Raytheon 2006 Annual Report Download - page 47

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. 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 our future results of
operations and financial condition.
Goodwill and other intangible assets represent a significant portion of our assets and any impairment of these assets could
negatively impact our results of operations.
At December 31, 2006, we had goodwill and other intangible assets of approximately $12.1 billion, net of accumulated
amortization, which represented approximately 47% 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 resulting from the impairment test must be written off in the period of determination. Intangible assets (other than
goodwill) are generally amortized over the useful life of such assets. Future determinations of significant write-offs of
goodwill as a result of an impairment test or any accelerated amortization of other intangible assets could have a negative
impact on our results of operations and financial condition.
We remain subject to certain risks and uncertainties with respect to Raytheon Aircraft Company while we continue to
operate the business.
While we continue to operate Raytheon Aircraft, we remain subject to certain risks and uncertainties including the risks
associated with: using lot accounting for new commercial aircraft and our valuation of used aircraft and parts in
inventories, both of which require significant judgment and the use of assumptions and estimates; a downturn in the
general aviation and other aircraft markets which could result in declining sales of aircraft and increases in aircraft
inventories and costs; an accident involving our aircraft which could result in significant tort liability and harm our
reputation and result in reduced sales; and compliance with extensive government regulation over aircraft
manufacturing, which could require us to incur greater costs and reduce our margins.
If Flight Options is unable to meet its projected future financial performance or otherwise support its carrying value, we
could record additional impairment charges which could have a negative impact on our results of operations.
Flight Options has a history of operating losses. In the fourth quarter of 2006 and 2005, we recorded a $55 million pretax
and a $22 million pretax goodwill impairment charge related to Flight Options, respectively, based on our determination
that the fair value of the business was not sufficient to recover the carrying value of its assets, including goodwill. We
estimated the fair value of Flight Options using a discounted cash flow methodology. There were no observable market
comparables available. The discounted cash flow methodology was based on the most recent Flight Options long-term
plan at such time and the financial objectives therein. This methodology involves significant judgment regarding Flight
Options’ projected future cash flows, expected market conditions and the impact of these on the selection of the discount
rate used in estimating the fair value of Flight Options. We periodically evaluate whether conditions exist or events have
occurred that impact Flight Options’ ability to achieve its financial objectives or otherwise affect the value of Flight
Options. Such conditions or events may include a downturn in the fractional ownership or general aviation markets or a
significant change in industry dynamics or customer preferences, increased competition or pricing pressures, an increase
in Flight Options’ operating costs due to higher aircraft or other costs, a change in our operating model or strategy with
respect to Flight Options, or other information regarding its market value. If we determine that the fair value of Flight
Options, which is largely based upon Flight Options’ projected future financial performance assuming continued
operation by us, is less than its carrying value, then our investment in Flight Options could become further impaired. In
the event that such a condition or event occurs, we may record additional charges which could have a material adverse
effect on our results of operations. For additional information related to Flight Options, see “Other” within “Segment
Results” within Item 7 of this Form 10-K.
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