Raytheon 2004 Annual Report Download - page 79

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61
Notes to Consolidated Financial Statements (Continued)
INVENTORIES Inventories are stated at cost (first-in, first-out or average cost), but not in excess of realizable
value. A provision for excess or inactive inventory is recorded based upon an analysis that considers current
inventory levels, historical usage patterns, future sales expectations, and salvage value.
PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Major improvements
are capitalized while expenditures for maintenance, repairs, and minor improvements are charged to expense.
When assets are retired or otherwise disposed of, the assets and related accumulated depreciation and amortization
are eliminated from the accounts and any resulting gain or loss is reflected in income. Gains and losses resulting
from the sale of plant and equipment at the defense businesses are included in overhead and reflected in the pricing
of products and services to the U.S. government.
Provisions for depreciation are generally computed using a combination of accelerated and straight-line
methods. Depreciation provisions are based on estimated useful lives as follows: buildings – 20 to 45 years,
machinery and equipment – 3 to 10 years, and equipment leased to others – 5 to 10 years. Leasehold improvements
are amortized over the lesser of the remaining life of the lease or the estimated useful life of the improvement.
IMPAIRMENT OF LONG-LIVED ASSETS Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). This accounting standard
addresses financial accounting and reporting for goodwill and other intangible assets and requires that periodic
tests of goodwill impairment be performed. A two-step impairment test is used to first identify potential goodwill
impairment and then measure the amount of goodwill impairment loss, if any.
In 2002, the Company recorded a goodwill impairment charge of $360 million related to its former Aircraft
Integration Systems business (AIS) as a cumulative effect of change in accounting principle. The fair value of AIS
was determined based upon the proceeds received by the Company in connection with the sale, as described in
Note B, Discontinued Operations. Due to the non-deductibility of this goodwill, the Company did not record a tax
benefit in connection with this impairment. Also in 2002, the Company completed the transitional review for
potential goodwill impairment in accordance with SFAS No. 142 and recorded a goodwill impairment charge of
$185 million pretax or $149 million after-tax, which represented all of the goodwill at Raytheon Aircraft, as a
cumulative effect of change in accounting principle. The fair value of Raytheon Aircraft was determined using a
discounted cash flow approach. The total goodwill impairment charge in 2002 was $545 million pretax, $509
million after-tax, $1.27 per basic share, or $1.25 per diluted share. The Company performs the annual impairment
test in the fourth quarter of each year. There was no goodwill impairment associated with the annual impairment
test performed in the fourth quarter of 2004, 2003 and 2002.
The amount of goodwill by segment at December 31, 2004 was $755 million for Integrated Defense Systems,
$1,349 million for Intelligence and Information Systems, $3,438 million for Missile Systems, $2,306 million for
Network Centric Systems, $2,674 million for Space and Airborne Systems, $867 million for Technical Services, and
$127 million for Other. Information about additions to goodwill is included in Note C, Acquisitions and
Divestitures. The amount of goodwill by segment at December 31, 2003 was $752 million for Integrated Defense
Systems, $1,349 million for Intelligence and Information Systems, $3,438 million for Missile Systems, $2,306
million for Network Centric Systems, $2,639 million for Space and Airborne Systems, $868 million for Technical
Services, and $127 million for Other.
Intangible assets subject to amortization consisted primarily of drawings and intellectual property totaling $74
million (net of $52 million of accumulated amortization) at December 31, 2004 and $59 million (net of $38 million