FINANCIAL CONTENTS
Management's Discussion and Analysis
Consolidated Income Statements
Consolidated
Statements
of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
Note 1. Organization and Significant Accounting Policies (continued)
Contract Accounting For long-term contracts, the Company capitalizes in inventory direct material, direct labor and factory overhead as incurred. The Company also capitalizes certain general and administrative costs for estimating and bidding on contracts awarded (of which approximately $210,000 remained in inventory at December 31, 2001 and 2000). Selling costs are expensed as incurred. Costs to complete long-term contracts are estimated on a monthly basis. Estimated margins at completion are applied to cumulative contract revenue to arrive at costs charged to operations. Accounting for long-term contracts under the percentage of completion method involves substantial estimation processes, including determining the estimated cost to complete a contract. As contracts may require performance over several accounting periods, formal detailed cost-to-complete estimates are performed and updated monthly via performance reports. ManagementÕs estimates of costs-to-complete change due to internal and external factors, such as labor rate and efficiency variances, revised estimates of warranty costs, estimated future material prices and customer specification and testing requirement changes. Changes in estimated costs are reflected in gross profit in the period in which they are known. If increases in projected costs-to-complete are sufficient to create a loss contract, the entire estimated loss is charged to operations in the period the loss first becomes known.
Product Warranty Costs The provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. The accrued liability for warranty costs is included in the caption "Accrued liabilities" in the accompanying consolidated balance sheets.
Concentrations of Credit Risk Financial instruments which potentially expose the Company to concentrations of credit risk consist of accounts receivable. The CompanyÕs customer base consists of various departments or agencies of the U.S. Government, aerospace and defense companies under contract with the U.S. Government and a number of customers in diverse industries across geographic areas. The Company performs periodic credit evaluations of its customersÕ financial condition and does not require collateral on its commercial accounts receivable. Credit losses are provided for in the financial statements and consistently have been within managementÕs expectations. Approximately 41% of accounts receivable outstanding at December 31, 2001 are due from three of the CompanyÕs largest customers. The Company recognized revenue from contracts with the U.S. Government and its agencies of approximately $40,046,000, $45,467,000 and $53,244,000 during the years ended December 31, 2001, 2000 and 1999, respectively. The CompanyÕs largest customers for the year ended December 31, 2001 were Raytheon Company and Honeywell International, Inc., which represented approximately 21% and 11%, respectively, of the CompanyÕs total net revenue. For the year ended December 31, 2000, the CompanyÕs largest customer was Raytheon Company, which represented approximately 15% of the CompanyÕs total net revenue. No other single customer accounted for more than 10% of the CompanyÕs total net revenue for the years ended December 31, 2001, 2000 or 1999.
