Raytheon 2003 Annual Report Download - page 27

due to charges affecting operating income totaling $237 million
which also resulted in a $228 million reduction in sales. Perform-
ance deterioration in ten programs primarily within the Air Traffic
Management Systems business and the Communications busi-
ness resulted in a charge in the third quarter of 2003 of $147 mil-
lion. There were a number of unfavorable events that occurred on
these ten programs including unsuccessful resolution of technical
issues, inability to achieve production rates and milestones, cus-
tomer directed delays and reductions in scheduled deliveries, and
unfavorable rulings and negotiations on contractual matters. In the
first six months of 2003, the Company recorded a $50 million
charge on two of these programs related to schedule and produc-
tion delays. In addition to the ten programs, the Company recorded
a charge of $40 million in the third quarter of 2003 resulting from
negative developments on a few claims and other performance
issues in other parts of the business.
Space and Airborne Systems (SAS) provides electro-optical/
infrared sensors, airborne radars, solid state high energy lasers,
precision guidance systems, electronic warfare systems, and
space-qualified systems for civil and military applications. SAS had
2003 sales of $3.7 billion versus $3.2 billion in 2002 and $2.7 bil-
lion in 2001. The increase in sales in 2003 was due to higher sales
on classified and Airborne Radar programs for the Air Force such
as Multi-platform Radar Technology Insertion Program, B-2 Radar
Modernization Program, F-15 Korea, and increased production of
the F/A-22 Radar. Operating income was $492 million in 2003 ver-
sus $428 million in 2002 and $339 million in 2001. Excluding
goodwill amortization, operating income was $416 million in 2001
or 15.2 percent of net sales.
Technical Services (TS) provides technical, scientific, and pro-
fessional services for defense, federal, and commercial customers
worldwide. TS had 2003 sales of $2.0 billion versus $2.1 billion in
2002 and 2001. The decrease in sales in 2003 was due to the loss
of several key programs. Operating income was $107 million in
2003 versus $116 million in 2002 and $123 million in 2001.
Excluding goodwill amortization, operating income was $148 mil-
lion in 2001 or 7.2 percent of net sales. The decrease in operating
income in 2003 was primarily due to write-offs of $39 million
related to an unfavorable change in scope on a long-term contract
of $22 million and a provision for the collectibility of certain unbilled
costs of $17 million. Included in operating income for 2002 was a
$28 million write-off of contract costs that the Company deter-
mined to be unbillable. The decrease was offset by a similarly sized
reserve at corporate established by the Company in the second
half of 2001 to address the issue.
Raytheon Aircraft Company (RAC) designs, manufactures, mar-
kets, and provides after-market support for business jets, turbo-
props, and piston-powered aircraft for the world’s commercial,
fractional ownership, and military aircraft markets. RAC had 2003
sales of $2.1 billion versus $2.0 billion in 2002 and $2.5 billion in
2001. The decrease in sales in 2002 was due to lower aircraft
deliveries, the divestiture of a majority interest in the Company’s
aviation support business in June 2001, and the divestiture of a
majority interest in the Company’s aircraft fractional ownership
business in March 2002. Operating income was $2 million in 2003
versus an operating loss of $39 million in 2002 and $77 million in
2001. Excluding goodwill amortization, RAC had an operating loss
of $69 million in 2001 or (2.8) percent of net sales.
The increase in operating income in 2003 was due to higher
productivity and cost saving initiatives implemented over the last
year. Included in 2003 operating income was a $46 million favor-
able profit adjustment on the Joint Primary Aircraft Training System
(JPATS) program partially offset by a $22 million charge on the
Premier program reflecting cost estimate increases. Included in
2002 operating income was a $26 million favorable profit adjust-
ment on the JPATS program. The Company has made a significant
investment in its Premier aircraft, the realization of which is contin-
gent upon future sales at forecasted prices and reductions in
production costs on future deliveries. The Company continues to
monitor the development costs and certification and delivery
schedule of the Horizon aircraft with anticipated certification in the
third quarter of 2004 and first delivery by year-end 2004. The
Company continues to believe there is risk in the market outlook for
both new and used aircraft.
The Other segment, which is comprised of Flight Options LLC
(FO), Raytheon Airline Aviation Services LLC (RAAS), and Raytheon
Professional Services LLC (RPS) had 2003 sales of $573 million
versus $210 million in 2002 and $207 million in 2001. FO offers
services in the aircraft fractional ownership industry. RAAS is a unit
formed to manage the Company’s commuter aircraft business and
Starship®aircraft portfolio. RPS works with customers to design
and execute learning solutions. The increase in sales was due to the
consolidation of FO in June 2003 as described below in Major
Affiliated Entities. The Other segment had an operating loss of
$34 million in 2003 versus $12 million in 2002 and $758 million
in 2001. The loss in 2003 included a $32 million operating loss
at RAAS due, in part, to an increase in a loan reserve on one
major customer.
Included in the 2001 results was a charge of $693 million
related to the commuter aircraft business. This was a result of con-
tinued weakness in the commuter aircraft market and the impact of
the events of September 11, 2001 on the commuter airline indus-
try. During the first half of 2001, the Company experienced a signif-
icant decrease in the volume of used commuter aircraft sales. An
evaluation of commuter aircraft market conditions and the events of
September 11, 2001 indicated the market weakness would con-
tinue into the foreseeable future. As a result, the Company com-
pleted an analysis of the estimated fair value of the various models
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