Raytheon 2014 Annual Report Download - page 80

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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 $545 million based on foreign exchange rates as of December 31, 2014) 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 $778 million based on foreign exchange rates as of December 31,
2014) 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
post termination costs, and approximately £33 million for interest, raising the gross amount of the UKBA claim for damages
and clawback of previous payments to approximately £415 million (approximately $646 million based on foreign exchange
rates as of December 31, 2014). 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 mounted 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. In March 2013, the UKBA updated the total net amount of its claims to
approximately £302 million (approximately $470 million based on foreign exchange rates as of December 31, 2014) for
damages, clawback of previous payments and interest, and inclusive of a credit for capability delivered by RSL. Arbitration
hearings commenced in late 2013 and were completed in 2013. We continue to believe that the receivables and other assets
remaining under the program for technology and services delivered of approximately $40 million at December 31, 2014 are
probable of recovery.
On August 15, 2014, RSL received a decision from the Tribunal. The Tribunal found that the UKBA had unlawfully terminated
RSL for default and had therefore repudiated the eBorders contract with RSL. Accordingly, the Tribunal denied the UKBA’s
claims for damages and clawback of previous payments. In addition, the Tribunal found that the UKBA had wrongfully retained
the $80 million it had drawn on RSL letters of credit in April 2011. The Tribunal awarded RSL approximately £185 million
(approximately $288 million based on foreign exchange rates as of December 31, 2014) as payment for capabilities delivered,
damages and other monetary relief. The Tribunal reserved ruling on costs and on the quantification of interest payable to RSL
for a later date.