Raytheon 2012 Annual Report Download - page 47

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The change in the FAS/CAS Pension Adjustment of $85 million in 2012 compared to 2011 was driven by a $105 million
increase in our CAS expense, primarily due to the continued recognition of the 2008 negative asset returns.
The change in the FAS/CAS Pension Adjustment of $110 million in 2011 compared to 2010 was primarily driven by a $177
million increase in our FAS expense. The $177 million increase in our FAS expense was driven primarily by the continued
recognition of the 2008 losses in the market related value of assets, which had an impact of approximately $200 million. Our
CAS expense increased $67 million as a result of actual versus expected asset and liability experience.
For 2013 compared to 2012, we currently expect our FAS expense will increase more than our CAS expense, which will
increase the FAS/CAS Pension Adjustment. We expect the FAS/CAS Pension Adjustment to be approximately $289 million
of expense driven by the lower discount rate environment and the difference in the recognition period for actual asset gains
and losses under FAS and CAS, described above. This expected increase in FAS expense in excess of CAS expense is subject
to our annual update, generally planned in the third quarter, of our actuarial estimate of the unfunded benefit obligation for
both FAS and CAS for final 2012 census data. After 2013, the FAS/CAS Pension Adjustment is more difficult to predict
because future FAS and CAS expense is based on a number of key assumptions for future periods. Differences between those
assumptions and future actual results could significantly change both FAS and CAS expense in future periods. However, based
solely on our current assumptions at December 31, 2012 and taking into account CAS Harmonization, which increases CAS
expense in 2013 and beyond, we would expect after 2013 our FAS/CAS Pension Adjustment expense to decline and ultimately
result in FAS/CAS Pension Adjustment income in 2015.
The pension and other postretirement benefit plans’ investments are stated at fair value. Investments in equity securities
(common and preferred) are valued at the last reported sales price when an active market exists. 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 and
private real estate funds are estimated at fair market value which primarily utilizes net asset values reported by the investment
manager or fund administrator. We review 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. The change in accumulated other comprehensive loss (AOCL) related to pension and other postretirement benefit
plans is as follows:
(In millions) 2012 2011 2010
Beginning balance $(10,776)$(7,931)$
(7,526)
Amortization of net losses included in net income 950 800 573
Loss arising during the period (2,225)(3,645)(978)
Ending balance $(12,051)$(10,776)$
(7,931)
The balance in AOCL related to our pension and other postretirement benefit plans is composed primarily of differences
between changes in discount rates, differences between actual and expected asset returns, differences between actual and
assumed demographic experience and changes in plan provisions. Changes to our pension and other postretirement benefit
obligation as a result of these variables are initially reflected in other comprehensive income. The deferred gains and losses
are amortized and included in future pension expense over the average employee service period of approximately 10 years at
December 31, 2012. The $2,225 million in 2012 losses arising during the period were driven primarily by the decrease in the
discount rate from 5.00% at December 31, 2011 to 4.15% at December 31, 2012, which had an impact of approximately $2.0
billion. The $3,645 million in 2011 losses arising during the period were driven primarily by the decrease in the discount rate
from 5.75% at December 31, 2010 to 5.00% at December 31, 2011, which had an impact of approximately $1.7 billion, as
well as actual asset returns which were lower than our expected return, which had an impact of approximately $1.5 billion.
The $978 million in 2010 losses arising during the period were driven primarily by the decrease in the discount rate from
6.25% at December 31, 2009 to 5.75% at December 31, 2010, which had an impact of approximately $1.0 billion. The historical
25-year average high quality corporate bond rate is approximately 7%. If our pension benefit obligations were valued at the
historical average rate, we would expect our pension funded status, on a projected benefit obligation basis, to approximate
100% and the corresponding AOCL to be substantially reduced.