Raytheon 2012 Annual Report Download - page 48

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Impairment of Goodwill
We evaluate our goodwill for impairment annually as of the first day of the fourth quarter and in any interim period in which
circumstances arise that indicate our goodwill may be impaired. Indicators of impairment include, but are not limited to, the
loss of significant business, significant decreases in federal government appropriations or funding for our contracts, or other
significant adverse changes in industry or market conditions. No events occurred during the periods presented that indicated
the existence of an impairment with respect to our goodwill. We estimate the fair value of our reporting units using a discounted
cash flow (DCF) model based on our most recent long-range plan in place at the time of our impairment testing, and compare
the estimated fair value of each reporting unit to its net book value, including goodwill. We discount the cash flow forecasts
using the weighted-average cost of capital method at the date of evaluation. The weighted-average cost of capital is comprised
of the estimated required rate of return on equity, based on publicly available data for peer companies, plus an equity risk
premium related to specific company risk factors, and the after-tax rate of return on debt, weighted at the relative values of
the estimated debt and equity for the industry. Preparation of forecasts for use in the long-range plan and the selection of the
discount rate involve significant judgments that we base primarily on existing firm orders, expected future orders, contracts
with suppliers, labor agreements and general market conditions. Significant changes in these forecasts or the discount rate
selected could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment
charge in a future period. The combined estimated fair value of all of our reporting units from our DCF model resulted in a
premium over our market capitalization, commonly referred to as a control premium. We believe our control premium is
reasonable based upon historic data of premiums paid on actual transactions within our industry. When available and as
appropriate, we also use comparative market multiples to corroborate our DCF model results. There was no indication of
goodwill impairment as a result of our 2012 impairment analysis. The fair values of each of our reporting units exceeded their
respective net book values, including goodwill. Based on our 2012 impairment analysis, the reporting unit that was closest to
impairment had a fair value in excess of net book value, including goodwill, of more than 47%. All other factors being equal,
a 10% decrease in expected future cash flows for that reporting unit would result in an excess of fair value over net book value
of approximately 30%. Alternatively, all other factors being equal, a 100 basis points increase in the discount rate used in the
calculation of the fair value of that reporting unit would result in an excess of fair value over net book value of approximately
25%. If we are required to record an impairment charge in the future, it could materially affect our results of operations.