Raytheon 2006 Annual Report Download - page 67

84% of sales in 2006, 83% in 2005 and 82% in 2004. Included in U.S. government sales were foreign military sales of $1.3
billion, $1.1 billion and $1.0 billion in 2006, 2005 and 2004, respectively. We currently expect defense market trends to
continue to positively impact our sales in 2007; however, our expectation is based on certain assumptions and estimates
regarding factors, such as U.S. government budget and appropriation decisions and geo-political events and
macroeconomic conditions, which are beyond our control. Total international sales, including foreign military sales, were
$3.7 billion or 18% of sales in 2006, $3.4 billion or 18% in 2005 and $3.3 billion or 18% in 2004.
Gross margin (net sales less cost of sales) was $3.7 billion in 2006, $3.2 billion in 2005 and $2.9 billion in 2004, or 18.4%
of sales in 2006, 17.0% in 2005 and 16.4% in 2004. Included in gross margin was a FAS/CAS Pension Adjustment,
described below, of $362 million, $448 million and $457 million of expense in 2006, 2005 and 2004, respectively.
The FAS/CAS Pension Adjustment represents the difference between our pension expense or income under SFAS No. 87
and our pension expense under Cost Accounting Standards (CAS) and is reported as a separate line item in our segment
results. SFAS No. 87 outlines the methodology used to determine pension expense or income for financial reporting
purposes, which is not necessarily indicative of the funding requirements of pension plans that are determined by other
factors. Cost Accounting Standards (CAS) prescribe the allocation to and recovery of pension costs on U.S. government
contracts and is a major factor in determining pension funding requirements. The results for each segment only include
pension expense as determined under CAS that can generally be recovered through the pricing of products and services to
the U.S. government.
Administrative and selling expenses were $1,422 million or 7.0% of sales in 2006, $1,290 million or 6.8% of sales in 2005
and $1,202 million or 6.7% of sales in 2004. Included in administrative and selling expenses in 2006 and 2005 was a $55
million and $22 million, respectively, goodwill impairment charge related to Flight Options described below in Segment
Results.
Research and development expenses were $464 million or 2.3% of sales in 2006, $430 million or 2.3% of sales in 2005 and
$413 million or 2.3% of sales in 2004.
Operating income was $1,840 million or 9.1% of sales in 2006, $1,512 million or 7.9% of sales in 2005 and $1,301 million
or 7.3% of sales in 2004. The changes in operating income by segment are described below in Segment Results.
Interest expense was $273 million in 2006, $312 million in 2005 and $418 million in 2004. The decreases in interest
expense in 2006 and 2005 were due to lower average outstanding debt, partially offset by a higher weighted-average cost
of borrowing for those years.
Other (income) expense, net was $44 million of income in 2006, $12 million of income in 2005 and $436 million of
expense in 2004. Included in other (income) expense, net in 2006 was a $24 million gain on the sale of Space Imaging
assets and a $34 million favorable adjustment resulting from the settlement of a class action lawsuit, partially offset by a
$7 million charge for the tentative settlement of the ERISA purported class action lawsuit filed in 2003 (both lawsuits are
described in Note 12, Commitments and Contingencies of the Notes to the Financial Statements). Included in other
(income) expense, net in 2005 was a $45 million gain on the sale of our investment in Indra ATM S.L., a Spanish joint
venture, partially offset by a $12 million charge related to our settlement with the SEC and a $10 million charge related to
the early redemption of debt. Included in other expense, net in 2004 was a $325 million charge related to our settlement
of a securities class action lawsuit described in Note 12, Commitments and Contingencies of the Notes to the Financial
Statements and a $132 million charge related to our repurchase of long-term debt and subordinated notes payable.
The effective tax rate was 34.4% in 2006, 34.7% in 2005 and 22.6% in 2004, reflecting the U.S. statutory rate adjusted for
various permanent differences between book and tax reporting. The effective tax rate in 2006 was reduced by ESOP
dividend deductions, manufacturing and export-related tax benefits and research credits, and was increased by various
non-deductible expenses. Included in the effective tax rate in 2006 was the impact of the nondeductible portion of the
$55 million Flight Options goodwill impairment charge. The effective tax rate in 2005 and 2004 was reduced by ESOP
dividend deductions, export-related tax benefits and research credits, and was increased by various non-deductible
expenses. Included in the effective tax rate in 2005 was the impact of the $12 million nondeductible settlement with the
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