Raytheon 2009 Annual Report Download - page 23

Sales to the U.S. Government
Our total net sales to the U.S. Government were $22.0 billion in 2009, $20.2 billion in 2008 and $18.3 billion in 2007,
representing 88%, 87% and 86% of total net sales in 2009, 2008 and 2007, respectively. Included in U.S. Government
sales were foreign military sales through the U.S. Government of $2.8 billion, $1.8 billion and $1.5 billion in 2009, 2008
and 2007, respectively. Our principal U.S. Government customer is the DoD; other U.S. Government customers include
the Departments of Homeland Security, Justice, State and Energy, Intelligence Community agencies, NASA and the FAA.
U.S. Government Contracts and Regulation
We act as a prime contractor or major subcontractor for numerous U.S. Government programs. As a result, we are
subject to extensive regulations and requirements of the U.S. Government agencies and entities which govern these
programs, including with respect to the award, administration and performance of contracts under such programs. We
are also subject to certain unique business risks associated with U.S. Government program funding and appropriations
and government contracts and with supplying technologically-advanced, cutting edge defense-related products and
services to the U.S. Government.
U.S. Government contracts generally are subject to the Federal Acquisition Regulation (FAR), which sets forth policies,
procedures and requirements for the acquisition of goods and services by the U.S. Government, agency-specific
regulations that implement or supplement FAR, such as the DoD’s Defense Federal Acquisition Regulation Supplement
(DFARS) and other applicable laws and regulations. These regulations impose a broad range of requirements, many of
which are unique to government contracting, including various procurement, import and export, security, contract
pricing and cost, contract termination and adjustment, and audit requirements. A contractor’s failure to comply with
these regulations and requirements could result in reductions to the value of contracts, contract modifications or
termination, and the assessment of penalties and fines and lead to suspension or debarment, for cause, from government
contracting or subcontracting for a period of time. In addition, government contractors are also subject to routine audits
and investigations by U.S. Government agencies such as the Defense Contract Audit Agency (DCAA). These agencies
review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations
and standards. The DCAA also reviews the adequacy of and a contractor’s compliance with its internal control systems
and policies, including the contractor’s purchasing, property, estimating, compensation and management information
systems. For a discussion of certain risks associated with compliance with U.S. Government contract regulations and
requirements, see Item 1A “Risk Factors” of this Form 10-K.
U.S. Government contracts include both cost reimbursement and fixed price contracts. Cost reimbursement contracts,
subject to a contract-ceiling amount in certain cases, provide for the reimbursement of allowable costs plus the payment
of a fee. These contracts fall into three basic types: (i) cost plus fixed fee contracts which provide for the payment of a
fixed fee irrespective of the final cost of performance, (ii) cost plus incentive fee contracts which provide for increases or
decreases in the fee, within specified limits, based upon actual results as compared to contractual targets relating to such
factors as cost, performance and delivery schedule, and (iii) cost plus award fee contracts which provide for the payment
of an award fee determined at the discretion of the customer based upon the performance of the contractor against
pre-established criteria. Under cost reimbursement type contracts, the contractor is reimbursed periodically for allowable
costs and is paid a portion of the fee based on contract progress. Some costs incident to performing contracts have been
made partially or wholly unallowable for reimbursement by statute, FAR or other regulation. Examples of such costs
include charitable contributions, certain merger and acquisition costs, lobbying costs, interest expense and certain
litigation defense costs.
Fixed-price contracts are either firm fixed-price contracts or fixed-price incentive contracts. Under firm fixed-price
contracts, the contractor agrees to perform a specific scope of work for a fixed price and as a result, benefits from cost
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
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