Raytheon 2009 Annual Report Download - page 92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
obligation of the plan and the market value of the plan’s assets. Previously unrecognized deferred amounts such as
demographic or asset gains or losses and the impact of historical plan changes are included in accumulated other
comprehensive (loss) income. Changes in these amounts in future years will be reflected through accumulated other
comprehensive (loss) income and amortized in future pension expense over the average employee service period.
Derivative Financial Instruments—We enter into foreign currency forward contracts to manage the currency exchange
rate risk associated with forecasted foreign currency purchases and sales under our customer contracts. We also
periodically enter into pay-variable, receive-fixed interest rate swaps to manage interest rate risk associated with our
fixed-rate financing obligations.
We recognize all derivative financial instruments as either assets or liabilities at fair value in our consolidated balance
sheets. We designate foreign currency forward contracts as cash flow hedges of forecasted purchases and sales
denominated in foreign currencies, and interest rate swaps as fair value hedges of our fixed-rate financing obligations. We
classify the cash flows from these instruments in the same category as the cash flows from the hedged items. We do not
hold or issue derivative financial instruments for trading or speculative purposes.
For foreign currency forward contracts designated and qualified for cash flow hedge accounting, we record the effective
portion of the gain or loss on the derivative in accumulated other comprehensive (loss) income, net of tax, and reclassify
it into earnings in the same period or periods during which the hedged revenue or cost of sales transaction affects
earnings. Gains and losses on derivatives not designated for hedge accounting or representing either hedge ineffectiveness
or hedge components excluded from the assessment of effectiveness are recognized currently in earnings.
We account for our interest rate swaps as fair value hedges of a portion of our fixed-rate financing obligations, and
accordingly record gains and losses from changes in the fair value of these swaps in interest expense, along with the
offsetting gains and losses on the fair value adjustment of the hedged portion of our fixed-rate financing obligations. We
also record in interest expense the net amount paid or received under the swap for the period and the amortization of
gain or loss from the early termination of interest rate swaps.
Employee Stock Plans—Stock-based compensation cost is measured at the grant date based on the calculated fair value
of the award. The expense is recognized over the employees’ requisite service period, generally the vesting period of the
award. The expense is amortized over the service period using the graded vesting method for our restricted stock and
restricted stock units and the straight line amortization method for our Long Term Performance Plan (LTPP). The
related gross excess tax benefit received upon exercise of stock options or vesting of a stock-based award, if any, is
reflected in the consolidated statements of cash flows as a financing activity rather than an operating activity.
Risks and Uncertainties—We provide a wide range of technologically advanced products, services and solutions for
principally governmental customers in the U.S. and abroad, and are subject to certain business risks specific to that
industry. Total sales to the U.S. Government, including foreign military sales, were 88%, 87% and 86% of total net sales
in 2009, 2008 and 2007, respectively. 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.
Subsequent Events—We have evaluated subsequent events through the time of filing this annual report on Form 10-K
with the Securities and Exchange Commission on February 24, 2010.
Note 2: Accounting Standards
In 2009, we adopted required new accounting standards related to the following:
ⳮThe accounting and disclosure of noncontrolling interests as discussed in Note 7;
ⳮThe disclosure of derivative instruments and hedging activities as discussed in Note 8;
ⳮThe accounting and disclosure of certain nonfinancial assets and liabilities not recognized or disclosed at fair value on
a recurring basis, as discussed in Note 9;
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