United Technologies 2011 Annual Report Download - page 53

MANAGEMENT’S DISCUSSION AND ANALYSIS
GOVERNMENT MATTERS
As described in “Critical Accounting Estimates – Contracting
with the U.S. government,” our contracts with the U.S.
government are subject to audits. Such audits may
recommend that certain contract prices should be reduced to
comply with various government regulations. We are also the
subject of one or more investigations and legal proceedings
initiated by the U.S. government with respect to government
contract matters.
As previously disclosed, the U.S. Department of Justice (DOJ)
sued us in 1999 in the U.S. District Court for the Southern
District of Ohio, claiming that Pratt & Whitney violated the
civil False Claims Act and common law. This lawsuit relates to
the “Fighter Engine Competition” between Pratt & Whitney’s
F100 engine and General Electric’s F110 engine. The DOJ
alleges that the government overpaid for F100 engines under
contracts awarded by the U.S. Air Force in fiscal years 1985
through 1990 because Pratt & Whitney inflated its estimated
costs for some purchased parts and withheld data that would
have revealed the overstatements. At trial of this matter,
completed in December 2004, the government claimed
Pratt & Whitney’s liability to be $624 million. On August 1,
2008, the trial court judge held that the Air Force had not
suffered any actual damages because Pratt & Whitney had
made significant price concessions. However, the trial court
judge found that Pratt & Whitney violated the False Claims
Act due to inaccurate statements contained in its 1983 offer.
In the absence of actual damages, the trial court judge
awarded the DOJ the maximum civil penalty of $7.09 million,
or $10,000 for each of the 709 invoices Pratt & Whitney
submitted in 1989 and later under the contracts. In
September 2008, both the DOJ and UTC appealed the
decision to the Sixth Circuit Court of Appeals. In November
2010, the Sixth Circuit affirmed Pratt & Whitney’s liability
under the False Claims Act and remanded the case to the U.S.
District Court for further proceedings on the question of
damages. Should the government ultimately prevail, the
outcome of this matter could result in a material adverse
effect on our results of operations in the period in which a
liability would be recognized or cash flows for the period in
which damages would be paid.
As previously disclosed, in December 2008, the U.S.
Department of Defense (DOD) issued a contract claim
against Sikorsky to recover overpayments the DOD alleges it
has incurred since January 2003 in connection with cost
accounting changes approved by the DOD and implemented
by Sikorsky in 1999 and 2006. These changes relate to the
calculation of material overhead rates in government
contracts. The DOD claims that Sikorsky’s liability is
approximately $92 million (including interest through
December 2011). We believe this claim is without merit, and
Sikorsky filed an appeal in December 2009 with the U.S.
Court of Federal Claims, which is pending. We do not believe
the resolution of this matter will have a material adverse
effect on our competitive position, results of operations, cash
flows or financial condition.
A significant portion of our activities are subject to export
control regulation by the U.S. Department of State (State
Department) under the U.S. Arms Export Control Act and
International Traffic in Arms Regulations (ITAR). From time to
time, we identify, investigate, remediate and voluntarily
disclose to the State Department’s Office of Defense Trade
Controls Compliance (DTCC) potential violations of the ITAR.
DTCC administers the State Department’s authority under the
ITAR to impose civil penalties and other administrative
sanctions for violations, including debarment from engaging
in the export of defense articles or defense services. Most of
our voluntary disclosures are resolved without the imposition
of penalties or other sanctions. However, in November 2011,
DTCC informed us that it considers certain of our voluntary
disclosures filed since 2005 to reflect deficiencies warranting
penalties and sanctions. We are currently in discussions with
DTCC to reach a consent agreement, which we anticipate will
provide for a payment by the Company and commitments
regarding additional remedial compliance efforts.
The voluntary disclosures that we anticipate will be
addressed in the consent agreement currently under
discussion include 2006 and 2007 disclosures regarding the
export by Hamilton Sundstrand to P&WC of certain
modifications to dual-use electronic engine control software,
and the re-export by P&WC of those software modifications
and subsequent P&WC-developed patches to China during
the period 2002-2004 for use in the development of the Z-10
Chinese military helicopter. The DOJ has also separately
conducted a criminal investigation of the matters addressed
in these disclosures, as well as the accuracy and adequacy of
the disclosures. We have been cooperating with the DOJ’s
investigation. Since November 2011, we have been in
discussions with the DOJ to resolve this matter.
We continue to evaluate the range of possible outcomes of
these separate but related export compliance matters, and
have recognized a potential liability at December 31, 2011 of
$45 million. We are currently unable to predict the precise
timing or outcome of the discussions. We do not believe the
ultimate resolution of these matters, individually or
collectively, will have a material adverse effect on our
competitive position, results of operations, cash flows or
financial condition.
OTHER MATTERS
Additional discussion of our environmental, U.S. government
contract matters, product performance and other contingent
liabilities is included in “Critical Accounting Estimates” and
Notes 1, 15 and 17 to the Consolidated Financial Statements.
For additional discussion of our legal proceedings, see Item 3,
“Legal Proceedings,” in our Annual Report on Form 10-K for
2011 (2011 Form 10-K).
2011 ANNUAL REPORT 51