Raytheon 2011 Annual Report Download - page 36

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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 primarily 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, and
how our financial performance is assessed and measured by management. 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 2011, 2010 and 2009 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. Government continues to focus on efforts to reduce federal budget deficits and curb the growing amount of national
debt. Currently, the primary vehicle to reduce the deficit is the Budget Control Act of 2011 (BCA). Enacted into law on August
2, 2011, it aims to reduce deficits in two phases. The first phase reduces federal outlays by $917 billion over the Fiscal Year
(FY) 2012–FY 2021 period, primarily by establishing specific limits on annual appropriations. Senior officials of the
Department of Defense (DoD) have publicly indicated that this will reduce DoD funding by $487 billion over this period
relative to the long-term DoD budget plans established in February 2011.
The second phase of the BCA established a bipartisan, bicameral select committee of Congress to identify at least an additional
$1.2 trillion in deficit reduction measures by November 23, 2011. Due to the select committee's failure to identify agreed upon
deficit reduction recommendations, pursuant to the terms of the BCA, a sequestration is scheduled to commence on January
2, 2013 that would result in a total of $1.2 trillion in reduced spending over the FY 2013–FY 2021 period. The BCA sequestration
contemplates that the DoD would bear 50% of the cuts excluding reduced interest payments. DoD officials estimate that such
sequestration would further reduce DoD spending by another $500 billion over the FY 2013–FY 2021 period relative to its
previous long-term plans.
It is uncertain whether the contemplated BCA sequestration will take effect on January 2, 2013 or whether it will be averted
through actions of the Congress and the Administration prior to January 2, 2013. Whether sequestration goes into effect or
is avoided, the resulting impact or impact of other actions on future DoD budgets and our programs are unknown at this time.
In addition, in January 2012, the DoD issued strategic guidance on the U.S. defense priorities for the next ten years in light
of the geopolitical environment and U.S. Government finances. The DoD guidance identified the primary missions of the
U.S. armed forces and the capabilities expected to be critical to future success, including Intelligence, Surveillance and
Reconnaissance (ISR), missile defense and cybersecurity. Although the actual impact of implementation of the strategic
guidance on the DoD budget and our programs is uncertain, we believe that we are well positioned to support many of these
critical capabilities.
The U.S. Government sales, excluding foreign military sales, accounted for 74% of our total net sales in 2011. Our principal
U.S. Government customer is the DoD, and DoD funding has grown substantially since FY 2001, when it was approximately
$300 billion. However, given the current budget environment, future defense spending levels are difficult to predict. A number
of other factors potentially impacting the DoD budget include the following: