Raytheon 2004 Annual Report Download - page 82

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64
Notes to Consolidated Financial Statements (Continued)
Company performance are achieved over a three-year performance cycle. The Company recognizes compensation
expense for variable award plans over the performance period based upon the then-current market values of the
underlying stock as well as the expected achievement of performance levels.
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 recognized related to the issuance of stock options. 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. Income tax benefits arising from employees’ premature disposition of stock option shares and exercise of
nonqualified stock options are credited to additional paid-in capital.
Had compensation expense for the Company’s stock option awards been determined based on the fair value at
the grant date consistent with the methodology prescribed under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, the Company’s net income and earnings per share would have
approximated the pro forma amounts indicated below:
(In millions except per share amounts) 2004 2003 2002
Reported net income (loss) $ 417 $ 365 $ (640)
Stock-based compensation expense included in reported net income (loss), net of tax 16 54
Compensation expense determined under the fair value method for all stock-based
awards, net of tax (71) (73) (63)
Pro forma net income (loss) $ 362 $ 297 $ (699)
Reported basic earnings (loss) per share $0.95 $0.88 $(1.59)
Reported diluted earnings (loss) per share 0.94 0.88 (1.57)
Pro forma basic earnings (loss) per share $0.83 $0.72 $(1.74)
Pro forma diluted earnings (loss) per share 0.82 0.72 (1.71)
The weighted-average fair value of each stock option granted in 2004, 2003, and 2002 was estimated as $8.70,
$8.57, and $13.46, respectively, on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
2004 2003 2002
Expected life 4 years 4 years 4 years
Assumed annual dividend growth rate 5% ––
Expected volatility 30% 40% 40%
Assumed annual forfeiture rate 8% 8% 12%
The risk free interest rate (month-end yields on 4-year treasury strips equivalent zero coupon) ranged from 2.4%
to 3.6% in 2004, 2.0% to 3.0% in 2003, and 2.5% to 4.7% in 2002.
RECLASSIFICATION OF FINANCIAL STATEMENTS Based upon recent public guidance provided by the staff of
the Securities and Exchange Commission, the Company has determined that certain transactions of Raytheon
Aircraft should be reclassified in the statement of cash flows from investing activities to operating activities.
Those transactions are as follows. The Company provides long-term financing to its aircraft customers. When
the Company sells a plane to a customer and provides long-term financing, no cash is received by the Company.
Origination of financing receivables was $325 million in 2004, $402 million in 2003, and $431 million in 2002. The
Company received proceeds of $59 million in 2004 and $279 million in 2003 related to the sale of certain general