Raytheon 2003 Annual Report Download - page 54

RAYTHEON COMPANY 333
Notes to Consolidated Financial Statements (Continued) 33333333333333333333333333333333333333333333
At December 31, 2003, the Company had commitments under
an agreement to outsource a significant portion of its information
technology function requiring minimum annual payments as follows:
(In millions)
2004 $68
2005 67
2006 64
2007 64
2008 64
Thereafter 65
In connection with certain aircraft sales, the Company had
offered trade-in incentives whereby the customer will receive a pre-
determined trade-in value if they purchase another aircraft from the
Company. The difference between the value of these trade-in
incentives, the majority of which expire by the end of 2005, and the
current estimated fair value of the underlying aircraft was approxi-
mately $34 million at December 31, 2003. There is a high degree
of uncertainty inherent in the assessment of the likelihood and
value of trade-in commitments.
The Company self-insures for losses and expenses for aircraft
product liability up to a maximum of $10 million per occurrence and
$50 million annually. Insurance is purchased from third parties
to cover excess aggregate liability exposure from $50 million to
$1.2 billion. This coverage also includes the excess of liability over
$10 million per occurrence. The aircraft product liability reserve
was $15 million and $12 million at December 31, 2003 and
2002, respectively.
The Company is involved in various stages of investigation and
cleanup related to remediation of various environmental sites. The
Company’s estimate of total environmental remediation costs
expected to be incurred is $119 million. Discounted at 8.5 percent,
the Company estimates the liability to be $72 million before U.S.
government recovery and had this amount accrued at December 31,
2003. A portion of these costs are eligible for future recovery
through the pricing of products and services to the U.S. govern-
ment. The recovery of environmental cleanup costs from the U.S.
government is considered probable based on the Company’s long
history of receiving reimbursement for such costs. Accordingly, the
Company has recorded $47 million at December 31, 2003 for the
estimated future recovery of these costs from the U.S. government,
which is included in contracts in process. The Company leases
certain government-owned properties and is generally not liable for
environmental remediation at these sites, therefore, no provision
has been made in the financial statements for these costs. Due to
the complexity of environmental laws and regulations, the varying
costs and effectiveness of alternative cleanup methods and tech-
nologies, the uncertainty of insurance coverage, and the unre-
solved extent of the Company’s responsibility, it is difficult to
determine the ultimate outcome of these matters, however, any
additional liability is not expected to have a material adverse effect
on the Company’s financial position or results of operations.
Environmental remediation costs expected to be incurred are:
(In millions)
2004 $25
2005 14
2006 11
2007 9
2008 7
Thereafter 53
The Company issues guarantees and has banks and surety
companies issue, on its behalf, letters of credit and surety bonds
to meet various bid, performance, warranty, retention, and
advance payment obligations. Approximately $1,316 million,
$890 million, and $389 million of these guarantees, letters of
credit, and surety bonds, for which there were stated values, were
outstanding at December 31, 2003, respectively, and $1,614 mil-
lion, $1,227 million, and $458 million were outstanding at
December 31, 2002, respectively. These instruments expire on
various dates through 2007. At December 31, 2003, the amount
of guarantees, letters of credit, and surety bonds, for which there
were stated values, that remained outstanding was $90 million,
$146 million, and $283 million, respectively, related to discontin-
ued operations and are included in the numbers above. Additional
guarantees of project performance for which there is no stated
value also remain outstanding.
In 1997, the Company provided a first loss guarantee of
$133 million on $1.3 billion of U.S. Export-Import Bank debt
through 2015 related to the Brazilian government’s System for the
Vigilance of the Amazon (SIVAM) program.
Defense contractors are subject to many levels of audit and
investigation. Agencies that oversee contract performance include:
the Defense Contract Audit Agency, the Department of Defense
Inspector General, the General Accounting Office, the Department
of Justice, and Congressional Committees. The Department of
Justice, from time to time, has convened grand juries to investigate
possible irregularities by the Company. Except as noted in the fol-
lowing paragraphs, individually and in the aggregate, these investi-
gations are not expected to have a material adverse effect on the
Company’s financial position or results of operations.
In 2002, the Company received service of a grand jury sub-
poena issued by the United States District Court for the Central
District of California. The subpoena seeks documents related to
the activities of an international sales representative engaged by
the Company related to a foreign military sales contract in Korea in
the late 1990s. The Company has cooperated fully in the investiga-
tion including producing documents in response to the subpoena.
The Company has in place appropriate compliance policies and
procedures, and believes its conduct has been consistent with
those policies and procedures.