United Technologies 2011 Annual Report Download - page 87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
participate jointly with Pratt & Whitney to provide the high
pressure compressor for the engine. JAEC will hold a 23%
share and be responsible for the engine fan, low pressure
compressor and combustor/diffuser. Pratt & Whitney will
hold the remaining shares and will be responsible for the
remainder of the PurePower PW1100G-JM engine and
systems integration.
On October 12, 2011, Pratt & Whitney and Rolls-Royce
announced an agreement to restructure their interests in IAE
and to form a new joint venture to develop engines to power
the next generation of 120 to 230 passenger mid-size aircraft
that will replace the existing fleet of mid-size aircraft
currently in service or in development. Consummation of
each of these transactions is subject to regulatory approvals
and other closing conditions. We expect the restructuring of
the parties’ interests in IAE to be completed in mid-2012. The
closing of the new joint venture is also subject to the
completion of the restructuring of the parties’ interests in IAE
and may take a substantially longer period of time to
complete. See Note 2 to the Consolidated Financial
Statements for further discussion.
The following table illustrates the income statement
classification and amounts attributable to transactions arising
from the collaborative arrangements between participants for
each period presented:
(Dollars in millions) 2011 2010 2009
Collaborator share of sales:
Cost of products sold $963 $850 $772
Cost of services sold 36 38 29
Collaborator share of program costs
(reimbursement of expenses incurred):
Cost of products sold (88) (83) (66)
Research and development (220) (135) (97)
Selling, general and administrative (4) (5) (4)
NOTE 17: CONTINGENT LIABILITIES
Leases. We occupy space and use certain equipment under
lease arrangements. Rental commitments of $1,883 million at
December 31, 2011 under long-term non-cancelable operating
leases are payable as follows: $515 million in 2012, $404
million in 2013, $292 million in 2014, $184 million in 2015, $115
million in 2016 and $373 million thereafter. Rent expense was
$453 million in 2011, $445 million in 2010 and $463 million in
2009.
Additional information pertaining to commercial aerospace
rental commitments is included in Note 4 to the Consolidated
Financial Statements.
Environmental. Our operations are subject to environmental
regulation by federal, state and local authorities in the United
States and regulatory authorities with jurisdiction over our
foreign operations. As described in Note 1 to the
Consolidated Financial Statements, we have accrued for the
costs of environmental remediation activities and periodically
reassess these amounts. We believe that the likelihood of
incurring losses materially in excess of amounts accrued is
remote. At December 31, 2011, we had $617 million reserved
for environmental remediation. Additional information
pertaining to environmental matters is included in Note 1 to
the Consolidated Financial Statements.
Government. We are now, and believe that in light of the
current U.S. government contracting environment we will
continue to be, the subject of one or more U.S. government
investigations. If we or one of our business units were
charged with wrongdoing as a result of any of these
investigations or other government investigations (including
violations of certain environmental or export laws) the U.S.
government could suspend us from bidding on or receiving
awards of new U.S. government contracts pending the
completion of legal proceedings. If convicted or found liable,
the U.S. government could fine and debar us from new U.S.
government contracting for a period generally not to exceed
three years. The U.S. government could void any contracts
found to be tainted by fraud.
Our contracts with the U.S. government are also subject to
audits. Like many defense contractors, we have received
audit reports, which recommend that certain contract prices
should be reduced to comply with various government
regulations. Some of these audit reports involved substantial
amounts. We have made voluntary refunds in those cases we
believe appropriate, have settled some allegations and
continue to litigate certain cases. In addition, we accrue for
liabilities associated with those matters that are probable and
can be reasonably estimated. The most likely settlement
amount to be incurred is accrued based upon a range of
estimates. Where no amount within a range of estimates is
more likely, then we accrued the minimum amount.
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 the 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
2011 ANNUAL REPORT 85