Raytheon 2006 Annual Report Download - page 40

In addition, because we are engaged in supplying technologically-advanced, cutting edge defense-related products and
services to the U.S. government, we are subject to certain business risks, some of which are specific to our industry. These
risks include: the cost of obtaining and retaining trained and skilled employees; the uncertainty and instability of prices
for raw materials and supplies; the problems associated with advanced designs, which may result in unforeseen
technological difficulties and cost overruns; and the intense competition and the constant necessity for improvement in
facilities and personnel training. Our sales to the U.S. government may be affected by changes in procurement policies,
budget considerations, changing concepts of national defense, political developments abroad and other factors. See
Item 1A “Risk Factors” and “Overview” within Item 7 of this Form 10-K for a more detailed discussion of these and other
related risks.
We, principally through our IIS and SAS business segments, are also involved in government programs which are
classified by the U.S. government and cannot be specifically described in this Form 10-K. The operating results of these
classified programs are included in our consolidated financial statements. The business risks and considerations
associated with these classified programs generally do not differ materially from those of our other government programs
and products.
We are subject to similar government regulations and contract requirements with respect to our sales to non-U.S.
customers. See “International Sales” on page 13 of this Form 10-K for more information regarding our sales outside of
the U.S. and Item 1A “Risk Factors” for a discussion of the risks associated with international sales.
See “Sales to the U.S. Government” on page 10 of this Form 10-K for information regarding the percentage of our
revenues generated from sales to the U.S. government.
Backlog
Our backlog of orders was $33.8 billion at December 31, 2006 and $31.5 billion at December 31, 2005. The 2006 amount
includes backlog of approximately $29.9 billion from the U.S. government compared with $27.0 billion at the end of
2005. Approximately $3.5 billion and $0.4 billion of the 2006 backlog amount represents direct foreign government
backlog and non-government foreign backlog, respectively. Approximately $18.2 billion of the 2006 year-end backlog is
not expected to be filled during the following twelve months. These amounts include both funded backlog (unfilled firm
orders for products for which funding has been both authorized and appropriated) and unfunded backlog (firm orders
for which funding has not yet been appropriated). For additional information related to backlog figures, see “Segment
Results” within Item 7 of this Form 10-K.
Research and Development
We conduct extensive research and development activities to continually enhance our existing products and services and
develop new products and services to meet our customers’ changing needs and requirements and to address new market
opportunities. During 2006, we expended $464 million on research and development efforts compared with $430 million
in 2005 and $413 million in 2004. These expenditures principally have been for product development for the U.S.
government, including bid and proposal efforts related to government programs. We also conduct funded research and
development activities under government contracts which are included in net sales. For additional information related to
our research and development activities, see “Note 1: Accounting Policies” within Item 8 of this Form 10-K.
Raw Materials, Suppliers and Seasonality
We are dependent upon the delivery of materials by suppliers and the assembly of major components and subsystems by
subcontractors used in our products. Some products require relatively scarce raw materials. In addition, in connection
with our government and defense business, we must comply with specific procurement requirements which may, in
effect, limit the suppliers and subcontractors we may utilize. In some instances, for a variety of reasons, we are dependent
on sole-source suppliers. We enter into long-term or volume purchase agreements with certain suppliers and take other
actions to ensure the availability of needed materials, components and subsystems. We generally have not experienced
material difficulties in procuring the necessary raw materials, components and other supplies for our products.
In recent years, our revenues in the second half of the year have generally exceeded revenues in the first half. The timing
of government awards, the availability of government funding and product deliveries are among the factors affecting the
periods in which revenues are recorded. We expect this trend to continue in 2007.
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