Raytheon 2005 Annual Report Download - page 84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-based compensation 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 Company’s net income and earnings per
share would have approximated the pro forma amounts indicated below:
(In millions except per share amounts) 2005 2004 2003
Reported net income $ 871 $ 417 $ 365
Stock-based compensation expense included in reported net income, net of tax 39 16 5
Compensation expense determined under the fair value method for all stock-based
awards, net of tax (72) (71) (73)
Pro forma net income $ 838 $ 362 $ 297
Reported basic earnings per share $1.95 $0.95 $0.88
Reported diluted earnings per share 1.92 0.94 0.88
Pro forma basic earnings per share $1.87 $0.83 $0.72
Pro forma diluted earnings per share 1.85 0.82 0.72
The weighted-average fair value of each stock option granted in 2005, 2004, and 2003 was estimated as $8.44, $8.70, and
$8.57, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions:
(In millions except per share amounts) 2005 2004 2003
Expected life 4 years 4 years 4 years
Assumed annual dividend growth rate 5% 5% —
Expected volatility 30% 30% 40%
Assumed annual forfeiture rate 8% 8% 8%
The risk free interest rate (month-end yields on 4-year treasury strips equivalent zero coupon) was 3.6% in 2005, and
ranged from 2.4% to 3.6% in 2004 and 2.0% to 3.0% in 2003.
Accounting Standards—In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments (SFAS No. 123R). SFAS No. 123R
requires the recognition of compensation expense related to stock options under SFAS No. 123, Accounting for Stock-
Based Compensation. In April 2005, the effective date for this accounting standard was deferred until the first annual
period beginning after June 15, 2005. The Company expects to adopt SFAS No. 123R prospectively in the first quarter of
2006 with an anticipated impact to earnings per share of less than $0.02 per share for the year 2006.
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, an amendment of ARB
No. 43, Chapter 4, Inventory Costs (SFAS No. 151). This accounting standard, which is effective for annual periods
beginning after June 15, 2005, requires that abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges. The adoption of SFAS No. 151 is not expected to
have a material effect on the Company’s financial position, results of operations, or liquidity.
Risks and Uncertainties—The Company is engaged in supplying defense-related equipment to the U.S. and foreign
governments, and is subject to certain business risks specific to that industry. Sales to the government may be affected by
changes in procurement policies, budget considerations, changing concepts of national defense, political developments
abroad, and other factors.
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