MANAGEMENT’S DISCUSSION AND ANALYSIS 2010 Compared with 2009 2011 Compared with 2010 2011 ANNUAL REPORT 41 Organic sales growth (5%) was driven by growth in the large commercial engine business (5%), higher spares volume across the business (combined 2%), and higher industrial volume at Pratt & Whitney Power Systems (1%). These increases were partially offset by lower military engine sales. The impact from foreign currency reflects the unfavorable transactional impact of foreign exchange hedging at P&WC (1%). Organic sales were essentially flat year-over-year. Growth in the large commercial engine business (4%), driven by higher commercial spares and aftermarket sales volumes, and an increase in the military engine business (1%) on higher engine deliveries, were mostly offset by lower sales at P&WC (2%) due to decreased engine sales volume and a decline at Pratt & Whitney Power Systems (2%) from lower industrial sales volumes. The impact from foreign currency (4%) reflects the beneficial transactional impact of foreign exchange hedging at P&WC. The operational profit decline (3%) primarily reflects higher year-over-year research and development costs (11%), unfavorable commercial engine business mix and fewer military engine business deliveries (combined 6%), partially offset by higher commercial spares volume (10%). Additionally, gains recorded on contract settlements and contract close-outs were offset, in part, by losses incurred as a result of increased airline industry exposures during the year (combined 4%). The 2% contributed by “Other” primarily reflects the gain on a sale of an equity investment. The operational profit decline (3%) primarily reflects higher year-over-year research and development costs. Lower profits at P&WC (9%) driven by decreased engine sales volumes were offset by higher profit contribution from the large commercial engine business (6%) driven by higher commercial spares and aftermarket sales volumes and an increase in the military engine business (3%). Hamilton Sundstrand is among the world’s leading suppliers of technologically advanced aerospace and industrial products and aftermarket services for diversified industries worldwide. Hamilton Sundstrand’s aerospace products, such as power generation, management and distribution systems, flight control systems, engine control systems, environmental control systems, fire protection and detection systems, auxiliary power units and propeller systems, serve commercial, military, regional, business and general aviation, as well as military ground vehicle, space and undersea applications. Aftermarket services include spare parts, overhaul and repair, engineering and technical support and fleet maintenance programs. Hamilton Sundstrand sells aerospace products to airframe manufacturers, the U.S. and foreign governments, aircraft operators and independent distributors. Hamilton Sundstrand’s principal industrial products, such as air compressors, metering pumps and heavy duty process pumps, serve industries involved with chemical and hydrocarbon processing, oil and gas production, water and wastewater treatment and construction. Hamilton Sundstrand sells these products under the Sullair, Sundyne, Milton Roy and other brand names directly to end users, and through manufacturer representatives and distributors. In September 2011, to better serve customers and drive to growth and achieve efficiencies through greater integration across certain product lines, we announced a new organizational structure. As part of this new structure, we created UTC Propulsion & Aerospace Systems, a new organization consisting of Pratt & Whitney and Hamilton Sundstrand. Pratt & Whitney and Hamilton Sundstrand will continue to report their financial and operational results as separate segments. 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 9% 12 % 12 % 1% — 8 % Foreign currency translation 1% 1% 1% — (1)% (1)% Acquisitions and divestitures, net — (1)% (1)% — — — Restructuring costs — — 2 % — — 6 % Other — (1)% 4 % — 1 % (6)% Total % change 10% 11 % 18 % 1% — 7 % TOTAL CHANGE YEAR-OVER-YEAR FOR: 2011 Compared with 2010 2010 Compared with 2009 (Dollars in millions) 2011 2010 2009 $ % $ % Net Sales $ 6,150 $5,608 $5,560 $542 10% $48 1% Cost of Sales 4,292 3,881 3,893 411 11% (12) — 1,858 1,727 1,667 Operating Expenses and Other 776 809 810 Operating Profits $ 1,082 $ 918 $ 857 $ 164 18% $61 7%