Raytheon 2005 Annual Report Download - page 81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred Contract Costs—Certain costs incurred in the performance of the Company’s government contracts are
required to be recorded under generally accepted accounting principles but are not currently allocable to contracts. Such
costs include a portion of the Company’s workers’ compensation, environmental expenses, and asset retirement
obligations. These costs become allocable to contracts when they are paid, at which time they are charged to contracts and
recovered from the government. The Company regularly assesses the probability of recovery of these costs. This
assessment requires the Company to make assumptions about the extent of cost recovery under the Company’s contracts
and the amount of future contract activity. If the level of backlog in the future does not support the continued deferral of
these costs, the profitability of the Company’s remaining contracts could be adversely affected.
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 government and 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 Goodwill and Long-lived Assets—In accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), which addresses financial accounting and
reporting for goodwill and other intangible assets, the Company performs periodic tests of goodwill impairment. A
two-step impairment test is used to first identify potential goodwill impairment and then measure the amount of
goodwill impairment loss, if any. The Company performs the annual impairment test in the fourth quarter of each year.
In 2005, the Company recorded a $22 million pretax, $19 million after-tax goodwill impairment charge in administrative
and selling expenses related to Flight Options (FO) which is included in the Other segment. The impairment was a result
of changes in valuation assumptions, the effect of projecting recent performance variances on future periods and the
addition of $28 million in goodwill resulting from the acquisition of the minority shares. If losses at FO were to continue
over the longer-term or if FO’s financial objectives were no longer expected to be achieved, the Company’s investment in
FO could become further impaired and additional charges may be required. FO must demonstrate substantial operating
results improvement to achieve its financial objectives including achieving its sales forecasts, reducing maintenance
expense, and improving dispatch availability over the 2005 average. The fair value of FO was estimated using a discounted
cash flow methodology since there were no market comparables available. There was no goodwill impairment associated
with the annual impairment test performed in the fourth quarter 2005 other than at FO. There was no goodwill
impairment in the fourth quarter of 2004 and 2003.
The amount of goodwill by segment at December 31, 2005 was $749 million for Integrated Defense Systems, $1,387
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 $133 million for Other.
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.
59