Raytheon 2007 Annual Report Download - page 66

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 $30 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 would change by
approximately $20 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 at December 31, 2007, is 6.5%, an increase from 6.0% at December 31, 2006.
An increase or decrease of 25 basis points in the discount rate assumption for 2007 would decrease or increase our
estimated pension expense for 2007 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. In addition, certain pension plans provide a lump sum form of
benefit which varies based upon externally determined interest rates. 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 general, we value our pension assets based upon quoted or observable market prices or other standard valuation
techniques which generally assume a liquid market. In addition, we estimate the value of certain non-readily marketable
investments, which are less than 5% of our pension assets at December 31, 2007, based on the most recently available
asset data which can be up to three months in arrears.
In addition, we have $3.2 billion of deferred losses in our pension and other postretirement benefit plans 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, 2007, would change by approximately $430 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, 2007, by approximately $130 million. The deferred losses are amortized and included in future
pension expense over the average employee service period of approximately 11 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 Financial Accounting Standards Board
(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 (loss) income in stockholders’ equity.
Impairment of Goodwill—We evaluate goodwill for impairment annually during the fourth quarter and in any
interim period in which circumstances arise that indicate our goodwill may be impaired. Indicators of impairment
include, but are not limited to, the loss of significant business; significant decreases in federal government appropriations
or funding for our contracts; or other significant adverse changes in industry or market conditions. No events occurred
during the periods presented that indicated the existence of an impairment with respect to our goodwill related to
continuing operations. We estimate the fair value of our reporting units using a discounted cash flow model based on our
most recent long-range plan and compare the estimated fair value of each reporting unit to its net book value, including
goodwill. We discount the related cash flow forecasts using the weighted average cost of capital method at the date of
evaluation. Preparation of forecasts for use in the long-range plan and the selection of the discount rate involve
significant judgments that we base primarily on existing firm orders, expected future orders, contracts with suppliers,
labor agreements and general market conditions. Significant changes in these forecasts or the discount rate selected could
affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a
future period. There was no indication of goodwill impairment for continuing operations as a result of our impairment
analysis. If we are required to record an impairment charge in the future, it could materially affect our results of
operations.
37