Raytheon Losses Due To Fewer Commercial Aircraft Sales

World Airline News, Nov 2, 2001

Declining sales of commercial aircraft were largely responsible for Raytheon reporting a net loss of $285 million in the third quarter, and financial analysts do not see much relief on the horizon. In the third quarter of last year, Raytheon had net income of $105 million.

Raytheon officials emphasize that its defense businesses are doing very well in terms of sales, margins and cash. That being the case, they say the company is in a good position to grow in coming months and years. But Raytheon's commercial businesses, including aircraft, are taking a beating from the soft economy. To drive home that point, Moody's Investors Service said the giant aerospace company's debt rating should remain negative. In addition, Raytheon said on Oct. 22 that it intends to offer 29 million shares of common stock in a move that is expected to generate about $1 billion for the company. The money will be used partly to reduce debt.

Raytheon Aircraft Company (RAC) reported sales of $449 million, compared with $749 million for the third quarter of 2000. The sales decline, according to Raytheon, was due to the divestiture of RAC and lower aircraft shipments. RAC shipped 73 aircraft in the third quarter, compared with 114 in the third quarter of 2000.

As previously announced, RAC reported third quarter charges of $693 million in connection with its commuter aircraft business and $52 million related to used general aviation aircraft. Including the effect of the charges, RAC recorded an operating loss of $758 million, compared with operating income of $40 million a year ago.

Performance at RAC is significantly below both plan and prior year through the first nine months of 2001. Adjusting for the divestiture, sales are down 20 percent over the prior year on a year-to-date basis. Margins have decreased from 4.4 percent, to 0.5 percent, excluding the charge taken during the quarter. Cash flow at RAC worsened due to lower demand for used aircraft and a resulting rise in used aircraft inventory.

RAC announced it was implementing further workforce reductions, cutting additional costs, and reducing factory and fleet inventory expenses to bring costs in line with a slowing economy. For the entire year, RAC will lay off a total of approximately 1,700 people. The business also continues to review production rates. In August, RAC's largest airplane, the new super mid-size Hawker Horizon, made its first flight. The Horizon is one-third larger than the company's mid-size Hawker 800XP, and has trans-Atlantic flight capability.

Moody's negative debt rating outlook for Raytheon was caused by several factors, one being the material declines of RAC in the third quarter. The Oct. 18 ratings action was also triggered by Raytheon's announcement of a third quarter charge of $693 million in connection with its commuter aircraft business and $52 million related to used general aviation aircraft. The cash portion of the charge, according to management, is expected to be approximately $350 million over a period of four years. But Moody's also considered a positive development - the company's announcement that Raytheon and Hughes Electronics Corporation have agreed on a settlement under which Hughes Electronics will reimburse Raytheon $635.5 million, with $500 million received on Oct. 16 and the balance to be paid within six months.

Other positive points for Raytheon are the continuing gradual improvements in Raytheon's defense business, which generates the bulk of the company's revenues, and the gradual improvement in its debt reduction program. However, these positive factors are to a great degree offset by the negative cash flow impact of the aircraft business related charge, the continuing cash outlays related to the company's exposure to the Washington Group International (WGI), as well as the deteriorating fundamentals of Raytheon Aircraft.

Despite recent moderate improvements in Raytheon's defense business, the negative rating outlook reflects the possibility that it may take longer than expected for the company to materially improve returns in its businesses and achieve further debt reduction, especially as its aircraft business is entering a down cycle. The outlook also incorporates the uncertainties about the timing and size of its exposure to liabilities stemming from the sale of Raytheon Engineers & Constructors (RE&C) to WGI.

Regarding the eventual liability related to the July 2000 sale of RE&C to WGI, management announced recently that the cost to complete two Massachusetts power plants abandoned by WGI will be $633 million, net of cash receipts, which is within the $450-$700 million range previously announced. In addition, the company reaffirmed its estimate of the $72-$125 million range of exposure on the 15 other guaranteed WGI construction projects. >TK Continental Airlines [CAL]: American Airlines [AMR]: American Airlines [AMR]: United Airlines [UAL]: