United Technologies 2011 Annual Report Download - page 42

MANAGEMENT’S DISCUSSION AND ANALYSIS
Airbus announced that it will offer a version of the PurePower PW1000G engine as a new engine option to power its A320neo
family of aircraft scheduled to enter service in 2015. Additionally, PurePower PW1000G engine models have been selected by
Bombardier to power the new CSeries passenger aircraft and by Mitsubishi Aircraft Corporation to power the new Mitsubishi
Regional Jet (MRJ), scheduled to enter into service in 2013 and 2014, respectively. Irkut Corporation of Russia has also selected
the PurePower PW1000G engine to power the proposed new Irkut MC-21 passenger aircraft, which is scheduled to enter into
service in 2016. The success of these aircraft and the PurePower PW1000G family of engines is dependent upon many factors
including technological challenges, aircraft demand, and regulatory approval. Based on these factors, as well as the level of
success of aircraft program launches by aircraft manufacturers and other conditions, additional investment in the PurePower
program is expected in 2012 and beyond.
In view of the risks and costs associated with developing new engines, Pratt & Whitney has entered into collaboration
arrangements in which sales, costs and risks are shared. In September 2011, Pratt & Whitney announced a new collaboration
with Japan Aero Engines Corporation (JAEC) and MTU Aero Engines AG (MTU) to collaborate to provide the PurePower
PW1100G-JM engine for the Airbus A320neo program. At December 31, 2011, the interests of third party participants in Pratt &
Whitney-directed commercial jet engine programs ranged from 14 percent to 48 percent. In addition, Pratt & Whitney has
interests in other engine programs, including the IAE collaboration, which sells and supports V2500 engines for the Airbus
A320 family of aircraft. On October 12, 2011, Pratt & Whitney and Rolls-Royce, a participant in the 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 closing conditions. 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
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. Pratt & Whitney also has a 50 percent ownership interest in the Engine Alliance (EA), a joint
venture with GE Aviation, which markets and manufactures the GP7000 engine for the Airbus A380 aircraft. Pratt & Whitney
has entered into risk and revenue sharing arrangements with third parties for 40 percent of the content that Pratt & Whitney is
responsible for providing to the EA. Pratt & Whitney accounts for its interests in the EA joint venture under the equity method
of accounting. Pratt & Whitney continues to pursue additional collaboration partners.
In September 2011, to better serve customers and to drive growth and achieve efficiencies through greater integration across
certain product lines, we announced a new organizational structure. As part of this new structure, we created UTC Propulsion &
Aerospace Systems, a new organization consisting of Pratt & Whitney and Hamilton Sundstrand. Pratt & Whitney and Hamilton
Sundstrand will continue to report their financial and operational results as separate segments.
TOTAL CHANGE YEAR-OVER-YEAR FOR:
2011 Compared with 2010 2010 Compared with 2009
(Dollars in millions) 2011 2010 2009 $% $%
Net Sales $13,430 $12,935 $12,392 $495 4% $543 4%
Cost of Sales 9,805 9,622 9,342 183 2% 280 3%
3,625 3,313 3,050
Operating Expenses and Other 1,626 1,326 1,215
Operating Profits $ 1,999 $ 1,987 $ 1,835 $ 12 1% $ 152 8%
FACTORS CONTRIBUTING TO TOTAL % CHANGE YEAR-OVER-YEAR IN:
2011 2010
Net Sales Cost of Sales
Operating
Profits Net Sales Cost of Sales
Operating
Profits
Organic* / Operational* 5 % — (3)% —2%(3)%
Foreign currency (including P&WC net hedging)* (1)% 1% (2)% 4% 1% 9 %
Restructuring costs —1%4%——3%
Other ——2%— — (1)%
Total % change 4% 2% 1% 4% 3% 8 %
* As discussed further in the “Business Overview” and “Results of Operations” sections, for Pratt & Whitney only, the transactional impact of foreign exchange hedging
at P&WC has been netted against the translational foreign exchange impact for presentation purposes in the above table. For all other segments, these foreign
exchange transactional impacts are included within the organic sales/operational operating profit caption in their respective tables. Due to its significance to Pratt &
Whitney’s overall operating results, we believe it is useful to segregate the foreign exchange transactional impact in order to clearly identify the underlying financial
performance.
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