United Technologies 2011 Annual Report Download - page 32

MANAGEMENT’S DISCUSSION AND ANALYSIS
On October 12, 2011, Pratt & Whitney and Rolls-Royce plc
(Rolls-Royce), a participant in the IAE International Aero
Engines AG (IAE) collaboration, announced an agreement to
restructure their interests in IAE. Under the terms of the
agreement, Rolls-Royce will sell its interests in IAE and license
its V2500 intellectual property in IAE to Pratt & Whitney for
$1.5 billion plus an agreed payment contingent on each hour
flown by V2500-powered aircraft in service at the closing
date during the fifteen year period following closing of the
transaction. Consummation of this restructuring is subject to
regulatory approvals and other closing conditions. The
acquisition of the additional interests in IAE will give Pratt &
Whitney a controlling interest with approximately 66%
ownership. Upon closing, we anticipate Pratt & Whitney will
begin consolidating IAE. The acquisition of the additional
interests in IAE and the intellectual property licenses will be
reflected as intangible assets and amortized in relation to the
economic benefits received over the projected remaining life
of the V2500 program.
Also, on October 12, 2011, Pratt & Whitney and Rolls-Royce
announced an agreement to form a new joint venture, in
which each will hold an equal share, to develop new engines
to power the next generation of 120 to 230 passenger
mid-size aircraft that will replace the existing fleet of mid-size
aircraft currently in service or in development. With this new
joint venture, Pratt & Whitney and Rolls-Royce will focus on
high-bypass ratio geared turbofan technology as well as
collaborate on future studies of next generation propulsion
systems. Pursuant to the agreement, the formation of this
new venture is subject to regulatory approvals and other
closing conditions, including completion of the restructuring
of the parties’ interests in IAE. We expect the restructuring of
the parties’ interests in IAE to be completed in mid-2012. The
closing of the new joint venture may take a substantially
longer period of time to complete.
Both acquisition and restructuring costs associated with a
business combination 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 the
acquisitions.
In addition to the foregoing, the combination of Carrier and
UTC Fire & Security into a new segment to be called UTC
Climate, Controls & Security, and the realignment of reporting
units required by this combination, along with the potential
disposition of certain businesses in connection with this
combination, will necessitate a re-evaluation of goodwill
allocations. Depending upon the resulting cash flows,
including those generated from the disposition of any
businesses, goodwill impairment charges could be incurred
and could be significant to UTC’s results of operations during
the period incurred.
For additional discussion of acquisitions and restructuring,
see “Liquidity and Financial Condition,” “Restructuring Costs”
and Notes 2 and 12 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net Sales
(Dollars in millions) 2011 2010 2009
Net sales $58,190 $54,326 $52,425
Percentage change year-over-year 7.1% 3.6% (11.3)%
The 7% increase in consolidated net sales in 2011, as
compared with 2010, reflects organic sales growth (6%), the
beneficial impact of foreign currency translation (2%) and the
adverse impact of net divestitures (1%) resulting from the
portfolio transformation efforts undertaken at Carrier. As
discussed above in the “Business Overview,” all segments
experienced organic sales growth during 2011, led by Sikorsky
(10%), Hamilton Sundstrand (9%), and Carrier (9%). The
organic sales growth at Sikorsky was primarily attributable to
higher military OEM and aftermarket sales, while the organic
sales growth at Hamilton Sundstrand was a result of higher
volumes in both the aerospace and industrial businesses.
Carrier’s organic sales growth was driven primarily by the
recovery in the transport refrigeration market. The organic
sales growth in the remaining businesses reflected higher
commercial sales and aftermarket volume at Pratt & Whitney,
higher new equipment volumes in emerging markets for Otis,
and strength within the products business at UTC Fire &
Security.
The 4% increase in consolidated net sales in 2010, as
compared with 2009, reflects organic sales growth (2%), the
beneficial impact of foreign currency translation (1%) and the
impact of net acquisitions (1%). The impact of net acquisitions
primarily reflects the acquisition of the GE Security business
at UTC Fire & Security, net of the impact of dispositions from
the portfolio transformation efforts undertaken at Carrier. The
organic sales increase was largely led by Carrier and Sikorsky.
These organic increases were partially offset by organic sales
contraction at both Otis and UTC Fire & Security. The organic
sales growth at Carrier was driven by continuing strength in
the transport refrigeration business, while Sikorsky’s growth
was primarily attributable to higher military sales. The organic
contraction at Otis was due to a decline in new equipment
sales as a result of continued commercial and residential
market weakness. In addition, the decline at UTC Fire &
Security reflected contraction in the service and install
business as a result of weak economic conditions in principal
markets.
Cost of Products and Services Sold
(Dollars in millions) 2011 2010 2009
Cost of products sold $31,026 $28,956 $ 28,905
Percentage of product sales 75.1% 74.9% 77.4%
Cost of services sold $11,127 $ 10,458 $ 9,956
Percentage of service sales 65.8% 66.7% 66.0%
Total cost of products and services sold $42,153 $ 39,414 $ 38,861
Percentage change year-over-year 6.9% 1.4% (10.9)%
30 UNITED TECHNOLOGIES CORPORATION