United Technologies 2011 Annual Report Download - page 44

MANAGEMENT’S DISCUSSION AND ANALYSIS
2011 Compared with 2010
The organic sales growth (9%) reflects higher volumes in
both the aerospace (6%) and the industrial (3%) businesses.
The increase within aerospace was driven by higher
aftermarket volume (5%), primarily commercial spares. The
industrials businesses increase was led by the compressor
business as a result of volume increases in the manufacturing
and energy sectors, particularly in the U.S. and Asia. The
organic cost of sales growth (12%) exceeded the organic
sales growth due largely to adverse mix within aerospace
OEM and higher warranty costs.
The increase in operational profit (12%) reflects an increase in
both the aerospace (7%) and the industrial (5%) businesses.
The growth within aerospace reflects higher commercial
spares volume, partially offset by adverse mix within OEM,
including a reduction in military ground vehicle volumes and
an increase in volume of lower margin commercial programs.
Also, operational profit growth reflects the benefit of lower
research and development costs (3%), offset by higher
warranty costs (4%). The increase within the industrial
businesses reflect the benefit of higher volume and cost
reduction initiatives. The increase contributed by “Other”
primarily reflects the absence of approximately $28 million of
asset impairment charges recorded in the second quarter of
2010. These charges related primarily to the disposition of an
aerospace business as part of Hamilton Sundstrand’s efforts
to implement low cost sourcing initiatives.
2010 Compared with 2009
The organic sales growth (1%) reflects higher volumes in the
industrial business (2%), partially offset by a decline in the
aerospace business (1%). The industrial business increase was
led by the compressor business attributable to general
increases in infrastructure and industrial spending particularly
in the U.S. and Asia. The decline within the aerospace
business reflects lower OEM sales volume (2%) partially offset
by an increase in the aftermarket business (1%) primarily as a
result of higher commercial spares and repair volume.
The 8% improvement in operational profit reflects an increase
in the industrial business (7%), reflecting the benefit from
higher volumes and cost reduction initiatives, and an increase
within the aerospace business (1%). The 1% improvement
within aerospace reflects favorable net operating
performance, including the benefit of ongoing cost reduction
initiatives, and volume growth from higher margin
commercial aftermarket sales partially offset by the impact
from adverse mix within OEM sales (net combined 8%). This
8% improvement was mostly offset by higher year-over-year
research and development costs (7%). The decrease
contributed by “Other” primarily reflects the impact of an
asset impairment charge recorded in 2010 related to the
disposition of an aerospace business. The decrease in “Other”
for operating profit also reflects the absence of a gain from
the sale of a business in 2009.
Sikorsky is one of the world’s largest helicopter companies. Sikorsky manufactures military and commercial helicopters and
also provides aftermarket helicopter and aircraft parts and services. In December 2007, the U.S. government and Sikorsky
signed a five-year multi-service contract for H-60 helicopters to be delivered to the U.S. Army and U.S. Navy, which include the
UH-60M, HH-60M, MH-60S and MH-60R. Upon completion of the contract in 2013, Sikorsky expects to have delivered
approximately 690 aircraft. Sikorsky is in negotiations with the U.S. government for a new five-year multi-service contract for
H-60 helicopters. Sikorsky is also developing the CH-53K next generation heavy lift helicopter for the U.S. Marine Corps and the
CH-148 derivative of the H-92 helicopter, a military variant of the S-92 helicopter, for the Canadian government. The latter is
being developed under a fixed-price contract that provides for the development and production of 28 helicopters, and related
logistical support through March 2028. The current contract value is estimated to be $4.5 billion, and is subject to changes in
underlying variables such as future flight hours as well as fluctuations in foreign currency exchange rates. This is the largest and
most expansive fixed-price development contract in Sikorsky’s history. As previously disclosed, in June 2010 Sikorsky and the
Canadian government signed contract amendments that revised the delivery schedule and contract specifications, and
established the requirements for the first six interim aircraft to enable initial operational test and evaluation activities. The
amendments also included modifications to the liquidated damages schedule, readjustment of payment schedules, resolution of
open disputes and other program enhancements. Sikorsky recognized revenue in 2011 upon completing a significant milestone
for work related to four interim configuration helicopters. Delivery of the final configuration aircraft is scheduled to begin in
2012. These aircraft will require further software testing and upgrades before full mission capability can be achieved. Sikorsky is
in discussions with the Canadian government concerning the need for additional interim aircraft, schedules to complete
remaining work, and the resolution of open disputes.
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