Four months’ warning at United Technologies…

Late last week, news hit that units of United Technologies (UTX) would pay $75 million to settle allegations (PDF) that they had helped China build an attack helicopter — and one of those subsidiaries, Pratt & Whitney Canada, pleaded guilty to violating the U.S. Arms Export Control Act. The government even put together a snazzy info-graphic on the settlement — the first of its kind that we’ve noticed.

This should all sound a little familiar to footnotedPro subscribers: On February 9, we published a report [PDF, subscription required] warning that United Technologies faced potentially serious investigations by the U.S. Justice Department and State Department over its engine sales to China, based on new disclosures by the company in the 10-K that the company filed the same day.

The company cast the disclosures as routine — burying them after a series of stale disclosures dating back as far as 2007 and 2008, and backing into the crux of the news with a lengthy discourse on how the company usually reports export-control violations voluntarily. The first mention of a criminal inquiry came halfway through the next, 113-word paragraph. It was the first mention of the controversy in the company’s filings that we could find, despite some chatter on the Web (including at the ExportLawBlog) questioning the exports.

There were other details of the disclosure that caught our eye. The company, unusually, warned that the government was questioning the good faith, speed and completeness of its voluntary disclosure of potential problems; it wasn’t completely clear that the DOJ and State Department inquiries paralleled one another completely, raising questions about how close to resolution these problems really were; and software exports were at issue, in addition to the Canadian hardware exports, which could bring U.S.-based units more squarely into the government’s cross-hairs.

Sure enough, the criminal charges and highly unusual guilty plea are what caught everyone’s attention when the news finally broke — more than four months after our report; and software exports proved to be at the center of the inquiry. Of the $75 million United Technologies is paying, about $21 million consists of penalties and forfeitures, while the rest, Reuters tells us, went to the State Department to resolve “576 administrative export control violations.”

Since our February 9 report, United Technologies’ stock is down about 7.6%, trailing the S&P 500 by almost 7 percentage points and other diversified industrials (on a total-return basis) by about 4.2 points year-to-date. Still, the stock has risen slightly since the day of the news, and the consensus is that the financial impact is immaterial to United Technologies (something we acknowledged was likely in our February report).

In the end, the reputational harm is done, and we’ll see how it affects the company in getting future contracts — and any future violations of the law could cause bigger headaches for the company, given its two-year deferred-prosecution agreement (PDF). Meantime, we’ll be keeping an eye out for signs that other companies are in bigger trouble than they’re letting on.

Image source: Military helicopter rotor blade (probably not the Z-10) via


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