Raytheon 2005 Annual Report Download - page 59

decrease in the aggregate realizable value of aircraft materials and parts at December 31, 2005, would result in an
impairment charge of approximately $5 million. The Company assumed an orderly disposition for both used aircraft and
aircraft materials and parts in connection with the assessments of realizable value.
Impairment of Goodwill and Long-lived Assets—The Company evaluates the recoverability of long-lived assets
upon indication of possible impairment by measuring the carrying amount of the assets against the related estimated
undiscounted cash flows. When an evaluation indicates that the future undiscounted cash flows are not sufficient to
recover the carrying value of the assets, the assets are adjusted to their estimated fair value. The determination of what
constitutes an indication of possible impairment, the estimation of future cash flows, and the determination of estimated
fair value are all significant judgments. In addition, the Company performs an annual goodwill impairment test in the
fourth quarter of each year. The Company estimates the fair value of reporting units using a discounted cash flow model
based on the Company’s most recent five-year plan and compares the estimated fair value to the net book value of the
reporting unit, including goodwill. Preparation of forecasts for use in the five-year plan involves significant judgments.
Changes in these forecasts could affect the estimated fair value of one or more of the Company’s reporting units and
could result in a goodwill impairment charge in a future period; however, a 10% decrease in the current fair value of each
of the Company’s reporting units would not result in a goodwill impairment charge except at Flight Options. In 2005, the
Company recorded a $22 million pretax, $19 million after-tax, goodwill impairment charge at Flight Options, as
described in Note A, Accounting Policies of the Notes to the Financial Statements.
Pension Costs—The Company has pension plans covering the majority of its employees, including certain employees
in foreign countries. The selection of the assumptions used to determine pension expense or income involves significant
judgment. The Company’s long-term return on asset (ROA) and discount rate assumptions are considered the key
variables in determining pension expense or income. To develop the long-term ROA assumption, the Company
considered the current level of expected returns on risk-free investments, the historical level of the risk premium
associated with the other asset classes in which the Company has invested pension plan assets, and the expectations 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 75% equities with a 9.9% expected return, between 20% and 40% debt securities with a 6.2% expected
return, between 2% and 7% real estate with an 8.2% expected return, and between 2% and 17% other (including private
equity and cash) with a 7.0% expected return. The long-term ROA assumption for the Company’s domestic pension
plans in 2006 is 8.75%, unchanged from 2005. An increase or decrease of 25 basis points in the expected ROA assumption
would increase or decrease the Company’s pension expense in 2006 by approximately $30 million. The discount rate
assumption was determined by using a model consisting of theoretical bond portfolios that closely match the various
durations of the Company’s pension liability duration. The discount rate assumption for the Company’s domestic
pension plans in 2006 is 5.75%, unchanged from 2005. The Company’s pension expense is expected to be approximately
$810 million in 2006 and $723 million in 2007. For every 2.5% that the actual domestic pension plan asset return exceeds
or is less than the long-term ROA assumption for 2006, the Company’s pension expense for 2007 would change by
approximately $17 million. An increase or decrease of 25 basis points in the discount rate assumption for 2007 would
increase or decrease the Company’s pension expense for 2007 by approximately $45 million.
In addition, the Company has $5.1 billion of pension and $427 million of retiree medical deferred actuarial losses
resulting from changes in discount rates, differences between actual and assumed asset returns, medical cost inflation and
differences between actual and assumed demographic experience (actual earnings, rates of turnover and retirement).
These losses are amortized and included in future pension and retiree medical expense over the average employee service
period of approximately 12 years. Although they are included in the liabilities disclosed in Note N, Pension and Other
Employee Benefits, of the Notes to the Financial Statements, they have not yet been recognized on the Company’s balance
sheet.
Effective December 31, 2005, the Company updated its mortality assumption for its pension and post retirement benefit
programs to a blend of the Company’s own historical experience and a table representing broad expectations of U.S.
mortality rates to reflect changes in the lifespan of the pension population. This assumption change results in an increase
in 2006 pension expense of $130 million.
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