Raytheon 2005 Annual Report Download - page 40

We use estimates in accounting for many of our programs and our new commercial aircraft and changes in our estimates
could adversely affect our future financial results.
Contract accounting requires 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. For example, we must make assumptions regarding the length of time to complete the contract because
costs also include expected increases in wages and prices for materials; consider incentives or penalties related to
performance on contracts in estimating sales and profit rates, and record them when there is sufficient information for us
to assess anticipated performance; and use estimates of award fees in estimating sales and profit rates based on actual and
anticipated awards.
In addition, we use lot accounting for our new commercial aircraft such as the Beechcraft Premier I and the Hawker
4000. Lot accounting involves selecting an initial lot size at the time a new aircraft begins to be delivered and measuring
an average margin over the entire lot for each aircraft sold. The costs attributed to aircraft delivered are based on the
estimated average margin 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.
Accordingly, the selection of lot size is a critical judgment. We determine 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.
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, including our ability to sell at least the number of aircraft
included in the initial lot size, or if the underlying circumstances were to change. Changes in underlying assumptions,
circumstances or estimates may adversely affect our future results of operations and financial condition.
We must assess the value of used aircraft and aircraft materials and parts which requires significant judgment, and
changes in the value of such items could adversely affect our future financial results.
The valuation of used aircraft in inventories, which are stated at cost, but not in excess of realizable value, requires
significant judgment. The valuation of used aircraft is also considered in assessing the realizable value of certain
commuter aircraft-related assets which serve as collateral for the underlying financing arrangements. As part of our
assessment of realizable value, we evaluate many factors, including current and future market conditions, the age and
condition of the aircraft, and availability levels for the aircraft in the market. In addition, the valuation of aircraft
materials and parts that support our worldwide fleet of aircraft, which are stated at cost, but not in excess of realizable
value, also requires significant judgment. As part of our assessment of realizable value, we evaluate many factors,
including the expected useful life of the aircraft, some of which have remained in service for up to 50 years. Furthermore,
we assumed an orderly disposition of both used aircraft and aircraft materials and parts in connection with our
assessments of realizable value. Changes in market or economic conditions and changes in products or competitive
products may adversely impact the future valuation of used aircraft and aircraft materials and parts and such change in
valuation could negatively impact our future financial condition and results of operations.
Goodwill and other intangible assets represent a significant portion of our assets and any impairment of these assets could
negatively impact our results of operation.
At December 31, 2005, we had goodwill and other intangible assets of approximately $12.1 billion, net of accumulated
amortization, which represented approximately 50% of our total assets. Our goodwill is subject to an impairment test on
an annual basis and is also tested whenever events and circumstances indicate that goodwill may be impaired. Any excess
goodwill carrying value resulting from the impairment test must be written off in the period of determination. Intangible
assets (other than goodwill) are generally amortized over a one to five-year period. In addition, we will continue to incur
non-cash charges in connection with the amortization of our intangible assets other than goodwill over the remaining
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