Raytheon 2014 Annual Report Download - page 92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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items of income and expense are recognized in different time periods for financial reporting purposes than for income tax
purposes. The Company does not provide for a U.S. income tax liability on undistributed earnings of our foreign subsidiaries.
Such earnings are indefinitely reinvested in foreign operations or expected to be remitted substantially free of additional tax.
Payments made for state income taxes are included in administrative and selling expenses as these costs can generally be
recovered through the pricing of products and services to the U.S. Government in the period in which the tax is payable.
Accordingly, the state income tax provision (benefit) is allocated to contracts in future periods as described below in Deferred
Contract Costs.
Other Expense (Income), Net—Other expense (income), net consists primarily of gains and losses from our investments
held in trusts used to fund certain of our non-qualified deferred compensation plans, gains and losses on the early repurchase
of long-term debt and certain financing fees.
Cash and Cash Equivalents—Cash and cash equivalents consist of cash and highly liquid investments with original maturities
of 90 days or less at the date of purchase. The estimated fair value of cash and cash equivalents approximates the carrying
value due to their short maturities.
Short-term Investments—We invest in marketable securities in accordance with our short-term investment policy and cash
management strategy. These marketable securities are classified as available-for-sale and are recorded at fair value as short-
term investments in our consolidated balance sheets. These investments are deemed Level 2 assets under the fair value hierarchy
at December 31, 2014 and December 31, 2013, as their fair value is determined under a market approach using valuation
models that utilize observable inputs, including maturity date, issue date, settlements date, and current rates. At December 31,
2014 and December 31, 2013, we had short-term investments of $1,497 million and $1,001 million, respectively, consisting
of highly rated bank certificates of deposit with a minimum long-term debt rating of A or A2 and a minimum short-term debt
rating of A-1 and P-1. As of December 31, 2014, our short-term investments had an average maturity of approximately five
months. The amortized cost of these securities closely approximated their fair value at December 31, 2014 and December 31,
2013. There were no securities deemed to have other than temporary declines in value for 2014. In 2014, we recorded unrealized
losses on short-term investments of less than $1 million, net of tax, in AOCL. In 2013, we recorded unrealized gains on short-
term investments of less than $1 million, net of tax, in AOCL. In 2014, we recorded sales of short-term investments of $882
million, which resulted in gains of less than $1 million recorded in other (income) expense, net. In 2013, we recorded sales
of short-term investments of $325 million, which resulted in gains of approximately $1 million recorded in other (income)
expense, net. For purposes of computing realized gains and losses on available-for-sale securities, we determine cost on a
specific identification basis.
Contracts in Process, Net—Contracts in process, net are stated at cost plus estimated profit, but not in excess of estimated
realizable value. Included in contracts in process are accounts receivable, which include amounts billed and due from customers.
We maintain an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be
collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age
of outstanding receivables and collateral to the extent applicable.
Deferred Contract Costs—Included in contracts in process, net are certain costs related to the performance of our U.S.
Government contracts which are required to be recorded under GAAP but are not currently allocable to contracts. Such costs
are deferred and primarily include a portion of our environmental expenses, asset retirement obligations, certain restructuring
costs, deferred state income taxes, workers’ compensation and certain other accruals. At December 31, 2014 and December 31,
2013, net deferred contract costs were approximately $223 million and $279 million, respectively. These costs are allocated
to contracts when they are paid or otherwise agreed. We regularly assess the probability of recovery of these costs. This
assessment requires us to make assumptions about the extent of cost recovery under our contracts and the amount of future
contract activity. If the level of backlog in the future does not support the continued deferral of these costs, the profitability
of our remaining contracts could be adversely affected.
Pension and other postretirement benefits costs are allocated to our contracts as allowed costs based on the U.S. Government
cost accounting standards (CAS). The CAS requirements for pension and other postretirement benefits costs differ from the
financial accounting standards (FAS) requirements under GAAP. Given the inability to match with reasonable certainty
individual expense and income items between the CAS and FAS requirements to determine specific recoverability, we have
not estimated the incremental FAS income or expense to be recoverable under our expected future contract activity, and
therefore did not defer any FAS expense for pension and other postretirement benefits plans in 2012–2014. This resulted in