Raytheon 2006 Annual Report Download - page 66

To develop the long-term ROA assumption, we perform periodic studies which consider our asset allocation strategies,
recent and anticipated future long-term performance of individual asset classes, and the associated risk. Since our
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 investment policy asset
allocation ranges are as follows:
Equities 50% to 75%
Debt Securities 20% to 40%
Real Estate 2% to 7%
Other (including private equity and cash) 2% to 17%
The long-term ROA assumption for our domestic pension plans in 2007 is 8.75%, unchanged from 2006. An increase or
decrease of 25 basis points in the expected ROA assumption would increase or decrease our estimated pension expense in
2007 by approximately $31 million. For every 2.5% that the actual domestic pension plan asset return exceeds or is less
than the long-term ROA assumption for 2007, our estimated pension expense for 2008 would change by approximately
$17 million.
The discount rate assumption is determined by using a model consisting of a theoretical bond portfolio for which the
timing and amount of cash flows approximates the estimated benefit payments of our pension plans. The discount rate
assumption for our domestic pension plans in 2007 is 6.0%, an increase from 5.75% in 2006. An increase or decrease of
25 basis points in the discount rate assumption for 2008 would increase or decrease our estimated pension expense for
2008 by approximately $45 million.
Other variables that can impact the pension funded status and expense include demographic experience such as the rates
of salary increase, retirement, turnover and mortality. Assumptions for these variables are set based on actual and
projected plan experience. Effective December 31, 2005, we updated our mortality assumption for our pension and
postretirement benefit programs to a blend of our 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 resulted in an
increase in 2006 pension expense of $130 million.
In addition, we have $3.9 billion of deferred losses resulting primarily from differences between actual and assumed asset
returns, changes in discount rates, changes in plan provisions and differences between actual and assumed demographic
experience. To the extent we continue to have fluctuations in these items we will experience increases or decreases in our
funded status and related accrued retiree benefit obligation. For every 25 basis point change in discount rate, our
projected benefit obligation for the pension plans as of December 31, 2006 would change by approximately $500 million.
In addition, a 1% change in the actual domestic pension plan asset return compared to the long-term ROA assumption
would change the market value of pension plan assets as of December 31, 2006 by approximately $100 million. The
deferred losses are amortized and included in future pension expense over the average employee service period of
approximately 12 years. As described in Note 1 to the Financial Statements, we adopted Statement of Financial
Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an
amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS No. 158) for the year ended December 31, 2006 which
resulted in a $1.9 billion increase in accrued retiree benefits and other long-term liabilities and a corresponding $1.3
billion decrease, net of taxes, in accumulated other comprehensive income (loss) in stockholders’ equity.
Effective January 1, 2007, all newly hired or rehired employees will participate in a new defined contribution plan in lieu
of our existing pension plans, subject to any applicable collective bargaining agreements. Our current eligible employees
will continue to participate in our existing pension plans without any change to level of benefits or payment options. This
change is not expected to have a material impact on our estimated pension expense or contributions in 2007.
CONSOLIDATED RESULTS OF OPERATIONS
Net sales were $20.3 billion in 2006, $19.0 billion in 2005 and $17.8 billion in 2004. The increase in sales in 2006 was
primarily due to higher sales at Integrated Defense Systems, Missile Systems and Network Centric Systems. The increase
in sales in 2005 was primarily due to higher sales at Integrated Defense Systems and Missile Systems. Sales to the U.S.
Department of Defense were 77% of sales in 2006, 75% in 2005 and 74% in 2004. Total sales to the U.S. government were
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