Raytheon 2010 Annual Report Download - page 38

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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, as both a prime and
subcontractor 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
subjective judgment. We then review our results of operations for 2010, 2009 and 2008 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
U.S. Government budget deficits for 2010 and 2011 are expected to be high by historical standards. The U.S. economic
recovery has been weaker than anticipated and unemployment remains high. As a result, we expect that the
Administration and the Congress will have to consider deficit reduction initiatives within the context of a weak economy
and competing spending priorities. These spending priorities include entitlement spending, such as Social Security,
Medicare, and Medicaid, and programs that are appropriated on an annual basis, including defense, homeland security,
international affairs, and a host of civil programs, ranging from education to veterans’ health care to law enforcement to
transportation infrastructure and more.
In February 2010, the Department of Defense (DoD) released the Quadrennial Defense Review (QDR), setting forth its
strategic priorities for the next four years. The QDR emphasized the need to successfully prosecute the operations in
Afghanistan and Iraq while also reshaping DoD forces to be able to respond to a wide range of future contingencies.
Among the priorities emphasized in the QDR were Intelligence, Surveillance and Reconnaissance, cyberwarfare, missile
defense, unmanned systems, and interoperability with allied forces. We believe that these priorities are well aligned with
our product offerings, technologies and capabilities.
The 2010 mid-term election results are expected to elevate the priority of deficit reduction. It remains unclear how much
of the deficit will be reduced by revenue changes and cuts to entitlement programs. We therefore expect all programs that
are appropriated on an annual basis, including defense, to undergo close scrutiny by both the Administration and the
Congress in the near future. We also anticipate that the fragile economic recovery will mean that policymakers will take
potential job losses into consideration, which could mitigate calls for more significant cuts in spending, particularly in the
near term.
In June 2010, the DoD launched its own series of initiatives to ensure more efficient use of its resources in order to
sufficiently fund its highest priorities: maintaining force structure and modernizing its weapons systems and equipment.
According to the DoD, its “Efficiencies Initiative,” coupled with funding the base budget at one percent annual real
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