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UTX » Topics » Other Matters Relating to Our Business as a Whole

This excerpt taken from the UTX 10-K filed Feb 11, 2009.

Other Matters Relating to Our Business as a Whole

STYLE="margin-top:12px;margin-bottom:0px">Competition and Other Factors Affecting Our Businesses

SIZE="2">As worldwide businesses, our operations can be affected by a variety of economic and other factors, including those described in this section, in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in our 2008 Annual Report, in Item 1, “Cautionary Note Concerning Factors That May Affect Future Results,” and in Item 1A, “Risk Factors” in this Form 10-K. Each business unit is subject to
significant competition from a large number of companies in the United States and other countries, and each competes on the basis of price, delivery schedule, product performance and service.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Our aerospace businesses are subject to substantial competition from domestic manufacturers, foreign manufacturers (whose governments sometimes provide
research and development assistance, marketing subsidies and other assistance for their national commercial products) and companies that obtain regulatory agency approval to manufacture spare parts. In particular, Pratt & Whitney
experiences intense competition for new commercial airframe/engine combinations. Engine suppliers may offer substantial discounts and other financial incentives, performance and operating cost guarantees, participation in financing arrangements and
maintenance agreements. Customer selections of engines and components can also have a significant impact on later sales of parts and services. In addition, the U.S. government’s and other governments’ policies of purchasing parts from
suppliers other than the original equipment manufacturer affect military spare parts sales. Significant elements of our aerospace businesses, such as spare parts sales for engines and aircraft in service, have short lead times. Therefore, backlog
information may not be indicative of future demand. Pratt & Whitney’s major competitors in the sale of engines are GE Aviation, Rolls-Royce, Honeywell and Turbomeca. For information regarding customer financing commitments,
participation in guarantees of customer financing arrangements and performance and operating cost guarantees, see Notes 4 and 13 to the Consolidated Financial Statements in our 2008 Annual Report.

STYLE="margin-top:18px;margin-bottom:0px">Research and Development

Since changes in technology
can have a significant impact on our operations and competitive position, we spend substantial amounts of our own funds on research and development. These expenditures, which are charged to expense as incurred, were $1,771 million or 3.1 percent of
total sales in 2008, as compared with $1,678 million or 3.1 percent of total sales in 2007 and $1,529 million or 3.2 percent of total sales in 2006. We also perform research and development work under contracts funded by the U.S. government and
other customers. This contract research and development, which is performed principally in the Pratt & Whitney segment and to a lesser extent in the Hamilton Sundstrand and Sikorsky segments, amounted to $2,101 million in 2008, as compared
to $2,123 million in 2007 and $1,952 million in 2006. These contract research and development costs include amounts that are expensed as incurred, through cost of products sold, and amounts that are capitalized into inventory to be subsequently
recovered through production aircraft shipments. Of the totals, $2,008 million, $1,872 million and $1,621 million were expensed in 2008, 2007 and 2006, respectively. The remaining costs have been capitalized.

STYLE="margin-top:18px;margin-bottom:0px">U.S. Government Contracts

U.S. government contracts
are subject to termination by the government, either for the convenience of the government or for default as a result of our failure to perform under the applicable contract. In the case of a termination for convenience, we would normally be
entitled to reimbursement for our allowable costs incurred, plus termination costs and a reasonable profit. If terminated by the government as a result of our default, we could be liable for additional costs the government incurs in acquiring
undelivered goods or services from another source and any other damages it suffers. Most of our U.S. government sales are made under fixed-price type contracts, while approximately $2,721 million or 4.6 percent of our total sales for 2008 were made
under cost-reimbursement type contracts.

Our contracts with the U.S. government are also subject to audits. Like many defense contractors,
we have received audit reports from the U.S. government which recommend that we reduce certain contract prices because cost or pricing data we submitted in negotiation of the contract prices or cost accounting practices may not have conformed to
government regulations. Some of these audit reports have involved substantial reductions. We have made voluntary refunds in those cases we believe appropriate, have settled some allegations and continue to litigate certain cases. For further
discussion of risks related to government contracting, see the discussion in Item 1A, “Risk Factors” and Item 3, “Legal Proceedings,” in this Form 10-K and Note 15 to the Consolidated Financial Statements in our 2008
Annual Report for further discussion.

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