Raytheon 2013 Annual Report Download - page 79

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the notional value in the offset agreements. Offset programs usually extend over several or more years and may provide for
penalties in the event we fail to perform in accordance with offset requirements. We have historically not been required to
pay any such penalties.
As a government contractor, we are subject to many levels of audit and investigation by the U.S. Government relating to our
contract performance and compliance with applicable rules and regulations. Agencies that oversee contract performance
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.
On July 22, 2010, Raytheon Systems Limited (RSL) was notified by the UK Border Agency (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 amounts of revenue and cost under the program in the second quarter of 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 $579 million based on foreign exchange rates as of December 31, 2013) 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 was included in the operating expenses of our Intelligence, Information and Services (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 $827 million based on foreign exchange rates as of December 31,
2013) against the UKBA for the collection of receivables, damages and interest. 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