Raytheon 2007 Annual Report Download - page 67

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CONSOLIDATED RESULTS OF OPERATIONS
In our discussions of comparative results, changes in sales are typically expressed in terms of volume. Volume generally
refers to increases (or decreases) in revenues incurred due to varying production activity levels, delivery rates or service
levels on individual contracts. Volume changes will typically carry a corresponding margin change based on the profit
rate for a particular contract. Segment operating margin reflects the performance on programs and changes in contract
mix. In addition, in our discussions of comparative results, changes in segment operating profit rates are typically
expressed in terms of volume, as discussed above, or performance. Performance refers to changes in contract profit rates.
These changes typically relate to profit recognition associated with revisions to total estimated costs at completion of the
contract that reflect improved (or deteriorated) operating or award fee performance on a particular contract. Changes in
estimates of contract sales, costs and profits are recognized using a cumulative catch-up, which recognizes in the current
period the cumulative effect of the changes on current and prior periods.
Selected consolidated results were as follows:
% of Net Sales
(In millions except percentages) 2007 2006 2005 2007 2006 2005
Net sales $21,301 $19,707 $18,491
Gross margin 4,264 3,730 3,277 20.0% 18.9% 17.7%
Administrative and selling expenses 1,434 1,322 1,228 6.7% 6.7% 6.6%
Research and development expenses 502 464 430 2.4% 2.4% 2.3%
Operating income 2,328 1,944 1,619 10.9% 9.9% 8.8%
Interest expense, net 33 197 266 0.2% 1.0% 1.4%
Other expense (income), net 70 (44) (13) 0.3% -0.2% -0.1%
Income from continuing operations 1,693 1,187 898 7.9% 6.0% 4.9%
Income (loss) from discontinued operations, net of tax 885 96 (27) 4.2% 0.5% -0.1%
Net income 2,578 1,283 871 12.1% 6.5% 4.7%
The increase in sales in 2007 was primarily due to higher sales at Network Centric Systems, Missile Systems and
Integrated Defense Systems. The increase in sales in 2006 was primarily due to higher sales at Integrated Defense Systems,
Missile Systems and Network Centric Systems. Sales to the U.S. Department of Defense were 81% of sales in 2007, 79% in
2006 and 77% in 2005. Total sales to the U.S. government were 86% of sales in 2007, 86% in 2006 and 85% in 2005.
Included in U.S. government sales were foreign military sales through the U.S. government of $1.5 billion, $1.3 billion
and $1.1 billion in 2007, 2006 and 2005, respectively. We currently expect defense market trends to continue to positively
impact our sales in 2008. However, as discussed above in Industry Considerations, our expectation is based on certain
assumptions and estimates regarding factors, such as U.S. government budget and appropriation decisions and
geo-political events and macroeconomic conditions, which are beyond our control. Total international sales, including
foreign military sales, were $4.2 billion or 20% of sales in 2007, $3.7 billion or 19% in 2006 and $3.4 billion or 18% in
2005.
Included in gross margin was a FAS/CAS Pension Adjustment of $259 million, $362 million and $448 million of expense
in 2007, 2006 and 2005 respectively. The FAS/CAS Pension Adjustment represents the difference between our pension
expense or income under Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions
(SFAS No. 87) and our pension expense under CAS and is reported as a separate line item in our segment results. SFAS
No. 87 outlines the methodology used to determine pension expense or income for financial reporting purposes, which is
not necessarily indicative of the funding requirements of pension plans that are determined by other factors. CAS
prescribe the allocation to and recovery of pension costs on U.S. government contracts and is a major factor in
determining pension funding requirements. The results for each segment only include pension expense as determined
under CAS that can generally be recovered through the pricing of products and services to the U.S. government.
The changes in operating income by segment are described below.
The decreases in interest expense, net in 2007 and 2006 were primarily due to a higher average cash balances and lower
average outstanding debt.
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