United Technologies 2012 Annual Report Download - page 32

30 UNITED TECHNOLOGIES CORPORATION
Gross margin as a percentage of sales decreased 60 basis
points, in 2012 as compared with 2011, driven primarily by the
adverse impact of the Goodrich and IAE transactions (40 basis
points), higher restructuring expense in 2012 (30 basis points), and
a loss provision recorded by Sikorsky for a contract with the Cana-
dian Government (30 basis points), all of which was partially offset
by benefits from the disposition of lower margin businesses in
connection with the UTC Climate, Controls & Security portfolio
transformation (30 basis points).
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 UTC Climate, Controls & Security and UTC
Aerospace Systems in 2010 and lower year-over-year restructuring
charges (20 basis points) were partially offset by higher warranty
costs at UTC Aerospace Systems in 2011.
Research and Development
(DOLLARS IN MILLIONS) 2012 2011 2010
Company-funded $ 2,371 $ 1,951 $ 1,656
Percentage of net sales 4.1% 3.5% 3.2%
Customer-funded $ 1,670 $ 1,419 $ 1,460
Percentage of net sales 2.9% 2.5% 2.8%
Research and development spending is subject to the varia-
ble 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 busi-
nesses and relates largely to the next generation product family at
Pratt & Whitney, the C-Series, Airbus A350, and Boeing 787 pro-
grams at UTC Aerospace Systems, and various programs at Sikor-
sky. The year-over-year increase in company-funded research and
development in 2012, compared with 2011, primarily reflects
increases at UTC Aerospace Systems as a result of incremental
research and development spending related to the Goodrich busi-
nesses (13%) and at Pratt & Whitney to further advance develop-
ment of multiple geared turbo fan platforms and military engines
(5%). The 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.
Company-funded research and development spending for
2013 is expected to increase by approximately $225 million over
2012 levels primarily due to the added spending as a result of the
Goodrich acquisition.
The increase in customer-funded research and develop-
ment in 2012, as compared with the prior year, reflects spending
related to the Goodrich businesses (24%) partially offset by a
decrease at Sikorsky (4%) related to a reduction in development
spending on U.S. Government military platforms. The decrease in
customer-funded research and development in 2011, as compared
with 2010, 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) 2012 2011 2010
Selling, general and administrative $ 6,452 $ 6,161 $ 5,798
Percentage of net sales 11.2% 11.1% 11.1%
The increase in selling, general and administrative
expenses in 2012, as compared with 2011, is due primarily to the
impact of acquisitions, net of divestitures, completed over the pre-
ceding twelve months (3%) and higher restructuring costs (2%).
Higher pension costs (1%) were offset by favorable foreign
exchange translation.
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, adverse
foreign exchange translation, and higher pension related costs.
Other Income, Net
(DOLLARS IN MILLIONS) 2012 2011 2010
Other income, net $ 952 $ 573 $ 31
Other income, net includes the operational impact of equity
earnings in unconsolidated entities, royalty income, foreign
exchange gains and losses as well as other ongoing and non-
recurring items. The year-over-year change in other income, net in
2012, as compared with 2011, largely reflects an approximately
$46 million net year-over-year increased gain resulting from UTC
Climate, Controls & Security’s ongoing portfolio transformation, a
$34 million gain on the fair value re-measurement of the Company’s
previously held shares of Goodrich, a $46 million gain resulting from
the effective settlement of a pre-existing claim in connection with
the acquisition of Goodrich, an $81 million increase in income from
joint ventures, as well as the absence of both a $66 million other-
than-temporary impairment charge on an equity investment at UTC
Climate, Controls & Security, and $45 million of reserves estab-
lished for legal matters. The remaining increase in other income, net
is attributable to net gains recognized on miscellaneous asset sales
and normal recurring operational activity as disclosed above.
The year-over-year change in other income, net in 2011, as
compared with 2010, largely reflects an approximately $55 million
net year-over-year increased gain resulting from UTC Climate,
Controls & Security’s ongoing portfolio transformation, a $41 million
gain from the sale of an equity investment at Pratt & Whitney, a $73
million gain on the contribution of a Sikorsky business into a new