United Technologies 2012 Annual Report Download - page 31

Management’s Discussion and Analysis 2012 ANNUAL REPORT 29
As discussed below in “Results of Operations,” operating
profit in both 2012 and 2011 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 UTC Climate, Controls & Secur-
ity’s ongoing portfolio transformation. Our earnings growth strategy
contemplates earnings from organic sales growth, including growth
from new product development and product improvements, struc-
tural cost reductions, operational improvements, and incremental
earnings from our investments in acquisitions. We invested $18.6
billion (including debt assumed of $2.6 billion) and $372 million
(including debt assumed of $15 million) in the acquisition of busi-
nesses across the entire company in 2012 and 2011, respectively.
Our investment in businesses in 2012 principally reflected the
Goodrich and IAE transactions. Acquisitions completed in 2011
consisted principally of a number of smaller acquisitions in both our
aerospace and commercial businesses.
Both acquisition and restructuring costs associated with
business combinations are expensed as incurred. Depending on
the nature and level of acquisition activity, earnings could be
adversely impacted due to acquisition and restructuring actions ini-
tiated in connection with the integration of the businesses acquired.
For additional discussion of acquisitions and restructuring,
see “Liquidity and Financial Condition,” “Restructuring Costs” and
Notes 2 and 13 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net Sales
(DOLLARS IN MILLIONS) 2012 2011 2010
Net sales $ 57,708 $ 55,754 $ 52,275
Percentage change year-over-year 3.5% 6.7% 3.6%
The factors contributing to the total percentage change year-over-
year in total net sales are as follows:
2012 2011
Organic volume –5%
Foreign currency translation (2)% 2%
Acquisitions and divestitures, net 6% –
Total % Change 4% 7%
Organic sales growth during 2012, at UTC Aerospace
Systems (7%) and Pratt & Whitney (2%) was offset by organic sales
contraction at Sikorsky (8%). The organic sales growth at UTC
Aerospace Systems was primarily attributable to higher aerospace
OEM volume, while the organic sales growth at Pratt & Whitney was
a result of higher military engine deliveries and aftermarket sales.
The organic sales contraction at Sikorsky was driven primarily by
fewer aircraft deliveries to the U.S. Government and foreign military
operations. There was no organic sales growth within the commer-
cial businesses in 2012. The sales increase from net acquisitions
and divestitures is a result of Goodrich and IAE sales, partially offset
by the ongoing portfolio transformation initiatives at UTC Climate,
Controls & Security.
All segments experienced organic sales growth during
2011, led by Sikorsky (10%), UTC Aerospace Systems (8%), and
UTC Climate, Controls & Security (7%). The organic sales growth at
Sikorsky was primarily attributable to higher military OEM and
aftermarket sales, while the organic sales growth at UTC Aerospace
Systems was a result of higher volumes in the aerospace OEM and
aftermarket businesses. UTC Climate, Controls & Security’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 and higher new equipment volumes in
emerging markets for Otis.
Cost of Products and Services Sold
(DOLLARS IN MILLIONS) 2012 2011 2010
Cost of products sold $ 31,094 $ 29,252 $ 27,513
Percentage of product sales 76.3% 75.2% 75.1%
Cost of services sold $ 11,059 $ 11,117 $ 10,441
Percentage of service sales 65.1% 65.9% 66.7%
Total cost of products and services sold $ 42,153 $ 40,369 $ 37,954
Percentage change year-over-year 4.4% 6.4% 1.5%
The factors contributing to the total percentage change
year-over-year in total cost of products and services sold are as
follows:
2012 2011
Organic volume –5%
Foreign currency translation (2)% 2%
Acquisitions and divestitures, net 6% (1)%
Total % Change 4% 6%
Total cost of products and services sold increased (4%) at
a rate consistent with sales growth (4%) in 2012 as compared with
2011. The increase in cost of products and services sold is a result
of the Goodrich and IAE transactions (8%) partially offset by lower
cost of products and services sold as a result of the UTC Climate,
Controls & Security portfolio transformation (3%) and the beneficial
impact of foreign currency exchange translation (2%).
Total cost of products and services sold increased organ-
ically (5%) at a rate consistent with organic sales growth (5%) in
2011 as compared with 2010. The beneficial impact of cost reduc-
tions and productivity gains were partially offset by higher commod-
ity, pension, and warranty costs in 2011.
Gross Margin
(DOLLARS IN MILLIONS) 2012 2011 2010
Gross margin $ 15,555 $ 15,385 $ 14,321
Percentage of net sales 27.0% 27.6% 27.4%