United Technologies 2011 Annual Report Download - page 88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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. Except as otherwise noted, we do not believe that
resolution of any of the above matters will have a material
adverse effect upon our competitive position, results of
operations, cash flows or financial condition.
As described in Note 15 to the Consolidated Financial
Statements, we extend performance and operating cost
guarantees beyond our normal warranty and service policies
for extended periods on some of our products. We have
accrued our estimate of the liability that may result under
these guarantees and for service costs that are probable and
can be reasonably estimated.
We have accrued for environmental investigatory,
remediation, operating and maintenance costs, performance
guarantees and other litigation and claims based on our
estimate of the probable outcome of these matters. While it is
possible that the outcome of these matters may differ from
the recorded liability, we believe that resolution of these
matters will not have a material impact on our competitive
position, results of operations, cash flows or financial
condition.
We also have other commitments and contingent liabilities
related to legal proceedings, self-insurance programs and
matters arising out of the normal course of business. We
accrue contingencies based upon a range of possible
outcomes. If no amount within this range is a better estimate
than any other, then we accrue the minimum amount.
We are also subject to a number of routine lawsuits,
investigations and claims (some of which involve substantial
amounts) arising out of the ordinary course of our business.
We do not believe that these matters will have a material
adverse effect upon our competitive position, results of
operations, cash flows or financial condition.
NOTE 18: SEGMENT FINANCIAL DATA
Our operations for the periods presented herein are classified
into six principal segments. The segments are generally
determined based on the management of the businesses and
on the basis of separate groups of operating companies, each
with general operating autonomy over diversified products
and services.
Otis products include elevators, escalators, moving walkways
and service sold to customers in the commercial and
residential property industries around the world.
Carrier products include HVAC and refrigeration systems,
controls, services and energy efficient products for
residential, commercial, industrial and transportation
applications.
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