RAYTHEON COMPANY 333 Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued) 3333333333333 Unlike many major defense contractors, the Company provides electronics for a wide range of missions and platforms. The Company has several thousand programs which the Company believes reduces some of the risk and volatility often inherent in the defense industry. The Company generally acts as a prime contractor or sub- contractor on its programs. The funding of U.S. government pro- grams is subject to Congressional authorization and appropriation. While Congress generally appropriates funds on a fiscal year basis, major defense programs are usually conducted under bind- ing contracts over multiple years. The termination of funding for a U.S. government program could result in a loss of future revenues, which would have a negative effect on the Company’s financial position and results of operations. U.S. government contracts are also subject to oversight audits and contain provisions for termina- tion. Failure to comply with U.S. government regulations could lead to suspension or debarment from U.S. government contracting. Sales to the U.S. government may be affected by changes in procurement policies, budget considerations, changing defense requirements, and political developments. The influence of these factors, which are largely beyond the Company’s control, could impact the Company’s financial position or results of operations.  AIRCRAFT INDUSTRY CONSIDERATIONS The health of the markets for Raytheon Aircraft’s products and services is influenced by a number of key economic and environmental factors including:  33 Economic growth or sustained market stability 33 The industry-wide level of inventory of used aircraft available  for sale 33 Regulatory and environmental factors including continued open access to national airspace and airports and operational equipment requirements 33 Introduction of new products  While the economy has shown signs of recovery by most meas- ures including GDP, corporate profits, and personal disposable income, the general aviation market continues to be depressed from its peak performance in 2001. Historically, the industry has lagged the U.S. economic recovery by 12–18 months.  Traditionally, the used aircraft market has led the recovery of  the new aircraft market by approximately nine months, however, the current size of the worldwide fleet of used aircraft available for sale and a slower economic recovery could delay market demand for new aircraft.  The size of the worldwide fleet of used aircraft available for sale has created intense price pressure on new aircraft and, as a result, many manufacturers have reduced line or production rates to avoid oversupplying the market with products that will only be moved through deep discounting. To support a recovery of the new aircraft market, the current worldwide inventory of used air- craft must be reduced.  Despite the increased activity in the used aircraft market during the last half of 2003 and strong fourth quarter sales activity for new aircraft, driven in large part by the bonus depreciation benefit of the Jobs Growth Tax Relief Reconciliation Act of 2003, the industry consensus is that the market for new aircraft will remain flat to slightly higher through 2005 with a modest recovery beginning in 2006.  FINANCIAL SUMMARY As discussed in more detail throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations: Gross bookings were $22.7 billion in 2003, $17.9 billion in 2002, and $17.0 billion in 2001 resulting in backlog of $27.5 bil- lion, $25.7 billion, and $25.6 billion at December 31, 2003, 2002, and 2001, respectively. Backlog represents future sales and cash flow that will be recognized over the next several years. Net sales were $18.1 billion in 2003, $16.8 billion in 2002, and $16.0 billion in 2001. The increase in sales was a result of strong growth at the defense businesses, primarily Integrated Defense Systems, Missile Systems, and Space and Airborne Systems. Operating income was $1.3 billion in 2003, $1.8 billion in 2002, and $0.8 billion in 2001. Operating income as a percent of net sales was 7.3 percent, 10.6 percent, and 4.8 percent in 2003, 2002, and 2001, respectively. Included in operating income was a FAS/CAS Pension Adjustment, described below in Consolidated Results of Operations, of $109 million of expense in 2003, $210 million of income in 2002, and $386 million of income in 2001. The FAS/CAS Pension Adjustment in 2004 is expected to be approximately $450 million of expense. Also included in oper- ating income were 2003 charges at Network Centric Systems and Technical Services of $276 million, 2001 charges at Raytheon Airline Aviation Services™ of $745 million, and 2001 goodwill amortization of $334 million. Operating cash flow from continuing operations was $2.1 bil- lion in 2003, $2.2 billion in 2002, and $0.8 billion in 2001. The increase from 2001 was due to better working capital manage- ment at the defense businesses and better inventory management at Raytheon Aircraft. Although the Company will continue to focus on working capital management at the defense businesses, this level of improvement is not expected to continue into the foresee- able future.