, actuation and
landing systems, and electronic systems. Once the acquisition
is complete, Goodrich and Hamilton Sundstrand will be
combined to form a new segment named UTC Aerospace
Systems. This segment and our Pratt & Whitney segment will
be separately reportable segments although they will both be
included within the UTC Propulsion & Aerospace Systems
organizational structure. We expect the increased scale,
financial strength and complementary products of the new
combined business will strengthen our position in the
aerospace and defense industry. Further, we expect that this
acquisition will enhance our ability to support our customers
with more integrated systems.
In connection with the pending acquisition of Goodrich, we
are evaluating a number of financing structures that will likely
include some level of short- and long-term debt, equity
issuance and cash. We intend to maintain our strong existing
credit rating and minimize future share count dilution on
earnings per share by targeting the equity component to
comprise no more than 25% of the total financing (excluding
the amount of debt assumed). As part of this assessment, we
are also evaluating the potential disposition of a number of
our non-core businesses to generate cash and minimize the
level of future debt or equity issuances. While certain
potential disposition candidates have been identified, no
actions have yet been committed to, and no businesses
currently meet the “held-for-sale” criteria. However, during
2012, it is possible that management will commit to the
disposition of one or more of these businesses which may
result in impairment charges or gains/losses that are realized
upon disposition. Any such gains or losses could be
significant to UTC’s results of operations during the period
incurred.
2011 ANNUAL REPORT 29