Raytheon 2012 Annual Report Download - page 82

74
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.
In June 2011, RSL submitted in the arbitration its defenses to the UKBA claim as well as substantial counterclaims in the
amount of approximately £500 million (approximately $808 million based on foreign exchange rates as of December 31,
2012) against the UKBA for the collection of receivables and damages. On October 3, 2011, the UKBA filed its reply to RSL's
counterclaims, and increased its claim amount by approximately £32 million, to include additional civil service and post-
termination costs, and approximately £33 million for interest, raising the total gross amount of the UKBA claim for damages
and clawback of previous payments to approximately £415 million (approximately $670 million based on foreign exchange
rates as of December 31, 2012). On January 6, 2012, RSL filed its response to the UKBA's reply. RSL is pursuing vigorously
the collection of all receivables for the program and damages in connection with the wrongful termination and is mounting a
strong defense to the UKBA's alleged claims for losses and previous payments. RSL has also settled substantially all
subcontractor claims, novated all key subcontracts to the UKBA and agreed with the UKBA that RSL's exit obligations to
operate the previously delivered capability ended in April 2011. Effective April 15, 2011, the UKBA took over responsibility
for operating the previously delivered capability.
The receivables and other assets remaining under the program for technology and services delivered were approximately $40
million at December 31, 2012 and 2011. We believe the remaining receivables and other assets are probable of recovery in
litigation or arbitration. We currently do not believe it is probable that RSL is liable for losses, previous payments (which
includes the $80 million related to the drawdown on the letters of credit), clawback or other claims asserted by the UKBA
either in its March 2011 arbitration filing or its October 2011 reply. Due to the inherent uncertainties in litigation and arbitration,
and the complexity and technical nature of actual and potential claims and counterclaims, it is reasonably possible that the
ultimate amount of any resolution of the termination could be less or greater than the amounts we have recorded. For the same
reasons, at this time, we are unable to estimate a range of the possible loss or recovery, if any, beyond the claim and counterclaim
amounts. If we fail to collect the receivable balances or are required to make payments against claims or other losses asserted
by the UKBA in excess of the amounts we have recorded, it could have a material adverse effect on our financial position,
results of operations or liquidity. Arbitration hearings commenced in late 2012 and we expect to have a decision in 2013.
On June 29, 2012 and July 13, 2012, we received a contracting officer’s final decision (COFD) for 2005 and 2004 incurred
costs at our SAS business. The COFDs demand a total payment of $241 million for costs, interest and penalties associated
with several issues, the largest of which relates to specific research and development and capital projects undertaken by SAS
between 2000 and 2005. To date, no COFDs have been provided for 2000 to 2003 periods at SAS on these issues. The
Government alleges that the costs incurred on the projects should have been charged directly to U.S. Government contracts
rather than through indirect rates and that these costs should not be recoverable. We strongly disagree with the Government's
position. We have requested a deferment of the payment and intend to litigate the issues. Due to the inherent uncertainties of
litigation, we cannot estimate a range of potential loss. We believe that we appropriately charged the disputed costs based on
government accounting standards and applicable precedent and properly disclosed our approach to the Government. We also
believe that in many cases, the statute of limitations has run on the issues. Based upon the foregoing, we do not expect the