Raytheon 2009 Annual Report Download - page 43

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Introduction
Raytheon Company develops technologically advanced, integrated products, services and solutions in four core defense
markets, Sensing, Effects, Command, Control, Communications and Intelligence (C3I), and Mission Support, as well as
the Cybersecurity and Homeland Security markets. We serve both domestic and international customers, principally as a
prime contractor on a broad portfolio of defense and related programs for government customers.
We operate in six 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).
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, key elements of our strategy, 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 estimates, which are those estimates 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 results of operations for 2009, 2008 and 2007 beginning with
an overview of our total company results, followed by a more detailed review of those results by business segment. 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
Domestic Considerations
The U.S. and global economies have been turbulent in the past year, and the U.S. budget deficits for 2009 and 2010 are
expected to be at historically high levels. As a result, we expect that the Administration will have to balance ongoing
critical priorities, such as defense and homeland security, with its new federal spending initiatives, such as health care
reform and alternative energy development, with the need to reduce the deficit over time. In this environment, we expect
defense spending growth to be somewhat slower than it has been for the previous nine years.
The U.S. Government including foreign military sales accounted for 88% of our total net sales in 2009. Our principal U.S.
Government customer is the U.S. Department of Defense (DoD). DoD funding has grown substantially since 2001. The
DoD base budget, which excludes funding for operations in Afghanistan and Iraq, grew from $300 billion in fiscal year
(FY) 2001 to $513 billion in FY 2009, or 7% compounded annually. The FY 2010 base budget is $531 billion, an increase
of $17 billion or 3% from the FY 2009 level, reflective of the still positive but slower growth rates we expect in the future.
DoD modernization funding, which consists of procurement and research and development (R&D), is of particular
importance to defense contractors. Modernization funding in the base budget grew at an annual rate of 7% over the FY
2001—FY 2009 period. The FY 2010 modernization level of $185 billion is 2%, or almost $4 billion, higher than the FY
2009 level. We expect the modernization growth rate to be positive, albeit lower than the recent past, going forward due
to the need to replace aging inventory of planes, ships, ground combat vehicles and other necessary warfighting
equipment, often referred to by DoD officials as recapitalization.
The DoD Operations and Maintenance Account (O&M), which includes funding for training, services and other
logistical support functions, is the other major account of importance to the defense industry. O&M in the DoD base
budget grew at an annual rate of 6% over the FY 2001—FY 2009 period. The FY 2010 level of $185 billion is 3%, or $5
billion higher, than the FY 2009 level. The Administration’s decision to accelerate the planned increase of active duty
ground forces by 92,000 will likely increase O&M funding requirements in the near future.
Overseas Contingency Operations (OCO) in Afghanistan and Iraq have largely been funded through emergency
supplemental appropriations rather than in the base budget appropriations. The Administration has indicated it would
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