Dear Shareowner
2012 was a year of transformation and accomplishment for United Technologies. By acquiring Goodrich and majority ownership in the IAE International Aero Engines collaboration, we strengthened our position in the fast-growing commercial aerospace market. These acquisitions brought tremendous new capabilities, technologies and leadership talent to our company. We further strengthened and streamlined our fire and security portfolio by divesting non-core businesses and applying Carrier’s successful portfolio transformation strategy to our portfolio. These actions enable us to better focus on growth opportunities in our core aerospace and building systems markets.
Our reshaped portfolio, investments in game-changing technologies and expanding emerging market presence — combined with our relentless drive to improve productivity, reduce costs and leverage our global scale — position us well to return to double-digit earnings growth in 2013 and beyond.
While the global economy remained challenging during this year of portfolio transformation, United Technologies delivered solid financial performance in 2012, highlighted by strong cash generation. For the year, cash flow from operations less capital expenditures once again exceeded net income. This strong cash performance, as well as solid execution of the portfolio transformation, enabled us to pay down approximately one-third of the debt from the Goodrich acquisition and allowed us to resume our share repurchase program in 2013.
We also increased our dividend by 11.5 percent in 2012, marking the 76th consecutive year United Technologies has paid a dividend to shareowners. Our long-term total shareowner return continued to exceed that of our peers and key market indices. For the past decade, from December 31, 2002, through December 31, 2012, UTC delivered total shareowner return of 225 percent, more than double either the Dow Jones Industrials or the S&P 500.
With our portfolio transformation substantially complete, United Technologies begins 2013 focused on integration and execution. Even with a soft European economy and a decline in U.S. defense spending, the growth opportunities available for UTC are truly amazing. Two simple facts highlight the scale of these opportunities. Today only an estimated 15 percent of the world’s population has ever flown, and every year for the next two decades, 15 million to 20 million people are expected to move to urban centers. Around the world, more skyscrapers, schools, hospitals and stadiums are being built, driving the demand for elevators, air-conditioning, and fire and security systems, as well as for air travel between cities. United Technologies is well positioned to capitalize on this rapid urbanization and strong commercial aerospace growth with our game-changing technologies and products that provide greater energy efficiency and meet local market demands.
The benefits of the new organizational structure we announced in the fall of 2011 became clear in 2012, allowing us to better leverage our global scale, talent and operating system to drive margin growth across the portfolio. UTC Climate, Controls & Security — the combination of our Carrier and UTC Fire & Security businesses — achieved record, industry-leading profit margins by successfully executing its portfolio transformation strategy, focusing on core businesses to drive organic growth and generating more than $100 million in integration synergies. At UTC Propulsion & Aerospace Systems, the team is focused on exceeding our target of delivering $400 million of annual savings related to the Goodrich acquisition. We expect to achieve approximately half of these savings by the end of 2013. Additional synergies will come from leveraging a common supply base and greater UTC content on newer aircraft platforms.
Across the portfolio, there were many other accomplishments in 2012. Among them, Sikorsky achieved a major milestone by certifying the S-76D helicopter, which provides customers with higher cruise speeds, better fuel efficiency, and greater reliability, and future capabilities, including rotor de-icing. Pratt & Whitney continued to win significant orders for its revolutionary PurePower Geared Turbofan engine, with nearly 3,000 announced engine orders, including options, as of the end of 2012. Engine testing has been completed for the Bombardier CSeries and has begun for the Airbus A320neo. Ground and flight testing has validated the expected improvements in fuel burn, emissions and noise reduction. In January 2013, Embraer became the fifth aircraft manufacturer to select the PurePower engine when it announced the Geared Turbofan as the exclusive power for its new second-generation E-Jet aircraft family. This selection will greatly enhance Pratt & Whitney’s position in the commercial aerospace market for decades to come.
On the commercial side, Otis continues to significantly strengthen its position by introducing new products tailored to specific end markets, including a Gen2 elevator application for the fast-growing social housing segment in China and an upcoming Gen2 application with a battery-backup system for the Indian and South Asian markets. Otis also significantly expanded its presence in China by opening a new manufacturing facility in Chongqing, supporting growth in central and western China. This factory and new factories scheduled to open in Bengaluru and São Paulo in 2013 highlight Otis’ customer-focused strategy of investing in key growth markets around the world.
A successful portfolio transformation positioned UTC Climate, Controls & Security for strong growth as the commercial construction and U.S. housing markets recover. The company also enhanced its position as a leading provider of efficient and sustainable solutions. New product launches included the high-efficiency Infinity 98 gas furnace; the WeatherExpert rooftop unit, the company’s most efficient commercial rooftop unit ever; and the new Kidde Worry-Free Smoke Alarm, significantly increasing fire safety in homes and reducing maintenance with a 10-year, sealed-in battery. UTC Climate, Controls & Security also strengthened its emerging market presence by increasing product localization, expanding its distribution footprint and establishing joint ventures in key markets. Highlighting this approach was the new joint venture in India with Midea and the opening of a new India manufacturing facility to take advantage of that nation’s fast-growing residential air-conditioning market.
As always, United Technologies’ performance over the past year reflects the dedication and hard work of our leadership team and our nearly 220,000 employees around the world. On behalf of our shareowners, I thank all employees for their many contributions, and in particular, I want to recognize the 27,000 Goodrich employees who joined UTC this past July for their willingness to embrace change. The talent, skills and teamwork displayed during the integration process have been truly extraordinary, setting the stage for a bright new chapter for our company.
I also thank our customers. We are grateful for the confidence and trust they place in our products and our people. We recognize customers have choices, and how we perform determines whether they choose us. We are committed to delivering the very best value to our customers by finding better, faster and more efficient ways to support their success.
In closing, I am proud of what United Technologies accomplished over the past year and excited about the momentum we have created. The entire team is now focused on integrating, executing and accelerating our performance to deliver UTC-style earnings growth well into the future.
Louis R. Chênevert
Chairman & Chief Executive Officer
