Raytheon 2005 Annual Report Download - page 64

profit adjustment on the military training aircraft programs partially offset by a $22 million charge on the Premier
program reflecting cost estimate increases. The favorable profit adjustments on the military training aircraft programs
were due to option exercises and productivity improvements. Since the last contract option related to the military
training aircraft programs was exercised in 2005, no favorable profit adjustment is expected in 2006. The Company
expects to be awarded a new multiyear military training aircraft production contract in 2006.
The Company has made significant investments in its Premier and Hawker 4000 aircrafts, the realization of which is
contingent upon future sales at forecasted prices and reductions in production costs on future deliveries. The Company
uses lot accounting for new commercial aircraft introductions. The size of the initial lot for the Premier I and the Hawker
4000 is 200 and 75 units, respectively, and the Company expects to complete the lots in 2007 and 2009, respectively.
During the fourth quarter of 2004, the Federal Aviation Administration granted a provisional type certification for the
Hawker 4000 aircraft. Final certification has not been received and no revenue has been recognized on this aircraft.
Other—The Other segment, which is comprised of Flight Options LLC (FO), Raytheon Airline Aviation Services LLC
(RAAS), and Raytheon Professional Services LLC (RPS) had 2005 sales of $781 million versus $675 million in 2004 and
$573 million in 2003. FO offers services in the aircraft fractional ownership industry. RAAS manages the long-term wind-
down of the Company’s commuter aircraft business. RPS works with customers to design and execute learning solutions.
The increase in sales in 2004 was primarily due to the consolidation of FO in June 2003. The Other segment had an
operating loss of $117 million in 2005 versus $40 million in 2004 and $34 million in 2003. The increase in operating loss
in 2005 was primarily due to the operating results of FO described below, and to a lesser extent RAAS. The higher losses
at RAAS were due to higher aircraft maintenance expense in the period.
The Other segment’s results in 2005 were principally comprised of the operations of FO. Although FO has had a history
of operating losses, the higher losses in 2005 are due to increased supplemental lift (higher third party chartering expense)
and maintenance expense related to the operational impacts primarily from older aircraft in the fleet, and the timing of
peak customer demand. The older aircraft in the fleet are being retired and replaced by newer aircraft which is expected
to be substantially complete by 2008. At the same time, FO is also taking action to reduce the number of different types of
aircraft in its fleet from twelve to four and in connection with this action reduce current operating costs. Although the
Company believes that these actions will result in improved financial results, there can be no assurance that these actions
will have the expected effect. In addition, in 2005, the Company recorded a $22 million pretax, $19 million after-tax
goodwill impairment charge related to FO. The impairment was a result of changes in valuation assumptions, the effect of
projecting recent performance variances on future periods, and the increase in goodwill as a result of the transaction
described below. The Company also recorded a $7 million charge in 2005 related to a third party settlement of a lawsuit
against FO and its minority shareholders.
In December 2005, the Company settled all disputes with the FO minority shareholders and acquired the minority shares
for $28 million in cash and assumed liabilities and now owns 100% of FO. The Company’s net investment in FO was
approximately $223 million at December 31, 2005. If losses at FO were to continue over the longer-term or if FO’s
financial objectives were no longer expected to be achieved, the Company’s investment in FO could become further
impaired and additional charges may be required. FO must demonstrate substantial operating results improvement to
achieve its financial objectives including achieving its sales forecasts, reducing maintenance expense, and improving
dispatch availability over the 2005 average.
RAAS has exposure to outstanding financing arrangements for commuter aircraft, with the aircraft serving as collateral
for these arrangements. Commuter aircraft customers of RAAS are generally thinly capitalized companies whose financial
condition could be significantly affected by sustained higher fuel costs, industry consolidation, and declining commercial
aviation market conditions. At December 31, 2005 and December 31, 2004, the Company’s exposure on commuter
aircraft assets was approximately $509 million relating to 253 aircraft and approximately $614 million relating to 297
aircraft, respectively. The carrying value of commuter aircraft assets assumes an orderly disposition of these assets. If the
Company were to dispose of these assets in an other than orderly disposition, or sell the business in its entirety, the value
realized would likely be reduced.
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