United Technologies 2012 Annual Report Download - page 96

94 UNITED TECHNOLOGIES CORPORATION
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 inves-
tigations (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. Govern-
ment 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 set-
tled some allegations and continue to litigate certain cases. In addi-
tion, we accrue for liabilities associated with those matters that are
probable and can be reasonably estimated. The most likely settle-
ment 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 govern-
ment 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 & Whit-
ney 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 trial court for further proceedings.
On June 18, 2012, the trial court found that Pratt & Whit-
ney had breached other obligations imposed by common law
based on the same conduct with respect to which the court pre-
viously found liability under the False Claims Act. Under the com-
mon law claims, the U.S. Air Force may seek damages for events
occurring before March 3, 1989, which are not recoverable under
the False Claims Act. Further proceedings at the trial court will
determine the damages, if any, relating to the False Claims Act and
common law claims. The government continues to seek damages
of $624 million, plus interest. Pratt & Whitney continues to contend
that the government suffered no actual damages. The parties have
submitted briefs and await a decision from the trial court. 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 Depart-
ment of Defense (DOD) issued a contract claim against Sikorsky to
recover overpayments the DOD alleges it has incurred since Jan-
uary 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 gov-
ernment contracts. The DOD claims that Sikorsky’s liability is
approximately $94 million (including interest through December 31,
2012). We believe this claim is without merit and Sikorsky filed an
appeal in December 2009 with the U.S. Court of Federal Claims.
Trial in the matter concluded in January 2013 and we await a deci-
sion from the court. 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.
As previously disclosed, UTC has been involved in admin-
istrative review proceedings with the German Tax Office concerning
€203 million (approximately $270 million) of tax benefits that we
have claimed related to a 1998 reorganization of the corporate
structure of Otis operations in Germany. A portion of these tax
benefits were disallowed by the local German Tax Office on July 5,
2012, as a result of the audit of tax years 1999 to 2000. The legal
and factual issues relating to the denial of the tax benefits center on
the interpretation and application of a German tax law. On
August 3, 2012, the Company filed suit in the local German tax
court and intends to litigate vigorously the matter to conclusion. We
do not believe the resolution of this matter will have a material
adverse effect on our results of operations, cash flows or financial
condition.