Raytheon 2014 Annual Report Download - page 51

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Impairment of Goodwill
We evaluate our goodwill for impairment annually as of the first day of our fiscal 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. We performed an interim goodwill impairment test and
there was no indication of impairment. 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. 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 2014 annual impairment analysis, as the fair values
of each of our reporting units exceeded their respective net book values, including goodwill. Based on our 2014 impairment
analysis, the reporting unit that was closest to impairment had a fair value in excess of net book value, including goodwill, of
approximately 55%. 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 40%. Alternatively, all other factors being equal, a 100
basis point 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 35%. If we are required to record an impairment charge in the future, it
could materially affect our results of operations.
CONSOLIDATED RESULTS OF OPERATIONS
Total Net Sales
The composition of external net sales by products and services for each segment in 2014 was approximately the following:
External Net Sales by Products and Services (% of segment total external net sales)
IDS IIS MS SAS
Products 90% 50% 95% 90%
Services 10% 50% 5% 10%
% of Total Net Sales
(In millions, except percentages) 2014 2013 2012 2014 2013 2012
Net sales
Products $ 19,126 $ 19,855 $ 20,380 83.8% 83.8% 83.5%
Services 3,700 3,851 4,034 16.2% 16.2% 16.5%
Total net sales $ 22,826 $ 23,706 $ 24,414 100.0% 100.0% 100.0%
Total Net Sales - 2014 vs. 2013—The decrease in total net sales of $880 million in 2014 compared to 2013 was primarily due
to lower external net sales of $404 million at IDS and $267 million at MS. The decrease in external net sales at IDS was
primarily due to lower net sales from the scheduled completion of certain production phases on various Patriot programs for
international customers, lower net sales on a close combat tactical radar program due to planned decreases in production and
lower net sales on a missile defense radar program for an international customer also due to planned decreases in production.
The decrease in external net sales at IDS was partially offset by higher net sales from an international air defense system
program awarded in the fourth quarter of 2013, higher net sales from an international Patriot program awarded in the first
quarter of 2014 and higher net sales from an international Patriot program awarded in the fourth quarter of 2014 driven
primarily by previously deferred precontract costs. The remaining decrease at IDS was spread across numerous programs
with no individual or common significant driver. The decrease in external net sales at MS was primarily due to lower net sales