Raytheon 2011 Annual Report Download - page 40

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We also focus on earnings per share (EPS), including Adjusted EPS, and measures to assess our cash generation and the
efficiency and effectiveness of our use of capital such as free cash flow (FCF) and return on invested capital (ROIC).
Considered together, we believe these metrics are strong indicators of our overall performance and our ability to create
shareholder value. We feel these measures are balanced among long-term and short-term performance, efficiency and growth.
We also use these and other performance metrics for executive compensation purposes.
In addition, we maintain a strong focus on program execution and the prudent management of capital and investments in order
to maximize operating income and cash. We pursue a capital deployment strategy that balances funding for growing our
business, including capital expenditures, acquisitions, and research and development; prudently managing our balance sheet,
including debt repayments and pension contributions; and returning cash to our stockholders, including dividend payments
and share repurchases.
Bookings were $26.6 billion, $24.4 billion and $25.1 billion in 2011, 2010 and 2009, respectively resulting in backlog of
$35.3 billion, $34.6 billion and $36.9 billion at December 31, 2011, 2010 and 2009, respectively. Backlog represents the dollar
value of contracts awarded for which work has not been performed. Backlog generally increases with bookings and generally
converts into sales as we incur costs under the related contractual commitments. We therefore discuss changes in backlog,
including any significant cancellations, for each of our segments, as we believe such discussion provides an understanding
of the awarded but not executed portion of our contracts. As described in Commitments and Contingencies on page 68, in the
second quarter of 2010, Raytheon Systems Limited (RSL) was notified of its termination on the U.K. Border Agency program,
which resulted in a net backlog adjustment of $556 million at IIS. In the second quarter of 2009, Kinetic Energy Interceptor
(KEI), a developmental program with the Missile Defense Agency (MDA), was terminated for convenience, which resulted
in a net backlog adjustment of approximately $2.4 billion at MS. The program was cancelled by the MDA due to a change in
missile defense priorities.
Total net sales were $24.9 billion, $25.2 billion and $24.9 billion in 2011, 2010 and 2009, respectively.
Operating income was $2.9 billion, $2.6 billion and $3.0 billion in 2011, 2010 and 2009, respectively. Operating margin was
11.5%, 10.4% and 12.2% in 2011, 2010 and 2009, respectively. Included in operating income was a FAS/CAS Adjustment,
described below in Critical Accounting Estimates, of $337 million of expense, $187 million of expense and $80 million of
income in 2011, 2010 and 2009, respectively.
Operating cash flow from continuing operations was $2.2 billion, $1.9 billion and $2.7 billion in 2011, 2010 and 2009,
respectively.
A discussion of our results of operations and financial condition follows below in Consolidated Results of Operations; Segment
Results; Financial Condition and Liquidity; and Capital Resources.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are based on the application of U.S. Generally Accepted Accounting Principles (GAAP),
which require us to make estimates and assumptions about future events that affect the amounts reported in our consolidated
financial statements and the accompanying notes. Future events and their effects cannot be determined with certainty. Therefore,
the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any
such differences may be material to our consolidated financial statements. We believe the estimates set forth below may
involve a higher degree of judgment and complexity in their application than our other accounting estimates and represent
the critical accounting estimates used in the preparation of our consolidated financial statements. We believe our judgments
related to these accounting estimates are appropriate. However, if different assumptions or conditions were to prevail, the
results could be materially different from the amounts recorded.
Revenue Recognition
We determine the appropriate method by which we recognize revenue by analyzing the type, terms and conditions of each
contract or arrangement entered into with our customers. The significant estimates we make in recognizing revenue for the
types of revenue-generating activities in which we are involved are described below. We classify contract revenues as product
or service according to the predominant attributes of the relevant underlying contracts unless the contract can clearly be split
between product and service. We define service revenue as revenue from activities that are not associated with the design,
development or production of tangible assets, the delivery of software code or a specific capability. Our services sales are
primarily related to our TS operating segment.