Raytheon 2005 Annual Report Download - page 98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company issues guarantees and has banks and surety companies issue, on its behalf, letters of credit and surety
bonds to meet various bid, performance, warranty, retention and advance payment obligations of the Company or its
affiliates. Approximately $312 million, $767 million, and $78 million of these guarantees, letters of credit, and surety
bonds, for which there were stated values, were outstanding at December 31, 2005, respectively, and $294 million, $827
million, and $250 million were outstanding at December 31, 2004, respectively. These instruments expire on various
dates through 2015. Included in guarantees and letters of credit above was $76 million and $183 million at December 31,
2005, respectively and $43 million and $153 million at December 31, 2004, respectively related to the Company’s joint
venture in Thales-Raytheon Systems (TRS). Also, included in guarantees, letters of credit, and surety bonds above was
$94 million, $8 million, and $62 million at December 31, 2005, respectively and $94 million, $9 million, and $234 million
at December 31, 2004, respectively related to discontinued operations. Additional guarantees of project performance for
which there is no stated value also remain outstanding.
The Company provides these guarantees and letters of credit to TRS and other affiliates to assist these entities in
connection with obtaining financing on more favorable terms, making bids on contracts, and performing their
contractual obligations. While the Company expects these entities to satisfy their loans, project performance, and other
contractual obligations, their failure to do so may result in a future obligation for the Company.
In connection with the order for 50 Hawker 4000 aircraft received by RAC in 2005, which is subject to the negotiation
and execution of a mutually agreeable parent guarantee, RAC will be subject to liquidated damages of approximately $80
million if it fails to deliver at least 30 aircraft in accordance with the terms of the agreement. Under the agreement, RAC is
also providing a guaranteed maintenance program which runs for ten years from the delivery date of each Hawker 4000
aircraft and provides for a guaranteed cost of maintenance, subject to annual CPI and other adjustments, for each
aircraft. RAC is responsible for any costs that exceed the guaranteed cost of maintenance.
The customers of Flight Options (FO), in certain instances, have the contractual ability to require FO to buy back their
fractional share based on its current fair market value. The estimated value of this potential obligation was $575 million
and $572 million at December 31, 2005 and 2004, respectively.
RAAS has exposure to outstanding financing arrangements for commuter aircraft, with the aircraft serving as collateral
for these arrangements. Commuter aircraft customers of RAAS are generally thinly capitalized companies whose financial
condition could be significantly affected by sustained higher fuel costs, industry consolidation, and declining commercial
aviation market conditions. At December 31, 2005 and December 31, 2004, the Company’s exposure on commuter
aircraft assets was approximately $509 million relating to 253 aircraft and approximately $614 million relating to 297
aircraft, respectively. The carrying value of commuter aircraft assets assumes an orderly disposition of these assets. If the
Company were to dispose of these assets in an other than orderly disposition, or sell the business in its entirety, the value
realized would likely be reduced.
In 1997, the Company provided a first loss guarantee of $133 million on $1.3 billion of U.S. Export-Import Bank loans
(maturing in 2015) to the Brazilian government related to the System for the Vigilance of the Amazon (SIVAM) program
being performed by the Company’s Network Centric Systems segment. The first interest payment became due and was
paid in 2005.
Defense contractors are subject to many levels of audit and investigation. Agencies that oversee contract performance
include: the Defense Contract Audit Agency, the Department of Defense Inspector General, the Government
Accountability Office, the Department of Justice, and Congressional Committees. The Department of Justice, from time
to time, has convened grand juries to investigate possible irregularities by the Company. Individually and in the
aggregate, these investigations are not expected to have a material adverse effect on the Company’s financial position,
results of operations, or liquidity. Raytheon Aircraft is also subject to oversight by the Federal Aviation Administration
(the “FAA”). The FAA routinely evaluates aircraft operational and safety requirements and is responsible for certification
of new and modified aircraft. Future action by the FAA may adversely affect Raytheon Aircraft’s financial position, results
of operations, and liquidity, including recovery of its investment in its newer aircraft.
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