Raytheon 2004 Annual Report Download - page 55

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for future returns of each asset class. Since the Company’s investment policy is to employ active management
strategies in all asset classes, the potential exists to outperform the broader markets, therefore, the expected returns
are higher than the broader markets. The expected return for each asset class was then weighted based upon an asset
allocation within the Company’s policy allocation ranges to develop the long-term ROA assumption. The policy
asset allocation ranges are between 50 and 76 percent equities with a 9.3% expected return, between 20 and 40
percent fixed income with a 6.6% expected return, between 2 and 7 percent real estate with a 9.9% expected return,
and between 2 and 17 percent other (including private equity and cash) with a 12.4% expected return. The long-
term ROA assumption for the Company’s domestic pension plans in 2005 is 8.75%. The discount rate assumption
was determined by using a model consisting of theoretical bond portfolios that match the various durations of the
Company’s pension liability duration. The discount rate assumption for the Company’s domestic pension plans in
2005 is 5.75%. The Company’s pension expense is expected to be approximately $800 million in 2005 and $700
million in 2006. For every 2.5 percent that the actual domestic pension plan asset return exceeds or is less than the
long-term ROA assumption for 2005, the Company’s pension expense for 2006 will change by approximately $15
million. If the Company adjusts the discount rate assumption for 2006 up or down by 25 basis points, the
Company’s pension expense for 2006 would change by approximately $45 million.
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Net sales were $20.2 billion in 2004, $18.1 billion in 2003, and $16.8 billion in 2002. The increase in sales was due
primarily to higher U.S. Department of Defense expenditures in the Company’s defense businesses, primarily
Integrated Defense Systems and Space and Airborne Systems as well as higher sales at Raytheon Aircraft. Sales to
the U.S. Department of Defense were 67 percent of sales in 2004, 65 percent in 2003, and 62 percent in 2002. Total
sales to the U.S. government, including foreign military sales, were 74 percent of sales in 2004 and 2003 and 73
percent in 2002. International sales, including foreign military sales, were $3.7 billion or 18 percent of sales in 2004,
$3.5 billion or 19 percent in 2003, and $3.5 billion or 21 percent in 2002. While international sales have remained
essentially flat, the amount as a percent of sales has declined as a result of increased sales to the U.S. Department of
Defense.
Gross margin (net sales less cost of sales) was $3.3 billion in 2004, $3.1 billion in 2003, and $3.4 billion in 2002,
or 16.4 percent of sales in 2004, 17.2 percent in 2003, and 20.3 percent in 2002. Included in gross margin was a FAS/
CAS Pension Adjustment, described below, of $474 million of expense, $109 million of expense, and $210 million
of income in 2004, 2003, and 2002, respectively. The change in the FAS/CAS Pension Adjustment was due primarily
to the reduction in the Company’s discount rate assumption under SFAS No. 87 and the actual rate of return on
pension plan assets in 2000 and 2001. The decrease in gross margin as a percent of sales in 2004 and 2003 was due
to the increase in the FAS/CAS Pension Adjustment. Also included in gross margin in 2003 were charges of $237
million at Network Centric Systems and $39 million at Technical Services.
Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions (SFAS No. 87),
outlines the methodology used to determine pension expense or income for financial reporting purposes, which is
not necessarily indicative of the funding requirements of pension plans, which are determined by other factors. A
major factor in determining pension funding requirements are Cost Accounting Standards (CAS) that proscribe the
allocation to and recovery of pension costs on U.S. government contracts. The difference between SFAS No. 87
(FAS) pension expense or income and CAS pension expense is reported as a separate line item in the Company’s
segment results called FAS/CAS Pension Adjustment. The results for each segment only include pension expense as
determined under CAS, which can generally be recovered through the pricing of products and services to the U.S.
government.