Raytheon 2004 Annual Report Download - page 53

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35
  
As the economy has been recovering, indicated by several measures including gross domestic product, corporate
profits, and personal disposable income, the general aviation market has been recovering as well. Although still
below its peak performance in 2001, 2004 reflected an improvement compared to the depressed level of activity
experienced in 2002 and 2003.
Traditionally, the used aircraft market has led the recovery of the new aircraft market by 9-12 months and
although worldwide levels of used aircraft available for sale have declined, a slower or delayed economic recovery
could delay market demand for used, and ultimately new aircraft.
The decline in the worldwide fleet of used aircraft available for sale has resulted in improved pricing of new
aircraft and many manufacturers have increased line or production rates. In order to support a continued recovery
of the new aircraft market, however, the current worldwide inventory of used aircraft must be reduced even further.
Due to the lower levels of used inventory and strong third and fourth quarter 2004 sales activity for new aircraft,
the industry consensus is that the market for new aircraft will continue to improve in 2005 and into the foreseeable
future. It is unknown at this time what impact, if any, will be felt without the benefit of bonus depreciation from
the Jobs Growth Tax Relief Reconciliation Act of 2003, which expired in 2004.
 
As discussed in more detail throughout Management’s Discussion and Analysis of Financial Condition and Results
of Operations:
Gross bookings were $25.7 billion in 2004, $22.7 billion in 2003, and $17.9 billion in 2002, resulting in backlog
of $32.5 billion, $27.5 billion, and $25.7 billion at December 31, 2004, 2003, and 2002, respectively. Backlog
represents future sales expected to be recognized over the next several years.
Net sales were $20.2 billion in 2004, $18.1 billion in 2003, and $16.8 billion in 2002. The increase in sales was a
result of strong growth at the defense businesses, primarily Integrated Defense Systems and Space and Airborne
Systems as well as growth at Raytheon Aircraft.
Operating income was $1.4 billion in 2004, $1.3 billion in 2003, and $1.8 billion in 2002. Operating income as a
percent of net sales was 6.9 percent, 7.3 percent, and 10.6 percent in 2004, 2003, and 2002, respectively. Included in
operating income was a FAS/CAS Pension Adjustment, described below in Consolidated Results of Operations, of
$474 million of expense in 2004, $109 million of expense in 2003, and $210 million of income in 2002. The FAS/
CAS Pension Adjustment in 2005 is expected to approximate the 2004 amount. Also included in operating income
in 2003 were charges on certain programs at Network Centric Systems and Technical Services of $276 million.
Operating cash flow from continuing operations was $2.1 billion in 2004, $2.6 billion in 2003, and $0.8 billion in
2002. Total debt was $5.2 billion at December 31, 2004 versus $7.4 billion at December 31, 2003.
  
The Company has identified the following accounting policies that require significant judgment. The Company
believes its judgments related to these accounting policies are appropriate.
Sales under long-term government contracts are recorded under the percentage of completion method. Incurred
costs and estimated gross margins are recorded as sales when work is performed based on the percentage that
incurred costs bear to the Company’s estimates of total costs and contract value. Cost estimates include direct and
indirect costs such as labor, materials, warranty, and overhead. Some contracts contain incentive provisions based
upon performance in relation to established targets which are included at estimated realizable value. Contract
change orders and claims are included when they can be reliably estimated and realization is probable. Due to the
long-term nature of many of the Company’s programs, developing estimates of total costs and contract value often
requires significant judgment. Factors that must be considered in estimating the work to be completed and ultimate
contract recovery include labor productivity and availability, the nature and complexity of the work to be