Raytheon 2007 Annual Report Download - page 76

determination that the fair value of the business was not sufficient to recover the carrying value of the assets, including
goodwill. We estimated the fair value of FO using a discounted cash flow methodology based upon the respective FO
long-range plan and the financial objectives therein. This methodology involved significant judgment regarding FO’s
projected future cash flows and expected market conditions, and their impact on the selection of the discount rate used in
estimating the fair value of FO. The 2005 impairment charge was driven by a downturn revision of FO’s then current
long-range plan as a result of 2005 performance, changes in valuation assumptions and the increase in goodwill as a result
of the acquisition of the minority shares. In 2006, FO’s cash flows and financial results improved over 2005; however,
during 2006 and, in particular, in the fourth quarter, certain unexpected events occurred and conditions arose which
negatively impacted the estimated value of the business. In the fourth quarter, FO experienced a significant increase in
competition in its fractional share business and its sales forecast became more difficult to predict as a result of the
acceleration of a continued shift in customer demand from fractional shares to the less predictable membership card
program. During 2006, the business was also negatively affected by the notification of a potential federal excise tax audit
and the pilots’ vote to be represented by a union. As a result of these factors, we increased the discount rate used in
determining FO’s value from 11% in 2005 to 13% in 2006, which reduced the estimated fair value of FO.
The Internal Revenue Service is currently conducting a federal excise tax audit at FO, related to the treatment of certain
FO customer fees and charges. We believe that an unfavorable outcome is not probable because, among other reasons,
there is a reasonable basis for our position that federal excise tax does not apply to management fees charged to FO’s
customers and such position is consistent with industry practice. Nevertheless, the ultimate resolution of this matter is
uncertain and difficult to predict and an unfavorable outcome could have a material effect on our results of discontinued
operations. We have retained this and other tax obligations incurred prior to the sale of FO.
Other Discontinued Operations—In 2000, we sold Raytheon Engineers & Constructors to Washington Group
International, Inc. (WGI). As a result of WGI’s bankruptcy, we were required to perform various contract and lease
obligations under letters of credit, surety bonds and guarantees (Support Agreements) that it had provided to project
owners and other parties. We have since settled many of those Support Agreement obligations. For the remaining
Support Agreement obligations, we have various risks and exposures, including warranty close out, various liquidated
damages issues and potential adverse claims resolution. In 2005, we recorded an after-tax charge of $23 million for an
estimated liability for foreign tax-related matters.
In 2002, we sold Aircraft Integration Systems (AIS) for $1,123 million, net, subject to purchase price adjustments. As part
of the transaction, we retained the responsibility for performance of the Boeing Business Jet (BBJ) program and retained
certain assets related to the BBJ program, which is now essentially complete. In January 2006, a dispute regarding the AIS
purchase price was resolved in arbitration and we recorded a pretax charge of $26 million in 2005 related to this
settlement. In the first quarter of 2006, all liabilities related to the purchase price dispute were discharged.
FINANCIAL CONDITION AND LIQUIDITY
We pursue a capital deployment strategy that balances funding for growing our business, including capital expenditures,
acquisitions and research and development, managing our balance sheet, including debt repayments and pension
contributions, and returning cash to our shareholders, including dividend payments and stock repurchases, as outlined
below. Our need for, cost of and access to funds are dependent on future operating results, as well as other external
conditions. We expect that cash and cash equivalents, cash flow from operations, proceeds from divestitures and other
available financing resources will be sufficient to meet anticipated operating, capital expenditure, investments, debt
service and other financing requirements during the next twelve months and for the foreseeable future.
Operating Activities—Net cash provided by operating activities was $1,198 million in 2007 compared to $2,743
million in 2006 and $2,515 million in 2005. Net cash provided by operating activities from continuing operations was
$1,249 million in 2007 compared to $2,477 million in 2006 and $2,352 million in 2005. The decrease of $1,545 million in
net cash provided by operating activities in 2007 was primarily due to higher pension contributions of $1,318 million in
2007 compared to $561 million in 2006 and higher net cash tax payments. Total federal and foreign tax payments, net of
refunds, were $734 million in 2007 compared to $375 million in 2006 and $56 million in 2005. Net tax payments in 2007
included $631 million of payments related to the sale of Raytheon Aircraft and refunds of $381 million related to a federal
research credit claim and export tax benefit claims. Federal and foreign tax payments for 2008 are expected to
approximate $660 million.
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