Raytheon 2006 Annual Report Download - page 59

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Introduction
Raytheon Company, together with its subsidiaries, is one of the world’s largest defense contractors, serving all branches of
the U.S. military and other U.S. government agencies, the North Atlantic Treaty Organization (NATO) and many allied
governments on every continent. We develop and provide technologically advanced, integrated products, services and
solutions in our core defense markets: Sensing, including radars and radio-frequency systems and infrared and electro-
optical sensors and systems; Command, Control, Communication and Intelligence (C3I), including tactical
communication, command & control and intelligence systems; Effects, including missiles, precision weapons and
information operations; and Mission Support, including full life-cycle services and training.
We operate in six principal business segments: Integrated Defense Systems (IDS), Intelligence and Information Systems
(IIS), Missile Systems (MS), Network Centric Systems (NCS), Space and Airborne Systems (SAS) and Technical Services
(TS). As discussed in more detail below and elsewhere in this Form 10-K, in December 2006, we entered into a definitive
agreement to sell our wholly-owned subsidiary, Raytheon Aircraft Company. Accordingly, Raytheon Aircraft is presented
as discontinued operations in this Form 10-K and, unless otherwise indicated, is not included in the discussion below,
which pertains to our continuing operations. For further information regarding Raytheon Aircraft and our discontinued
operations, see “Note 2: Discontinued Operations” within Item 8 of this Form 10-K. For a more detailed description of
our segments, see “Business Segments” within Item 1 of this Form 10-K.
In this section, we discuss our industry and how certain factors may affect our business, our key strategic imperatives and
opportunities that will drive our business, how our financial performance is assessed and measured by management, and
other business considerations, including certain risks and challenges to our business. Next, we discuss our critical
accounting policies, which are those policies that are most important to both the reporting of our financial condition and
results of operations and require management’s most difficult or subjective judgment. We then review our 2006 results of
operations beginning with an overview of our total company results, followed by a more detailed review of those results
by business segment and discontinued operations. We also review our financial condition and liquidity including our
capital structure and resources, off-balance sheet arrangements, commitments and contingencies, and conclude with a
discussion of our exposure to various market risks.
Industry Considerations
The Global War on Terrorism, Operation Enduring Freedom and Operation Iraqi Freedom have altered the global
defense and security environment and have had, and for the foreseeable future are likely to continue to have, a significant
impact on the markets for defense and advanced technology systems and products. The U.S. Department of Defense (the
“DoD”) continues to focus on both supporting ongoing operations in Afghanistan and Iraq and transforming the U.S.
military to confront future threats. In addition, the Office of Homeland Security and other U.S. government agencies
continue to focus on enhancing the security of our homeland.
Overall U.S. defense spending has increased in recent years in connection with the ongoing operations and the need to
transform our force structure to address future threat scenarios. While the future direction of ongoing operations
remains unsettled, we believe that the 2006 Quadrennial Defense Review, a comprehensive report issued by the DoD
every four years on defense strategy, force structure, force modernization plans, infrastructure, budget plans and other
elements of the U.S. defense programs and policies (the “QDR”), will continue to drive strategic thinking and budget
priorities for the near term. The QDR recommended certain changes to force structure, particularly with respect to
special operations forces, relating to the Global War on Terrorism and the insurgency in Iraq. However, at the same time,
the QDR also largely maintained the DoD’s transformation initiatives that we have supported over the last several years.
Specifically, the QDR sets forth the following transformation priorities for which we are a key contributor:
ⳮContinued broad emphasis on net-centricity and net-enabled weapon systems, with our Distributed Common
Ground System providing the network centric operations backbone for the U.S. armed forces for their intelligence,
surveillance and reconnaissance systems;
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