Raytheon 2003 Annual Report Download - page 43

P41 333 RAYTHEON COMPANY 333
COMPREHENSIVE INCOME Comprehensive income and its
components are presented in the statement of stockholders’ equity.
Accumulated other comprehensive income consisted of the fol-
lowing at December 31:
(In millions) 2003 2002
Minimum pension liability $(2,240) $(2,122)
Unrealized losses on interest-only strips (2) (2)
Interest rate lock (1) (2)
Foreign exchange translation 24 (58)
Cash flow hedges 24 5
Unrealized gains (losses) on investments 1(1)
Total $(2,194) $(2,180)
The minimum pension liability adjustment is shown net of tax
benefits of $1,195 million and $1,132 million at December 31,
2003 and 2002, respectively. The unrealized losses on interest-
only strips are shown net of tax benefits of $1 million at December 31,
2003 and 2002. The interest rate lock is shown net of tax benefits
of $1 million at December 31, 2003 and 2002. The cash flow
hedges are shown net of tax liabilities of $13 million and $3 million
at December 31, 2003 and 2002, respectively.
TRANSLATION OF FOREIGN CURRENCIES Assets and lia-
bilities of foreign subsidiaries are translated at current exchange
rates and the effects of these translation adjustments are reported
as a component of accumulated other comprehensive income in
stockholders’ equity. Deferred taxes are not recognized for translation-
related temporary differences of foreign subsidiaries as their undis-
tributed earnings are considered to be permanently invested.
Income and expenses in foreign currencies are translated at the
weighted-average exchange rate during the period. Foreign
exchange transaction gains and losses in 2003, 2002, and 2001
were not material.
PENSION COSTS The Company has several pension and
retirement plans covering the majority of employees, including cer-
tain employees in foreign countries. Annual charges to income are
made for the cost of the plans, including current service costs, inter-
est on projected benefit obligations, and net amortization and defer-
rals, increased or reduced by the return on assets. Unfunded
accumulated benefit obligations are accounted for as a long-term
liability. The Company funds annually those pension costs which are
calculated in accordance with Internal Revenue Service regulations
and standards issued by the Cost Accounting Standards Board.
INTEREST RATE AND FOREIGN CURRENCY CONTRACTS
The Company meets its working capital requirements with a combi-
nation of variable rate short-term and fixed rate long-term financing.
The Company enters into interest rate swap agreements or interest
rate locks with commercial and investment banks primarily to man-
age interest rates associated with the Company’s financing
arrangements. The Company also enters into foreign currency for-
ward contracts with commercial banks only to fix the dollar value of
specific commitments and payments to international vendors and
the value of foreign currency denominated receipts. The hedges
used by the Company are transaction driven and are directly
related to a particular asset, liability, or transaction for which a com-
mitment is in place. These instruments are executed with credit-
worthy institutions and the majority of the foreign currencies are
denominated in currencies of major industrial countries. The
Company does not hold or issue financial instruments for trading or
speculative purposes.
FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated
fair value of certain financial instruments, including cash, cash
equivalents, and short-term debt approximates the carrying value
due to their short maturities and varying interest rates. The esti-
mated fair value of notes receivable approximates the carrying
value based principally on the underlying interest rates and terms,
maturities, collateral, and credit status of the receivables. The
estimated fair value of investments, other than those accounted
for under the cost or equity method, are based on quoted market
prices. The estimated fair value of long-term debt of approxi-
mately $7.0 billion at December 31, 2003 was based on quoted
market prices.
Estimated fair values for financial instruments are based on pric-
ing models using current market information. The amounts realized
upon settlement of these financial instruments will depend on actual
market conditions during the remaining life of the instruments.
EMPLOYEE STOCK PLANS Proceeds from the exercise of
stock options under employee stock plans are credited to common
stock at par value and the excess is credited to additional paid-in
capital. The fair value at the date of award of restricted stock is
credited to common stock at par value and the excess is credited
to additional paid-in capital. The fair value is charged to income as
compensation expense over the vesting period. Income tax bene-
fits arising from employees’ premature disposition of stock option
shares and exercise of nonqualified stock options are credited to
additional paid-in capital.
The Company applies Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations, in accounting for its stock-based compensation
plans. Accordingly, no compensation expense has been recog-
nized for its stock-based compensation plans other than for
restricted stock.
Had compensation expense for the Company’s stock option
plans been determined based on the fair value at the grant date for
awards under these plans, consistent with the methodology
prescribed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, the