Raytheon 2012 Annual Report Download - page 109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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include: the Defense Contract Audit Agency, the Defense Contract Management Agency, the Inspector General of the
Department of Defense and other departments and agencies, the Government Accountability Office, the Department of Justice
and Congressional Committees. From time to time, these and other agencies investigate or conduct audits to determine whether
our operations are being conducted in accordance with applicable requirements. Such investigations and audits could result
in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, the suspension
of government export licenses or the suspension or debarment from future U.S. Government contracting. U.S. Government
investigations often take years to complete and many result in no adverse action against us. Our final allowable incurred costs
for each year are also subject to audit and have from time to time resulted in disputes between us and the U.S. Government
with litigation resulting at the Court of Federal Claims (COFC) or the Armed Services Board of Contract Appeals (ASBCA)
or their related courts of appeals. In addition, the Department of Justice has, from time to time, convened grand juries to
investigate possible irregularities by us. We also provide products and services to customers outside of the U.S. and those
sales are subject to local government laws, regulations, and procurement policies and practices. Our compliance with such
local government regulations or any applicable U.S. Government regulations (e.g., the Foreign Corrupt Practices Act and the
International Traffic in Arms Regulations) may also be investigated or audited. Other than as specifically disclosed herein,
we do not expect these audits, investigations or disputes to have a material effect on our financial position, results of operations
or liquidity, either individually or in the aggregate.
We have completed a self-initiated internal review of certain of our international operations, focusing on compliance with the
Foreign Corrupt Practices Act. In the course of the review, we identified possible areas of concern involving certain practices
related to operations in a foreign jurisdiction where we do business. We voluntarily disclosed and shared the results of our
review with the SEC and the DoJ. The SEC staff and the DoJ have completed their review of this matter without recommending
enforcement action.
On July 22, 2010, RSL was notified by the UKBA 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 claiming
entitlement to recovery of certain losses incurred and previous payments made to RSL. We believe that RSL performed well
and delivered substantial capabilities to the UKBA under the program, which has been operating successfully and providing
actionable information since live operations began in May 2009. 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 impact of the UKBA Program Adjustment
reduced IIS' total net sales and operating income by $316 million and $395 million, respectively, for the year ended
December 31, 2010. The UKBA Program Adjustment also reduced total company diluted earnings per share from continuing
operations by $0.75 in the year ended December 31, 2010. On July 29, 2010, RSL filed a dispute notice on the grounds that
the termination by the UKBA was not valid. On August 18, 2010, the UKBA initiated arbitration proceedings on this issue.
On March 22, 2011, the UKBA gave notice that it had presented a demand to draw on the approximately $80 million of letters
of credit provided by RSL upon the signing of the contract with the UKBA in 2007. On March 23, 2011, the UKBA submitted
a detailed claim in the arbitration of approximately £350 million (approximately $565 million based on foreign exchange
rates as of December 31, 2012) for damages and clawback of previous payments, plus interest and arbitration costs, excluding
any credit for capability delivered or draw on the letters of credit. The UKBA also asserted that additional amounts may be
detailed in the claim in the future if estimates of its damages change, and for continuing post-termination losses and any re-
procurement costs, which have not been quantified. At RSL's request, on March 29, 2011, the Arbitration Tribunal issued an
interim order restraining the UKBA from drawing down on the letters of credit pending a hearing on the issue. Following the
hearing, the Tribunal lifted the restraint on the basis that, at this early stage of the proceedings, the Tribunal had not heard the
evidence needed to decide the merits of whether the contractual conditions for a drawdown had been established. The Tribunal
also concluded that any decision on the UKBA's right to call on the letters of credit is inextricably intertwined with the ultimate
decision on the merits in the arbitration. The Tribunal also preserved RSL's right to claim damages should RSL later establish
that the drawdown was not valid. As a result, on April 6, 2011, the UKBA drew the $80 million on the letters of credit.
As a result of the Tribunal's decision that the letters of credit are inextricably intertwined with the ultimate decision on the
merits in the arbitration, we were no longer able to evaluate, independently from the overall claim, the probability of recovery
of any amounts drawn on the letters of credit. We therefore recorded $80 million of costs related to the UKBA drawdown
(UKBA LOC Adjustment), which is included in the operating expenses of our Intelligence and Information Systems (IIS)
segment in the first quarter of 2011.