Raytheon 2004 Annual Report Download - page 81

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Notes to Consolidated Financial Statements (Continued)
comprehensive income in stockholders’ equity. Deferred taxes are not recognized for translation-related temporary
differences of foreign subsidiaries as their undistributed 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 2004, 2003, and 2002 were not material.
PENSION COSTS The Company has several pension and retirement plans covering the majority of employees,
including certain employees in foreign countries. Annual charges to income are made for the cost of the plans,
including current service costs, interest on projected benefit obligations, and net amortization and deferrals,
increased or reduced by the return on assets. Unfunded accumulated benefit obligations are included in accrued
retiree benefits and other long-term liabilities. 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 combination 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 to manage
interest rates associated with the Company’s financing arrangements. The Company also enters into foreign
currency forward contracts with commercial banks 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 commitment
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 estimated 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 approximately $5.5 billion at December 31,
2004 was based on quoted market prices.
Estimated fair values for financial instruments are based on pricing 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.
MINORITY INTEREST The Company’s minority interest primarily relates to its investment in Thales-Raytheon
Systems Co. Ltd., described in Note G, Other Assets, and is included in other expense, net.
EMPLOYEE STOCK PLANS In 2004, the Company changed the general form of its broad-based equity
compensation. Prior to 2004, the Company primarily issued stock options, the Company now primarily issues
restricted stock. 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.
In 2004, the Company established the Long-term Performance Plan (LTPP) under the 2001 Stock Plan which
provides for awards of common stock to the Company’s senior leadership when specific pre-established levels of