Raytheon 2006 Annual Report Download - page 91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
benchmark data. Based on the foregoing, we determined that the implied fair value of goodwill decreased from $133
million to $78 million which resulted in the $55 million goodwill impairment charge. An additional increase in the
discount rate of 1% would result in an additional goodwill impairment charge of approximately $21 million.
FO must continue to demonstrate substantial operating performance improvement, including achieving its sales forecasts
and reducing operating expenses, to meet its projected financial objectives and estimated future cash flows. We periodically
evaluate whether conditions exist or events have occurred that impact FO’s ability to achieve its financial objectives or
otherwise affect the value of FO, including the matters discussed in Note 12, Commitments and Contingencies. Other
conditions or events may include a downturn in the fractional ownership or general aviation markets, continued increased
competition, an increase in FO’s operating costs due to higher aircraft or other costs, a change in our operating model or
strategy with respect to FO or other information regarding its market value. If, in the future, we determine that the fair value
of FO, which is largely based upon FO’s projected future financial performance assuming continued operations by us, is less
than its carrying value, then our investment in FO could become further impaired. Although we do not believe that FO is
further impaired at this time, 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. As of December 31, 2006, the consolidated net assets of FO
were $239 million including a remaining goodwill balance of $78 million.
There was no goodwill impairment associated with the annual impairment test performed in the fourth quarter 2005 and
2006 other than at Flight Options. The amount of goodwill by segment at December 31, 2006 was $751 million for
Integrated Defense Systems, $1,383 million for Intelligence and Information Systems, $3,431 million for Missile Systems,
$2,363 million for Network Centric Systems, $2,666 million for Space and Airborne Systems, $867 million for Technical
Services and $78 million for Other. 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 goodwill at the Other segment at December 31, 2006 and 2005 was entirely
related to Flight Options. Information about additions to goodwill is included in Note 3, Acquisitions and Divestitures.
Intangible assets subject to amortization consisted primarily of drawings and intellectual property totaling $57 million
(net of $52 million of accumulated amortization) at December 31, 2006 and $50 million (net of $40 million of
accumulated amortization) at December 31, 2005. Amortization expense is expected to approximate $11 million for each
of the next five years.
In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we determine whether long-lived assets are to be held-for-use or held-for-disposal. Upon indication
of possible impairment, we evaluate the recoverability of held-for-use long-lived assets by measuring the carrying amount
of the assets against the related estimated undiscounted future cash flows. When an evaluation indicates that the future
undiscounted cash flows are not sufficient to recover the carrying value of the asset, the asset is adjusted to its estimated
fair value. In order for long-lived assets to be considered held-for-disposal, we must have committed to a plan to dispose
of the assets. Once deemed held-for-disposal, the assets are stated at the lower of carrying amount or fair value.
Computer Software—Internal use computer software, which consists primarily of an integrated financial package, is
stated at cost less accumulated amortization and is amortized using the straight-line method over its estimated useful life,
generally 10 years.
Investments—Investments, which are included in other assets, include equity ownership of 20% to 50% in
unconsolidated affiliates and of less than 20% in other companies. Investments in unconsolidated affiliates, where our
ownership is between 20% and 50%, are accounted for under the equity method. Investments in other companies with
less than 20% ownership are stated at estimated fair value with unrealized gains and losses included in other
comprehensive income (loss).
Advance Payments and Billings in Excess of Costs Incurred—We receive advances, performance-based
payments and progress payments from customers which may exceed costs incurred on certain contracts.
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