Raytheon 2011 Annual Report Download - page 55

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rates, among other variables. These estimates also include the estimated cost of satisfying our industrial cooperation
agreements, sometimes referred to as offset obligations required under certain contracts. Based on this analysis, any adjustments
to net sales, costs of sales, and the related impact to operating income are recorded as necessary in the period they become
known. These adjustments may result from positive program performance and an increase in operating profit during the
performance of individual contracts if we determine we will be successful in mitigating risks surrounding the technical,
schedule, and cost aspects of those contracts or realizing related opportunities. Likewise, these adjustments may result in a
decrease in operating profit if we determine we will not be successful in mitigating these risks or realizing related opportunities.
Changes in estimates of net sales, costs of sales, and the related impact to operating income are recognized using a cumulative
catch-up, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on
a contract's percent complete. A significant change in one or more of these estimates could affect the profitability of one or
more of our contracts. Given that we have over 15,000 individual contracts and the types and complexity of the assumptions
and estimates we must make on an on-going basis, as discussed above, we have both favorable and unfavorable EAC
adjustments. We had the following aggregate EAC adjustments for the periods presented:
EAC Adjustments (In millions)
Gross favorable
Gross unfavorable
Total net EAC adjustments
2011
$ 1,041
(493)
$ 548
2010
$ 968
(810)
$ 158
2009
$ 875
(433)
$ 442
There was one significant individual EAC adjustment for the UKBA LOC Adjustment of $80 million in 2011 and there were
two significant individual EAC adjustments, the UKBA Program Adjustment for $395 million and an NCS EAC adjustment
for $28 million in 2010 as described more fully on page 55.
The $390 million increase in net EAC adjustments in 2011 compared to 2010 was primarily due to the impact of the UKBA
Program Adjustment and UKBA LOC Adjustment described above.
The $284 million decrease in net EAC adjustments in 2010 compared to 2009 was primarily due to the impact of the UKBA
Program Adjustment described above.
Changes in contract mix and other program performance refer to changes in operating margin due to a change in the relative
volume of contracts with higher or lower fee rates such that the overall average margin rate for the segment changes and other
drivers of program performance, including margin rate increases or decreases due to EAC adjustments in prior periods and
the effect of non-revenue generating costs. A higher or lower expected fee rate at the initial award of a contract typically
correlates to the contract's risk profile, which is often specifically driven by the type of customer and related procurement
regulations, the type of contract (for example, fixed price vs. cost plus), the maturity of the product or service, and the scope
of work.
Because each segment has thousands of contracts in any reporting period, changes in operating income and margin are likely
to be due to normal changes in volume, net EAC adjustments, and contract mix and other performance on many contracts
with no single change, or series of related changes, materially driving a segment's change in operating income or operating
margin percentage.
Backlog—We disclose period ending backlog for each segment. 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. Therefore, we 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 portions of our contracts.