Raytheon 2004 Annual Report Download - page 38

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20
We use estimates in accounting for many programs. Changes in our estimates could adversely affect our future
financial results.
Contract and program accounting require judgment relative to assessing risks, including risks associated with
customer directed delays and reductions in scheduled deliveries, unfavorable resolutions of claims and contractual
matters, judgments associated with estimating contract revenues and costs, and assumptions for schedule and
technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and cost at
completion is complicated and subject to many variables. Assumptions have to be made regarding the length of
time to complete the contract because costs also include expected increases in wages and prices for materials.
Incentives or penalties related to performance on contracts are considered in estimating sales and profit rates, and
are recorded when there is sufficient information for us to assess anticipated performance. Estimates of award fees
are also used in estimating sales and profit rates based on actual and anticipated awards.
Because of the significance of the judgments and estimation processes described above, it is likely that materially
different amounts could be recorded if we used different assumptions or if the underlying circumstances were to
change. Changes in underlying assumptions, circumstances or estimates may adversely affect future financial
performance.
We consider several factors in determining lot size and use estimates in measuring average cost of manufacturing
aircraft in the lot.
The Company uses lot accounting for new commercial aircraft such as the Beechcraft Premier I and the Hawker
Horizon. Lot accounting involves selecting an initial lot size at the time a new aircraft begins to be delivered and
measuring an average cost over the entire lot for each aircraft sold. The costs attributed to aircraft delivered are
based on the estimated average cost of all aircraft in the lot and are determined under the learning curve concept
which anticipates a predictable decrease in unit costs from cost reduction initiatives and as tasks and production
techniques become more efficient through repetition. Once the initial lot has been completed, the use of lot
accounting is discontinued. The selection of lot size is a critical judgment. The Company determines lot size based
on several factors, including the size of firm backlog, the expected annual production on the aircraft, and the
anticipated market demand for the product.
Incorrect underlying assumptions, circumstances or estimates concerning the selection of the initial lot size or
changes in market condition, along with a failure to realize predicted unit costs from cost reduction initiatives and
repetition of task and production techniques as well as supplier cost reductions, may adversely affect future
financial performance.
We consider several factors when determining the market or carrying value of used general aviation and
commuter aircraft.
The Company considers independent published data on value of used aircraft, comparable like sales, and current
market conditions. Changes in market or economic conditions and changes in products or competitive products
may adversely impact the future valuation of used aircraft.
We may incur additional charges relating to our former Engineering and Construction Business.
We have obligations related to outstanding letters of credit, surety bonds and guarantees (Support Agreements)
provided in connection with a number of contracts and leases of our engineering and construction business unit
(E&C Business), which we sold to Washington Group International in July 2000. In meeting the obligations under
the remaining Support Agreements, we have various risks and exposures, including delays, equipment and
subcontractor performance, warranty closeout, various liquidated damages issues, collection of amounts due under
contracts, and potential adverse claims resolution under various contracts and leases. While these potential
obligations, liabilities and risks or the impact of them are difficult to predict, any one or more of these factors could
have a material adverse impact on our financial condition.