Raytheon 2007 Annual Report Download - page 41

savings and carries the burden of cost overruns. Under fixed-price incentive contracts, the contractor shares with the
government savings accrued from contracts performed for less than target costs and costs incurred in excess of targets up
to a negotiated ceiling price (which is higher than the target cost) and carries the entire burden of costs exceeding the
negotiated ceiling price. Accordingly, under such incentive contracts, the contractor’s profit may also be adjusted up or
down depending upon whether specified performance objectives are met. Under firm fixed-price and fixed-price
incentive type contracts, the contractor usually receives either milestone payments equaling up to 90% of the contract
price or monthly progress payments from the government generally in amounts equaling 80% of costs incurred under
government contracts. The remaining amount, including profits or incentive fees, is billed upon delivery and acceptance
of end items under the contract. For a discussion of certain risks associated with fixed price contracts, see Item 1A “Risk
Factors” of this Form 10-K.
U.S. government contracts generally also permit the government to terminate the contract, in whole or in part, without
prior notice, at the government’s convenience or for default based on performance. If a contract is terminated for
convenience, the contractor is generally entitled to payments for its allowable costs and will receive some allowance for
profit on the work performed. If a contract is terminated for default, the contractor is generally entitled to payments for
its work that has been accepted by the government. The U.S. government’s right to terminate its contracts has not had a
material adverse effect upon our operations or financial condition in light of our total government and defense business.
For a discussion of the risks associated with the U.S. government’s right to terminate its contracts, see Item 1A “Risk
Factors” of this Form 10-K.
U.S. government programs generally are implemented by the award of individual contracts and subcontracts. Congress
generally appropriates funds on a fiscal year basis even though a program may extend across several fiscal years.
Consequently, programs are often only partially funded initially and additional funds are committed only as Congress
makes further appropriations. The contracts and subcontracts under a program generally are subject to termination for
convenience or adjustment if appropriations for such programs are not available or change. The U.S. government is
required to equitably adjust a contract price for additions or reductions in scope or other changes ordered by it. For a
discussion of the risks associated with program funding and appropriations, see Item 1A “Risk Factors” and “Overview”
within Item 7 of this Form 10-K. 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 are also involved in U.S. government programs, principally through our IIS and SAS business segments, 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 11 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 $36.6 billion at December 31, 2007 and $33.8 billion at December 31, 2006. The 2007 amount
includes backlog of approximately $30.2 billion from the U.S. government compared with $29.9 billion at the end of
2006. Approximately $5.7 billion and $0.4 billion of the 2007 backlog amount represents direct foreign government
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