United Technologies 2011 Annual Report Download - page 33

MANAGEMENT’S DISCUSSION AND ANALYSIS
The factors contributing to the total percentage change year-
over-year in total cost of products and services sold are as
follows:
2011 2010
Organic volume 6% 1%
Foreign currency translation 2% 1%
Acquisitions and divestitures, net (1)% —
Restructuring —(1)%
Total % Change 7% 1%
Total cost of products and services sold increased organically
(6%) at a rate consistent with organic sales growth (6%). The
beneficial impact of cost reductions and productivity gains
were partially offset by higher commodity, pension, and
warranty costs in 2011.
Both total cost of products and services sold and overall
sales volumes increased in 2010, as compared with 2009, as a
result of higher year-over-year sales volumes. Total cost of
products and services sold increased organically (1%) at a
rate lower than organic sales growth of 2% reflecting the
beneficial impact from operational improvements, cost
savings and restructuring actions taken.
Gross Margin
(Dollars in millions) 2011 2010 2009
Gross margin $16,037 $14,912 $13,564
Percentage of net sales 27.6% 27.4% 25.9%
Gross margin as a percentage of sales increased 20 basis
points, in 2011 as compared with 2010, driven primarily by
increased volumes and lower cost of sales resulting from
continued focus on cost reductions, savings from previously
initiated restructuring actions and net operational efficiencies.
The beneficial impacts of the absence of asset impairment
charges (10 basis points) recorded at Carrier and Hamilton
Sundstrand in 2010 and lower year-over-year restructuring
charges (20 basis points) were partially offset by higher
warranty costs at Hamilton Sundstrand in 2011.
Gross margin as a percentage of sales increased 150 basis
points in 2010 relative to 2009. The increase was driven
primarily by higher volumes and lower cost of sales resulting
from continued focus on cost reductions, savings from
previously initiated restructuring actions and net operational
efficiencies. Gross margin as a percentage of sales in 2010
also reflects the benefits of the shift in mix from new
equipment sales to higher margin service sales at Otis, the
increase in higher margin aerospace aftermarket sales at the
aerospace businesses, and the beneficial impact from net
acquisition/disposition activity. The beneficial impact of lower
year-over-year restructuring charges (20 basis points) was
offset by the adverse impact of asset impairment charges (20
basis points) recorded in 2010, related to disposition activity
at Carrier and Hamilton Sundstrand.
Research and Development
(Dollars in millions) 2011 2010 2009
Company-funded $2,058 $1,746 $ 1,558
Percentage of net sales 3.5% 3.2% 3.0%
Customer-funded $ 1,768 $1,890 $2,095
Percentage of net sales 3.0% 3.5% 4.0%
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 product family at Pratt & Whitney, the
Boeing 787 program at Hamilton Sundstrand, and various
programs at Sikorsky. The year-over-year increase in
company-funded research and development in 2011,
compared with 2010, primarily reflects increases at Pratt &
Whitney associated with the next generation product family.
The increase in company-funded research and development
in 2010, compared with 2009, principally reflects increases at
Pratt & Whitney associated with the next generation product
family, increases at both Hamilton Sundstrand and Sikorsky
as they continue to ramp up new product development
programs, and an increase at UTC Fire & Security related to
the acquisition in 2010 of the GE Security business.
Company-funded research and development spending for
2012 is expected to increase by approximately $150 million
from 2011 levels as a result of our continued focus on
developing new technologies, led by Pratt & Whitney.
The decrease in customer-funded research and development
in both 2011 and 2010, as compared with prior years, was
primarily driven by a decrease at Pratt & Whitney related to a
reduction in development spending on the Joint Strike
Fighter program.
Selling, General and Administrative
(Dollars in millions) 2011 2010 2009
Selling, general and administrative $6,464 $6,024 $6,036
Percentage of net sales 11.1% 11.1% 11.5%
The increase in selling, general and administrative expenses in
2011, as compared with 2010, is due primarily to the impact of
acquisitions completed over the year, including the
acquisition of the GE Security business in March 2010 and the
acquisition of Clipper in December 2010, adverse foreign
exchange translation, and higher pension related costs.
The decrease in selling, general and administrative expenses
in 2010, as compared with 2009, is due primarily to a
continued focus on cost reduction and the impact from
restructuring and cost saving initiatives undertaken in 2009
in anticipation of adverse economic conditions. These
improvements were partially offset by the impact of recent
acquisitions. As a percentage of sales, the 40 basis point
year-over-year decrease primarily reflects the impact of lower
restructuring costs.
2011 ANNUAL REPORT 31