Raytheon 2010 Annual Report Download - page 101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On July 22, 2010, Raytheon Systems Limited (“RSL”) was notified by the UK Border Agency that it had been terminated
for cause on a program. The termination notice included allegations that RSL had failed to perform on certain key
milestones and other matters in addition to claims to recover certain losses incurred and previous payments made to RSL.
We believe that RSL performed well and delivered substantial capabilities to the UK Border Agency under the program,
which has been operating successfully and providing actionable information since live operations began in May 2009. On
July 29, 2010, RSL filed a dispute notice on the grounds that the termination by the UK Border Agency was not valid. On
August 18, 2010, the UK Border Agency initiated arbitration proceedings on this issue. We expect the arbitration
procedures to commence in the first half of 2011. We intend to pursue vigorously the collection of receivables for the
program and damages in connection with the termination and defend ourselves against the UK Border Agency’s claims
for losses and previous payments.
As a result of the termination notice, we adjusted our estimated amount of revenue and costs under the program in the
second quarter of 2010. The adjustment was based on our determination that certain assets were no longer expected to be
recovered and for estimated costs for certain exit cost obligations under the contract and the estimated settlement of
expected future subcontractor claims. The impact of the adjustment reduced Intelligence and Information Systems’ total
net sales and operating income by $316 million and $395 million, respectively, for the year ended December 31, 2010. At
December 31, 2010, we had approximately $80 million in letters of credit and approximately $70 million of receivables
and other assets remaining under the program for technology and services delivered, which we believe, are probable of
recovery in litigation or arbitration. No amounts have been drawn down on the letters of credit. We currently do not
believe it is probable that we are liable for losses, previous payments or other claims asserted by the UK Border Agency.
Due to the inherent uncertainties in litigation and arbitration as noted above, and the complexity and technical nature of
potential claims and counterclaims, as well as the resolution of the related matters involving subcontractors, it is
reasonably possible that the ultimate amount of any resolution of the termination could be less or greater than our
estimate and at this time, we are unable to estimate a range of the potential difference in such amounts, if any. If we are
unsuccessful in recovering amounts drawn on the letters of credit, if any, fail to collect the receivable balance, are required
to make payments against claims or other losses asserted by the UK Border Agency or pay subcontractor claims in excess
of our estimates made in connection with the adjustment in the second quarter of 2010 described above, it could have a
material adverse effect on our financial position, results of operations or liquidity.
In addition, various other claims and legal proceedings generally incidental to the normal course of business are pending
or threatened against us. We do not expect any additional liability from these proceedings to have a material adverse
effect on our financial position, results of operations or liquidity.
Product Warranty—We provide for product warranties in conjunction with certain product sales for which we recognize
revenue upon delivery.
Activity related to product warranty accruals was as follows:
(In millions)
Balance at December 31, 2007 $47
Provisions for warranties 5
Warranty services provided (13)
Balance at December 31, 2008 39
Provisions for warranties 7
Warranty services provided (7)
Balance at December 31, 2009 39
Provisions for warranties 14
Warranty services provided (10)
Balance at December 31, 2010 $43
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