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). 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. 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. 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. 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 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 (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% (DOLLARS IN MILLIONS) 2012 2011 2010 Other income, net $ 952 $ 573 $ 31 Other Income, Net Research and Development 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%