Raytheon 2009 Annual Report Download - page 53

The Plan’s investments are stated at fair value. Investments in equity securities (common and preferred) are valued at the
last reported sales price. Investments in fixed income securities are generally valued using methods based upon market
transactions for comparable securities and various relationships between securities which are generally recognized by
institutional traders. Investments in private equity funds, hedge funds and private real estate funds are estimated at fair
market value which primarily utilizes net asset values reported by the investment manager. The pension investment team
reviews independently appraised values, audited financial statements and additional pricing information to evaluate the
net asset values. For the very limited group of securities and other assets for which market quotations are not readily
available or for which the above valuation procedures are deemed not to reflect fair value, additional information is
obtained from the investment manager and evaluated internally to determine whether any adjustments are required to
reflect fair value.
In addition, we had $7.5 billion and $7.9 billion of deferred losses in accumulated other comprehensive loss related to our
pension and other postretirement benefit plans at December 31, 2009 and 2008, respectively, composed primarily of
differences between actual and expected asset returns, changes in discount rates, changes in plan provisions and
differences between actual and assumed demographic experience. The $0.4 billion decrease in 2009 was driven primarily
by actual asset returns which exceeded our expected return and amortization of previous deferred losses in 2009 pension
expense, partially offset by the decrease in discount rate in 2009 from 2008. To the extent we continue to experience such
differences between these items, our funded status and related accrued retiree benefit obligation will change. Changes to
our accrued retiree benefit obligation are initially reflected as a reduction to other comprehensive income. The deferred
losses are amortized and included in future pension expense over the average employee service period of approximately
11 years.
Impairment of Goodwill
We evaluate goodwill for impairment annually on the first day of 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 our continuing operations. We
estimate the fair value of our reporting units using a discounted cash flow (DCF) 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 cash flow forecasts using the weighted-average cost of capital method at the date of evaluation. The
weighted-average cost of capital is comprised of the estimated required rate of return on equity, based on publically
available data for peer companies, plus an equity risk premium related to specific company risk factors, and the after-tax
rate of return on our debt, weighted at the relative values of our debt and equity. 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. The combined estimated fair value of
all of our reporting units from our DCF model often results in a premium over our market capitalization, commonly
referred to as a control premium. We believe our control premium is reasonable based upon historic data of premiums
paid on actual transactions within our industry. When available and as appropriate, we also use comparative market
multiples to corroborate our DCF model results. There was no indication of goodwill impairment as a result of our 2009
impairment analysis. The combined fair values of our reporting units exceeded the combined net book values, including
goodwill, of our reporting units. Based upon our 2009 impairment analysis, the reporting unit that was closest to
impairment would not have an impairment until it experienced a decrease in fair value of approximately 30% or more. If
we are required to record an impairment charge in the future, it could materially affect our results of operations.
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