MANAGEMENT’S DISCUSSION AND ANALYSIS FACTORS CONTRIBUTING TO TOTAL % CHANGE YEAR-OVER-YEAR IN: 2011 2010 Net Sales Cost of Sales Operating Profits Net Sales Cost of Sales Operating Profits Organic / Operational 2% 2% 2% (3)% (5)% 6 % Foreign currency translation 4% 4% 5% 1% 1% (1)% Acquisitions and divestitures, net 1% 1% — 1% 1% — Restructuring costs — — — — (1)% 3 % Other — — 2% — — (3)% Total % change 7% 7% 9% (1)% (4)% 5 % 2011 Compared with 2010 2010 Compared with 2009 The organic sales increase (2%) in the year was due to higher new equipment sales volume in China, Russia and Brazil (combined 3%), partially offset by declines in North America (1%). Increased contractual maintenance and repair volume across all regions was offset by a decline in modernization volume in Europe. New equipment orders improved 15% versus the prior year, led by strong order growth in China. Selling prices remained under pressure. The operational profit improvement (2%) in the period was due to higher new equipment volume, increases in contractual maintenance and repair services, and the benefits of ongoing cost reduction initiatives, partially offset by lower pricing, the impact of higher commodity costs, and lower modernization volume in Europe. The organic sales decline (3%) was due to a decrease in new equipment sales volume as a result of lower opening backlog entering the year, partially offset by a strong volume rebound in China. The decrease in new equipment sales was partially offset by continued growth in the contractual maintenance business. New equipment orders improved 7% versus the prior year, led by strong order growth in China. Selling prices remained under pressure in most markets. Operational profit improvement (6%) resulted from higher maintenance volume and ongoing cost reduction activities, which more than offset the impact of lower new equipment volume and pricing. Ongoing cost reduction activities also contributed to the 5% reduction in cost of sales. The decrease contributed by “Other” primarily reflects the absence of a $52 million gain recognized in 2009 on the re-measurement to fair value of a previously held equity interest in a joint venture resulting from the purchase of a controlling interest. Carrier is the leading provider of HVAC and refrigeration solutions, including controls for residential, commercial, industrial and transportation applications. In 2011, Carrier continued to execute the business transformation strategy it began in 2008 by completing divestitures of several non-core businesses and taking noncontrolling equity interests in various ventures. This included taking a noncontrolling equity interest in a new South American venture in exchange for the contribution of Carrier’s existing HVAC operations in Brazil, Argentina and Chile to the new venture, which manufactures and distributes HVAC products in those countries. Carrier’s products and services are sold under Carrier and other brand names to building contractors and owners, homeowners, transportation companies, retail stores and food service companies. Carrier sells directly to the end customer and through manufacturers’ representatives, distributors, wholesalers, dealers and retail outlets. Certain of Carrier’s HVAC businesses are seasonal and can be impacted by weather. Carrier customarily offers its customers incentives to purchase products to ensure an adequate supply of its products in the distribution channels. The principal incentive program provides reimbursements to distributors for offering promotional pricing on Carrier products. We account for incentive payments made as a reduction to sales. In September 2011, to better serve customers and to drive growth and achieve efficiencies through greater integration across certain product lines, we announced a new organizational structure which combines Carrier with UTC Fire & Security into a new segment called UTC Climate, Controls & Security. This new segment will report combined financial and operational results beginning with the first quarter of 2012. 36 UNITED TECHNOLOGIES CORPORATION TOTAL CHANGE YEAR-OVER-YEAR FOR: 2011 Compared with 2010 2010 Compared with 2009 (Dollars in millions) 2011 2010 2009 $ % $ % Net Sales $11,969 $11,386 $11,335 $583 5% $5 1 Cost of Sales 9,246 8,850 8,923 396 4% (73) (1)% 2,723 2,536 2,412 Operating Expenses and Other 1,203 1,474 1,672 Operating Profits $ 1,520 $ 1,062 $ 740 $458 43% $322 44 %