1
EXHIBIT 13
Five-Year Statistical Summary
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1999 1998 1997 1996 1995
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(In millions except share amounts) (Restated) (Restated) (Restated) (Restated)
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Results of Operations
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Net sales $19,841(1) $19,419(4) $13,593 $12,257 $11,836
Operating income 1,527(2) 2,006(5) 1,060(7) 1,192(9) 1,122(10)
Interest expense, net 713 711 359 154 171
Net income 404(3) 844(6) 511(8) 757(9) 795(11)
Diluted earnings per share $1.19(3) $2.47(6) $2.11(8) $3.15(9) $3.24(11)
Dividends declared per share 0.80 0.80 0.80 0.80 0.75
Average diluted shares outstanding (in thousands) 340,784 341,861 241,886 240,165 245,397
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Financial Position at Year-End
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Current assets $8,931 $8,965 $9,155 $5,688 $5,279
Property, plant, and equipment, net 2,417 2,275 2,891 1,802 1,584
Total assets 28,110 28,232 28,520 11,358 9,999
Current liabilities 7,886 7,032 11,176 4,875 3,801
Long-term debt 7,298 8,163 4,406 1,500 1,488
Total debt 9,770 8,990 10,062 3,727 2,704
Stockholders' equity 10,959 10,797 10,386 4,575 4,273
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General Statistics
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Total backlog $28,420 $24,045(12) $21,515 $12,251 $10,662
U.S. government backlog included above 16,107 14,622(12) 12,547 5,637 5,142
Capital expenditures 532 509 459 406 329
Depreciation and amortization 724 761 457 369 371
Number of employees (actual) 105,300 108,200 119,200 75,300 73,200
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(1) Includes a charge of $200 million.
(2) Includes charges of $320 million and restructuring and special charges of
$207 million, offset by $65 million of favorable adjustments to
restructuring-related reserves.
(3) Includes charges of $320 million pretax and restructuring and special
charges of $221 million pretax, offset by favorable adjustments to
restructuring-related reserves of $65 million pretax, and a net gain on
sales of operating units and investments of $23 million pretax. The impact
of these items combined was a net charge of $276 million after-tax, or
$0.81 per diluted share.
(4) Includes a charge of $310 million.
(5) Includes a charge of $310 million and restructuring and special charges of
$252 million.
(6) Includes a charge of $310 million pretax, restructuring and special charges
of $252 million pretax, and a net gain on sales of operating units of $141
million pretax. The impact of these items combined was a net charge of $271
million after-tax, or $0.79 per diluted share.
(7) Includes restructuring and special charges of $495 million.
(8) Includes restructuring and special charges of $495 million pretax and a net
gain on sales of operating units of $72 million pretax. The impact of these
items combined was a net charge of $275 million after-tax, or $1.14 per
diluted share.
(9) Includes a special charge of $34 million pretax, $22 million after-tax, or
$0.09 per diluted share.
(10) Includes a charge of $77 million and a special charge of $125 million.
(11) Includes a charge of $77 million pretax, a special charge of $125 million
pretax, and a net gain on sales of operating units of $210 million pretax.
The impact of these items combined was a net gain of $5 million after-tax,
or $0.02 per diluted share.
(12) During 1998, the Company changed its method of reporting backlog at certain
locations as discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Note: The Company has restated its financial statements for revenue related to
bill and hold transactions at Raytheon Aircraft as more fully discussed in Note
B to the financial statements. In addition, certain prior year amounts have been
reclassified to conform to the current year presentation. In December 1997, the
Company issued 102.6 million shares of Class A common stock and converted each
share of Raytheon common stock into one share of Class B common stock in
connection with the merger with Hughes Defense. All share and per share amounts
have been restated to reflect the two-for-one stock split in October 1995.
3
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Raytheon Company (the "Company") is a global technology leader that operates in
three major business areas: Electronics, both defense and commercial,
Engineering and Construction, and Aircraft. The Company is a leader in defense
electronics, including missiles; radar; sensors and electro-optics;
reconnaissance, surveillance, and intelligence; command, control, communication,
and information; training; simulation and services; naval systems; air traffic
control systems; and aircraft integration systems. The Company's results of
operations include the results of Texas Instruments' defense business (TI
Defense) which was acquired on July 11, 1997, and the defense business of Hughes
Electronics Corporation (Hughes Defense) which merged with the Company on
December 17, 1997. The Electronics segments were established in conjunction with
the consolidation and reorganization of the Company's Electronics businesses and
the creation of Raytheon Systems Company (RSC) in December 1997. RSC is
comprised of the Defense Systems segment, the Sensors and Electronic Systems
segment, the Command, Control, Communication and Information Systems segment,
and the defense electronics portion of the segment that includes Aircraft
Integration Systems, Training and Services, Commercial Electronics, and Other.
In the first quarter of 2000, RSC was eliminated and the Defense Systems and
Sensors and Electronic Systems segments were combined into the new Electronic
Systems segment. The Engineering and Construction segment offers full-service
engineering and construction capabilities to clients worldwide. The Aircraft
segment is one of the leading providers of business and special mission aircraft
and delivers a broad line of jet, turboprop, and piston-powered airplanes to
corporate and military customers worldwide.
Consolidated Results of Operations
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which
among other guidance, clarifies certain conditions to be met in order to
recognize revenue. After reexamining the terms underlying certain transactions
of Raytheon Aircraft, the Company determined that revenue related to these
transactions should be reversed. In view of the cumulative effect of the
unrecorded adjustment on the results of future periods, the Company restated its
annual and quarterly consolidated financial statements. The restatements were
required to reverse sales that the Company believed were properly recorded as
bill and hold sales when the manufacturing process was substantially complete
and the rights of ownership of the aircraft had passed to the buyer, but before
minor modifications had been completed and the physical delivery of the aircraft
occurred. The restated financial statements reflect sales when final delivery of
the aircraft occurred. As these adjustments relate to the timing of revenue
recognition, all reversals are recognized in later periods. The financial
statements and related notes set forth in this Annual Report reflect all such
restatements.
Net sales in 1999 were $19.8 billion compared with $19.4 billion in 1998 and
$13.6 billion in 1997. Sales to the U.S. Department of Defense were 53 percent
of sales in 1999, 56 percent in 1998, and 34 percent in 1997. Total sales to the
U.S. government, including foreign military sales, were 61 percent of sales in
1999, 66 percent in 1998, and 46 percent in 1997. The increases in 1998 are
primarily a result of the merger with Hughes Defense and the acquisition of TI
Defense. Total international sales, including foreign military sales, were 27
percent of sales in 1999, 26 percent in 1998, and 29 percent in 1997.
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Gross margin in 1999 was $3.6 billion compared with $4.3 billion in 1998 and
$2.7 billion in 1997, or 18.1 percent of sales in 1999, 21.9 percent in 1998,
and 19.6 percent in 1997. Excluding the restructuring and special charges
described below of $133 million, net in 1999 ($198 million of restructuring and
special charges offset by $65 million of favorable adjustments to
restructuring-related reserves), $85 million in 1998, and $401 million in 1997,
gross margin was $3.7 billion in 1999, $4.3 billion in 1998, and $3.1 billion in
1997, or 18.7 percent of sales in 1999, 22.3 percent in 1998, and 22.5 percent
in 1997. The decrease in gross margin as a percent of sales in 1999 is due to
lower international revenues and more competitive pricing pressure in defense
electronics.
Administrative and selling expenses were $1,550 million in 1999, $1,664
million in 1998, and $1,189 million in 1997. The increase in 1998 is due
primarily to the merger with Hughes Defense and the acquisition of TI Defense,
partially offset by the sale of the Company's home appliance, heating, air
conditioning, and commercial cooking operations in September 1997. Excluding the
restructuring charges described below of $9 million in 1999 and the special
charges of $167 million in 1998 and $94 million in 1997, administrative and
selling expenses decreased to 7.8 percent of sales in 1999 and 7.7 percent in
1998 from 8.1 percent in 1997. The decrease is due primarily to economies of
scale resulting from the merger with Hughes Defense and the acquisition of TI
Defense.
Research and development expenses were $508 million or 2.6 percent of sales
in 1999, $582 million or 3.0 percent of sales in 1998, and $415 million or 3.1
percent of sales in 1997. The decrease in research and development expenses as a
percent of sales in 1999 is due primarily to the elimination of duplicate
research and development processes within the former RSC.
In the fourth quarter of 1997, the Company recorded a $220 million
restructuring charge, which is included in cost of sales, to reduce the then
newly formed RSC workforce by 12,800 employees and reduce space by approximately
11 million square feet at 34 facilities through sales, subleases, and lease
terminations. In connection with these actions, the Company also accrued $584
million as liabilities assumed in connection with the merger with Hughes Defense
and the acquisition of TI Defense as part of the allocation of purchase price
and not as a charge to operations. The principal actions involve the
consolidation of missile and other electronics systems' manufacturing and
engineering, as well as the consolidation of certain component manufacturing
into Centers of Excellence.
In the fourth quarter of 1998, the estimated number of employee terminations
increased by approximately 1,200 employees, primarily comprised of manufacturing
employees, however, the actual cost of termination per employee was lower than
the original estimate. As a result of these changes in estimate, the total cost
of employee severance decreased by $37 million. In the fourth quarter of 1998,
the Company determined that facilities exit costs would run lower than the
original estimate by $30 million because many of the facility actions were
progressing ahead of the original schedule, reducing the amount of rent and
occupancy costs, and costs to return certain facilities to the required
condition were less than originally planned. In the fourth quarter of 1998, the
Company committed to close two additional facilities and further reduce
employment by approximately 1,400 positions. The total program cost of the
actions was estimated at $67 million, comprised of $14 million of severance and
other employee related costs and $53 million of facility closure and related
costs.
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In the third quarter of 1999, the Company recorded a $35 million
restructuring charge, which is included in cost of sales, for higher than
originally estimated exit costs related to the Hughes Defense and TI Defense
actions. The estimate for employee related exit costs increased by $27 million
for higher than planned severance and other termination benefit costs. The
estimate for facility related exit costs increased by $8 million for additional
lease termination costs expected to be incurred. The Company accrued $12 million
of exit costs as liabilities assumed in connection with a minor acquisition. The
Company recorded a $102 million restructuring charge in the third quarter of
1999, of which $93 million is included in cost of sales and $9 million is
included in administrative and selling expenses, to further reduce the
Electronics workforce by 2,200 employees and vacate and dispose of an additional
2.7 million square feet of facility space. Employee related exit costs of $55
million include severance and other termination benefit costs for manufacturing,
engineering, and administrative employees. Facility related exit costs of $47
million include the costs for lease termination, building closure and disposal,
and equipment disposition.
In the fourth quarter of 1999, the Company determined that the cost of the
RSC restructuring initiatives would be $65 million lower than originally planned
and recorded a favorable adjustment to the original $220 million restructuring
charge. The reduction in the estimated costs related to lower than anticipated
costs for severance and facilities. The primary reasons for the reduction in
severance costs include a shift in the composition of severed employees, higher
attrition resulting in the need for fewer severed employees, and more employees
transferring to other locations within the Company. The estimated costs related
to facilities were lower than anticipated due to the identification of
alternative uses for assets originally identified for disposition, lower
de-installation costs, and more rapid exit from facilities.
The total cost of the Electronics actions are currently estimated at $1.2
billion, of which $888 million pertains to exit costs. Approximately $453
million of the exit costs relate to employee severance and $435 million relate
to facilities. Through December 31, 1999, Electronics employment had been
reduced by approximately 10,900 people, and 9.5 million square feet had been
vacated. The Company expects to essentially complete these restructuring actions
in 2000. While these actions are intended to improve the Company's competitive
position, there can be no assurances as to their ultimate success or that
additional restructuring actions will not be required.
In the fourth quarter of 1997, the Company recorded a $75 million
restructuring charge, which is included in cost of sales, to reduce the Raytheon
Engineers & Constructors (RE&C) workforce by 1,000 employees and close or
partially close 16 offices, reducing space by approximately 1.1 million square
feet. The restructuring charge included $31 million for employee severance and
$44 million for facilities exit. During the fourth quarter of 1998, the Company
modified the plan for RE&C to close fewer facilities than originally estimated.
As a result of this modification, the number of employee terminations was
reduced from approximately 2,300 people to approximately 1,400 and the total
cost of employee severance decreased by $11 million. Because higher than
expected facilities exit costs were incurred at the locations being closed, the
total estimated cost of facilities exit increased by $11 million. In October
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1998, the Company announced plans for an additional 260 person reduction in
the RE&C workforce and recorded an additional $33 million restructuring
charge, which is included in cost of sales. The Company completed these
actions during 1999 for $10 million less than planned due to lower facility
exit costs. In the second quarter of 1999, the Company implemented
additional restructuring plans to further reduce the RE&C workforce by 200
employees at a cost of $10 million. The Company recorded a restructuring
charge of $10 million in the third quarter of 1999, which is included in
cost of sales, to reduce the workforce by another 150 employees. The
workforce affected by the 1999 restructuring actions were engineering and
administrative employees. The total cost of the RE&C actions are currently
estimated at $118 million, of which $63 million relate to employee
severance and $55 million relate to facilities exit.
Through December 31, 1999, RE&C employment had been reduced by approximately
1,600 people, and 1.1 million square feet had been vacated. While these actions
are intended to improve the Company's competitive position, there can be no
assurances as to their ultimate success or that additional restructuring actions
will not be required.
In 1999, the Company recorded the following restructuring charges and
favorable adjustments to restructuring-related reserves, discussed above, and
special charges, discussed below, which were included in the statements of
income and classified as a reduction in net sales or included in cost of sales,
administrative and selling expenses, or other expense as indicated below:
Admin.
Net Cost and Selling Other
(In millions) Sales of Sales Expenses Expense Total
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Restructuring charges
Electronics $128 $9 $137
RE&C 10 10
Favorable adjustments to
restructuring-related reserves
Electronics (65) (65)
Special charges
Electronics
Iridium LLC $15 6 $14 35
Korean business venture 33 33
Exit PRT business 6 6
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Total $15 $118 $9 $14 $156
===============================================================================
In 1999, the Company recorded a $35 million special charge to write down its
minority investment and receivables related to Iridium LLC, which filed for
Chapter 11 protection from creditors on August 13, 1999. The Company also
recorded an additional $33 million special charge to further write down
inventory and receivables related to a Korean business venture and a $6 million
special charge to exit the personal rapid transit (PRT) business, including the
costs to dispose of a test track. At December 31, 1999, the remaining assets
related to the Korean business venture consisted of a $5 million receivable.
7
In 1998, the Company recorded the following restructuring charges, discussed
above, and special charges, discussed below, which were included in the
statements of income and classified as either cost of sales or administrative
and selling expenses as indicated below:
Admin.
Cost and Selling
(In millions) of Sales Expenses Total
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Restructuring charges
RE&C $33 $33
Special charges
RE&C asset impairment 52 52
Electronics
Korean business venture $42 42
Exit a line of business 83 83
Write down assets to be sold 42 42
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Total $85 $167 $252
===============================================================================
During the second quarter of 1998, the Company's partner in a Commercial
Electronics business venture in Korea began to experience financial
difficulties. As a result, the Company recorded a $42 million special charge to
recognize a permanent impairment of its investment in the business venture,
reducing the book value of the investment to estimated fair value. During the
third quarter of 1998, the financial condition of the business venture
deteriorated further, and the Company recorded an additional $83 million special
charge to exit a line of business, which included writing off its remaining
investment in the Korean business venture.
In 1998, the Company also recorded a $52 million special charge for asset
impairment related to the RE&C restructuring actions to exit two operations
which were closed in 1999. The charges consisted of $45 million of goodwill
associated with one of the operations to be exited and $7 million for the
estimated loss on disposition of the other operation.
Also in 1998, the Company recorded a $42 million special charge to write down
the assets of two operations in the Electronics businesses that the Company had
decided to sell, to estimated fair value of approximately $125 million. One sale
was completed during 1998 and the other during 1999. The operating results,
which were not material, were included in the Company's results of operations
through the date of sale.
In 1997, the Company recorded the following restructuring charges, discussed
above, and special charges, discussed below, which were included in the
statements of income and classified as either cost of sales or administrative
and selling expenses as indicated below:
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Admin.
Cost and Selling
(In millions) of Sales Expenses Total
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Restructuring charges
Electronics $220 $220
RE&C 75 75
Special charges
RE&C contract valuations 50 50
Electronics
Asset impairment 9 9
Write down assets to be sold $48 48
One time merger costs 17 46 63
Aircraft asset impairment 30 30
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Total $401 $94 $495
===============================================================================
In 1997, the Company recorded a $63 million special charge primarily for
one-time costs in the Electronics businesses associated with the merger with
Hughes Defense and the acquisition of TI Defense. The Company also recorded a
$48 million special charge primarily to write down to estimated fair value
certain assets in the Electronics businesses that the Company had decided to
sell. The sale of these assets was completed in 1998 and the proceeds and loss
on disposition were not material. A $9 million special charge was also recorded
for an asset impairment.
Also in 1997, the Company recorded a $50 million special charge for contract
valuations at RE&C and a $30 million special charge to recognize a permanent
impairment at Raytheon Aircraft.
Operating income was $1,527 million or 7.7 percent of sales in 1999, $2,006
million or 10.3 percent of sales in 1998, and $1,060 million or 7.8 percent of
sales in 1997. Excluding the restructuring and special charges described above
of $142 million, net in 1999 ($207 million of restructuring and special charges
offset by $65 million of favorable adjustments to restructuring-related
reserves), $252 million in 1998, and $495 million in 1997, operating income as a
percent of sales was 8.4 percent, 11.6 percent, and 11.4 percent in 1999, 1998,
and 1997, respectively. The changes in operating income by segment are discussed
below.
Interest expense, net was $713 million in 1999, $711 million in 1998, and
$359 million in 1997. The increase in 1998 was due principally to the higher
debt level resulting from the merger with Hughes Defense and the acquisition of
TI Defense. During 1998, the Company issued $3.8 billion of long-term notes and
debentures in order to secure favorable long-term rates. The weighted average
cost of borrowing was 7.1 percent in 1999, 6.9 percent in 1998, and 6.8 percent
in 1997.
Other income, net was $14 million in 1999, versus $142 million in 1998 which
included a $141 million net gain on sales of operating units, and $65 million in
1997 which included a $72 million net gain on sales of operating units.
9
The effective tax rate was 44.8 percent in 1999, 41.3 percent in 1998, and
33.3 percent in 1997. The effective tax rate reflects primarily the U.S.
statutory rate of 35 percent reduced by foreign sales corporation tax credits
and research and development tax credits applicable to certain government
contracts, increased by non-deductible amortization of goodwill. The increase in
the effective tax rate in 1999 and 1998 was primarily due to the increase in
non-deductible amortization of goodwill resulting from the merger with Hughes
Defense.
In 1999, the Company adopted the American Institute of Certified Public
Accountants Statement of Position 98-5, Reporting on the Costs of Start-Up
Activities (SOP 98-5). This accounting standard requires that certain start-up
and pre-contract costs be expensed as incurred. The Company recorded a charge of
$53 million after-tax reflecting the initial application of SOP 98-5 and the
cumulative effect of the change in accounting principle.
The impact of the 1999 restructuring and special charges, favorable
adjustments to restructuring-related reserves, and net gain on sales of
operating units and investments combined was a net charge of $133 million pretax
and $86 million after-tax. The impact of the 1998 restructuring and special
charges and net gain on sales of operating units combined was a net charge of
$111 million pretax and $72 million after-tax. The impact of the 1997
restructuring and special charges and net gain on sales of operating units
combined was a net charge of $423 million pretax and $275 million after-tax.
Net income in 1999 was $404 million, or $1.19 per diluted share on 340.8
million average shares outstanding. Net income in 1998 was $844 million, or
$2.47 per diluted share on 341.9 million average shares outstanding. Net income
in 1997 was $511 million, or $2.11 per diluted share on 241.9 million average
shares outstanding. The Company issued 102.6 million shares of Class A common
stock in December 1997 in connection with the merger with Hughes Defense.
The Company's total number of employees was approximately 105,300 at December
31, 1999, approximately 108,200 at December 31, 1998, and approximately 119,200
at December 31, 1997. The decreases are primarily a result of the restructuring
initiatives outlined above.
Segment Results
1999 1998 1997
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Sales (In millions) (Restated) (Restated)
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Defense Systems $ 5,215 $ 4,941
Sensors and Electronic Systems 2,695 2,934
Command, Control, Communication
and Information Systems 3,576 3,529
Aircraft Integration Systems,
Training and Services, Commercial
Electronics, and Other 3,003 3,418
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Total Electronics 14,489 14,822 $ 8,972
Engineering and Construction 2,656 2,065 2,255
Aircraft 2,696 2,532 2,366
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Total $19,841 $19,419 $13,593
===============================================================================
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1999 1998 1997
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Operating Income (In millions) (Restated) (Restated)
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Defense Systems $ 785 $ 880
Sensors and Electronic Systems 332 556
Command, Control, Communication
and Information Systems 301 371
Aircraft Integration Systems,
Training and Services, Commercial
Electronics, and Other 8 225
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Total Electronics 1,426 2,032 $ 856
Engineering and Construction (61) (253) 19
Aircraft 162 227 185
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Total $1,527 $2,006 $1,060
==============================================================================
Certain prior year segment amounts were reclassified to conform to the current
year presentation. Information for the segments that comprise Total Electronics
has not been presented for 1997 because the Company determined that it was
impracticable to obtain the comparative information due to the significant
acquisitions, divestitures, and reorganizations that took place during 1997. In
keeping with the Company's on-going consolidation efforts and to further
simplify its organizational structure, in the first quarter of 2000, RSC was
eliminated and the Defense Systems and Sensors and Electronic Systems segments
were combined into the new Electronic Systems segment. These organizational
changes will be reflected in the Company's 2000 financial statements.
The Electronics businesses reported 1999 sales of $14.5 billion and operating
income of $1,426 million, 1998 sales of $14.8 billion and operating income of
$2,032 million, and 1997 sales of $9.0 billion and operating income of $856
million. In 1999, the Company recorded a $195 million contract-related operating
charge of which $165 million was recorded as a reduction to net sales and $30
million was included in cost of sales. Approximately $130 million related to
changes in estimates on three contracts. Two were fixed price U.S. government
contracts that were in loss positions, of which one was expected to begin to
realize certain efficiencies that have not materialized. The second recently
completed the development phase at higher than expected costs resulting in a
higher loss than originally anticipated, therefore, additional loss provisions
were recorded. The third was a fixed price commercial program in a new line of
business. The cost of this program was running higher than the initial
projections, therefore, a loss provision was recorded. The significant increase
in 1998 was attributable primarily to the merger with Hughes Defense and the
acquisition of TI Defense. Additionally, the previously discussed restructuring
and special charges decreased to $167 million in 1998 from $340 million in 1997.
Defense Systems reported 1999 sales of $5.2 billion, an increase from $4.9
billion in 1998. Operating income was $785 million in 1999 versus $880 million
in 1998. The decrease in operating income was primarily due to the 1999 charges.
Sensors and Electronic Systems reported 1999 sales of $2.7 billion versus
$2.9 billion in 1998. Operating income was $332 million in 1999 versus $556
million in 1998. The decrease in operating income was primarily due to the 1999
charges and higher margin programs completed in the prior year.
11
Command, Control, Communication and Information Systems reported 1999 sales
of $3.6 billion versus $3.5 billion in 1998. Operating income was $301 million
in 1999 compared to $371 million in 1998. The decrease in operating income was
primarily due to the 1999 charges.
Aircraft Integration Systems, Training and Services, Commercial Electronics,
and Other reported 1999 sales of $3.0 billion down from $3.4 billion in 1998.
Operating income was $8 million in 1999 compared to $225 million in 1998. The
decrease in operating income was primarily due to the 1999 charges and higher
margin programs completed in the prior year.
RE&C reported 1999 sales of $2.7 billion and an operating loss of $61
million, 1998 sales of $2.1 billion and an operating loss of $253 million, and
1997 sales of $2.3 billion and operating income of $19 million. In 1999, RE&C
recorded a $125 million operating charge of which $20 million was recorded as a
reduction to net sales and $105 million was included in cost of sales. The
charge related to four troubled international fixed price contracts in loss
positions that are experiencing schedule delays and cost overruns due to labor
difficulties and subcontractor performance. Delays, cancellations, and cost
growth on other projects have also contributed to the erosion in operating
margins. These difficulties may continue into the forseeable future. Any
additional cost growth or losses will have an adverse effect on the Company's
financial position and results of operations. In 1998, RE&C recorded a
non-recurring charge of $310 million consisting of a $153 million change in
estimate on certain contracts and a $157 million charge related to certain
contract claims. The charge related to the change in estimate was due to
increased cost projections on several large turnkey projects. The charge related
to contract claims was due to a change in methodology employed by the Company to
pursue outstanding claims. In accordance with contract accounting rules, this
charge was recorded as a reduction in net sales. In addition, RE&C recorded
previously discussed restructuring and special charges of $85 million in 1998
and $125 million in 1997. The decrease in sales and operating income in 1998 was
due primarily to the $310 million non-recurring charge. RE&C has undertaken
corrective actions in an effort to improve cash flow management, reduce the
overhead structure, and strengthen the management team.
Raytheon Aircraft reported 1999 sales of $2.7 billion and operating income of
$162 million or 6.0 percent of sales, 1998 sales of $2.5 billion and operating
income of $227 million or 9.0 percent of sales, and 1997 sales of $2.4 billion
and operating income of $185 million or 7.8 percent of sales. The increase in
sales was primarily due to increased demand for the King Air and Hawker
aircraft. Excluding the 1997 special charge of $30 million discussed above,
operating income was 9.1 percent of sales. The decline in operating income as a
percent of sales in 1999 was due to increased development and start-up costs for
the Premier I, Hawker Horizon, and JPATS aircraft, higher production costs, and
commuter valuation costs.
12
Backlog consisted of the following at December 31:
1999 1998 1997
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(In millions) (Restated) (Restated)
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Electronics $20,783 $17,648 $16,641
Engineering and Construction 3,355 3,888 2,900
Aircraft 4,282 2,509 1,974
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Total backlog $28,420 $24,045 $21,515
===============================================================================
U.S. government backlog
included above $16,107 $14,622 $12,547
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The increase in backlog in 1999 was due primarily to the receipt of several
significant orders at Electronics and Aircraft. In the third quarter of 1998,
the Company changed its method of reporting backlog at certain locations in
order to provide a consistent method of reporting across and within the
Company's businesses. Backlog includes the full value of contract awards when
received, excluding awards and options expected in future periods. Prior to the
change, contract values which were awarded but incrementally funded were
excluded from reported backlog for some parts of the business. The one-time
impact of this change was a $1.1 billion increase to Electronics backlog and a
$0.9 billion increase to Engineering and Construction backlog, related
principally to U.S. government contracts. Prior periods have not been restated
for this change. Excluding this change, backlog remained essentially unchanged
from December 31, 1998 to December 31, 1997.
Financial Condition and Liquidity
Net cash used in operating activities in 1999 was $317 million versus net cash
provided by operating activities of $994 million in 1998. The decrease was due
principally to increased working capital requirements and restructuring
activities at the Electronics businesses. Net cash provided by operating
activities was $1,044 million in 1997. In 1999 and 1998, the Company incurred
cash expenditures of $426 million and $276 million, respectively, on
restructuring and exit costs and $265 million and $56 million, respectively, of
capital expenditures and period expenses related to restructuring and
consolidation activities for RSC and RE&C combined. The Company expects to spend
approximately $250 million on exit costs and approximately $50 million on
capital expenditures and period costs related to restructuring actions in 2000.
While the Company expects that the completion of restructuring and consolidation
activities will reduce cash flow in the near term, over the next five years the
Company expects to recover that investment.
The Company maintains an ongoing program under which it sells general and
commuter aviation long-term receivables. During the fourth quarter of 1998, the
Company initiated a program under which it sells government short-term
receivables. Proceeds from the sale of government short-term receivables were
$225 million in 1998. In addition, the Company maintains an ongoing program
under which it sells engineering and construction short-term receivables. In
1999, the Company changed its method of reporting cash flows related to the
origination and sale of financing receivables, which are now classified as cash
flows from investing activities. Prior to the change, these amounts were
classified as cash flows from operating activities. Prior year amounts have been
reclassified to conform with the current year presentation.
13
Net cash used in investing activities was $400 million in 1999 versus net
cash provided by investing activities of $617 million in 1998 and net cash used
in investing activities of $2,937 million in 1997. Origination of financing
receivables was $1,438 million in 1999, $1,339 million in 1998, and $1,317
million in 1997. Sale of financing receivables was $1,239 million in 1999,
$1,105 million in 1998, and $1,182 million in 1997. Capital expenditures were
$532 million in 1999, $509 million in 1998, and $459 million in 1997. The
increase in 1998 was primarily due to the merger with Hughes Defense and the
acquisition of TI Defense. Capital expenditures in 2000 are expected to
approximate 1999 levels.
Proceeds from the sales of property, plant, and equipment were $102 million
in 1999. Proceeds from the sales of property, plant, and equipment in 1998 were
$700 million and included a $490 million property sale and five-year operating
lease facility. The transaction was intended to diversify the Company's sources
of funding and extend the term for a portion of the Company's financing
obligations. Remaining lease payments approximate $83 million in 2000, $77
million in 2001, $64 million in 2002, and $215 million in 2003. The lease
facility contains covenants that are substantially similar to those in the
Company's senior credit facilities. Proceeds from the sales of property, plant,
and equipment were $69 million in 1997.
In 1998, the Company made net payments for the purchase of acquired companies
of $96 million, including $63 million for the acquisition of AlliedSignal's
Communications Systems business. In 1997, net payments of $3,087 million were
made in connection with the merger with Hughes Defense and the acquisition of TI
Defense. Pursuant to the terms of the Master Separation Agreement (the
"Separation Agreement"), which requires an adjustment based on net assets, the
final purchase price for Hughes Defense has not been determined. Based on the
terms and conditions of the Separation Agreement, the Company believes that it
is entitled to a reduction in the purchase price, a position that Hughes
Electronics disputes. The Company and Hughes Electronics have begun the process
of negotiating a possible resolution of this matter. If the matter is not
successfully resolved through negotiation, the Separation Agreement provides for
binding arbitration. Accordingly, while the Company expects a reduction in
purchase price from the original terms of the agreement, the amount, timing, and
effect on the Company's financial position are uncertain. As a result of this
uncertainty, no amounts have been recorded in the financial statements related
to this expected reduction in purchase price. Any payment received from Hughes
Electronics as a result of a reduction in purchase price will result in a
corresponding reduction in goodwill and not be reflected in the income
statement. Any payment received from Hughes Electronics for interest accrued on
a reduction in purchase price, as provided in the Separation Agreement, will be
reflected in the income statement in the period of receipt.
Pursuant to the terms of the Separation Agreement, Hughes Electronics
delivered to the Company a balance sheet for Hughes Defense as of December 17,
1997 (the "Closing Balance Sheet"), the effective time of the merger with Hughes
Defense. During the course of the Company's review of the Closing Balance Sheet,
the Company identified numerous items requiring adjustment. As a result of this
review, as well as the accrual of additional exit costs, the Company recorded a
total of approximately $1 billion of adjustments, exit cost accruals, and
additional goodwill during 1998. As a result of the different measurements of
the purchase price allocation, additional annual goodwill amortization of
approximately $26 million will be recorded. The Closing Balance Sheet included:
14
o Contracts in process of $2,226 million, which the Company reduced by $1,170
million to record additional contract loss provisions of $693 million,
other contract adjustments of $272 million, billed and unbilled contract
write-offs of $139 million, and contract claim write-offs of $66 million.
o Inventories of $343 million, which the Company reduced by $84 million
primarily to record write-offs of excess and obsolete inventory.
o Other current assets of $208 million, which the Company increased by $612
million primarily to record additional deferred tax assets related to the
Company's adjustments to the Closing Balance Sheet.
o Property, plant, and equipment of $1,103 million, which the Company reduced
by $78 million to record an estimated fair value adjustment.
o Other long-term assets of $1,023 million, which the Company increased by
$119 million primarily to record an increase in the value of certain
prepaid pension assets.
o Current liabilities of $1,701 million, which the Company increased by $931
million to record $584 million of exit costs, $245 million of adjustments
for unfavorable leases, $29 million related to liabilities for employee
compensation and related taxes and benefits, and $14 million for additional
environmental liabilities.
o Long-term liabilities of $1,069 million, which the Company reduced by $83
million primarily to reduce certain liabilities to estimated fair value.
As noted above, the adjustments recorded during 1998 were made as a result
of the Company's review of the Closing Balance Sheet. The Company believes many
of the same types of adjustments may also have been required in the September
28, 1997 Hughes Defense balance sheet which is included in the Company's
Solicitation Statement/Prospectus dated November 10, 1997 (the "Prospectus").
As a result, the Company believes that the September 28, 1997 Hughes Defense
balance sheet may contain items that are material departures from generally
accepted accounting principles, therefore, investors are cautioned that the pro
forma combined condensed financial statements contained in the Prospectus may
not be representative of the combined company's actual financial position.
Hughes Electronics and their independent accountants do not agree with the
Company's assessment.
15
In September 1999, the Company sent Hughes Electronics a demand for mediation
pursuant to the alternative dispute resolution process set forth in the
Separation Agreement in connection with a separate claim against Hughes
Electronics concerning the accuracy and completeness of disclosures made by
Hughes Electronics to the Company prior to the merger.
In November 1999, the Company filed a complaint against Towers, Perrin,
Forster & Crosby (TPF&C). The complaint arises out of a series of events
concerning certain Hughes Electronics pension plans (the "Hughes Plans"),
portions of which were acquired by the Company in connection with the merger
with Hughes Defense. Specifically, the complaint alleges that the Company was
damaged by false representations made to the Company by TPF&C regarding the
amount of surplus in the Hughes Plans and errors committed by TPF&C in providing
administrative services to the Hughes Plans. The complaint seeks damages in an
amount to be determined at trial.
In 1999, the Company sold its Cedarapids, Inc. subsidiary for $170 million,
other non-core business operations for $65 million in cash and $3 million in
securities, and securities received as partial payment for previously divested
businesses for $32 million. Total sales and operating income related to these
divested businesses were $138 million and $3 million, respectively in 1999.
In 1998, the Company sold its commercial laundry business unit for $315
million in cash and $19 million in securities and its Raytheon Aircraft Montek
subsidiary for $160 million. Also in 1998, the Company sold other non-core
business operations for $273 million. Total sales and operating income related
to these divested businesses were $372 million and $8 million, respectively in
1998.
In 1997, the Company sold its home appliance, heating, air conditioning, and
commercial cooking operations for $522 million. Also during 1997, the Company
sold its Switchcraft and Semiconductor divisions, which were part of Commercial
Electronics, for $183 million. The Company has been divesting non-core assets as
part of its strategy to focus and streamline its core businesses.
Dividends paid to stockholders were $269 million in 1999, $271 million in
1998, and $189 million in 1997. The quarterly dividend rate was $0.20 per share
for each of the four quarters of 1999, 1998, and 1997. The increase in dividends
paid in 1998 was due to the issuance of 102.6 million shares in connection with
the merger with Hughes Defense.
Outstanding shares were reduced by the repurchase of 2.6 million shares for
$150 million in 1999, 4.6 million shares for $247 million in 1998, and 1.7
million shares for $94 million in 1997.
Total debt was $9.8 billion at December 31, 1999 and $9.0 billion at December
31, 1998. The Company's outstanding debt has interest rates ranging from 5.7% to
7.375% and matures at various dates through 2028. Total debt, as a percentage of
total capital, was 47.1 percent and 45.4 percent at December 31, 1999 and 1998,
respectively.
16
The Company has bank agreement covenants. During 1999, the Company's most
restrictive covenant was amended. The new covenant requires that the earnings
before interest and taxes (EBIT) be at least 2.4 times net interest expense for
the prior four quarters. Prior to the amendment, the requirement was that EBIT
was at least three times net interest expense for the prior four quarters. The
Company was in compliance with this covenant during 1999, 1998, and 1997.
The Company issued $3.8 billion of long-term notes and debentures in 1998 and
$3.0 billion in 1997. These financings were used to refinance the debt
associated with the merger with Hughes Defense and the acquisition of TI Defense
and to take advantage of favorable long-term interest rates in order to reduce
short-term borrowings.
In July 1999, the Company filed a shelf registration with the Securities and
Exchange Commission registering the possible future issuance of up to $3.0
billion in debt and/or equity securities.
In March 2000, the Company issued $2.25 billion of long-term debt in a
private placement consisting of $200 million of floating rate notes due in 2002,
$800 million of 7.9% notes due in 2003, $850 million of 8.2% notes due in 2006,
and $400 million of 8.3% notes due in 2010. Proceeds from the offering were used
to repay outstanding short-term debt, extending the maturity of the Company's
debt obligations.
Credit ratings for the Company were established by Moody's at P-2 for
short-term borrowing and Baa2 for senior debt, Standard and Poor's at A-3 for
short-term borrowing and BBB- for senior debt, and Duff & Phelps at D-3 for
short-term borrowing and BBB- for senior debt.
Lines of credit with certain commercial banks totaling $4.1 billion at
December 31, 1999 exist as standby facilities to support the issuance of
commercial paper by the Company. These lines of credit bear interest based upon
LIBOR and mature at various dates through 2002. At December 31, 1999, borrowings
under these lines of credit totaled $1.4 billion.
The Company's need for, cost of, and access to funds are dependent on future
operating results, as well as conditions external to the Company. The Company
believes that its financial position will be sufficient to maintain access to
the capital markets in order to support its current operations.
The following discussion covers quantitative and qualitative disclosures
about the Company's market risk. The Company's primary market exposures are to
interest rates and foreign exchange rates.
The Company meets its working capital requirements with a combination of
variable rate short-term and fixed rate long-term financing. The Company enters
into interest rate swap agreements or treasury rate locks with commercial and
investment banks primarily to reduce the impact of changes in interest rates on
financing arrangements. The Company also enters into foreign currency forward
contracts with commercial banks to minimize fluctuations in the value of
payments to international vendors and the value of foreign currency denominated
receipts. The market-risk sensitive instruments used by the Company for hedging
are entered into with commercial and investment banks and are directly related
to a particular asset, liability, or transaction for which a firm commitment is
in place. The Company also sells receivables through various special purpose
entities and retains a partial interest that may include servicing rights,
interest only strips, and subordinated certificates.
17
Financial instruments held by the Company which are subject to interest rate
risk include notes payable, commercial paper, long-term debt, long-term
receivables, investments, and interest rate swap agreements. The aggregate
hypothetical loss in earnings for one year of those financial instruments held
by the Company at December 31, 1999 and 1998, which are subject to interest rate
risk resulting from a hypothetical increase in interest rates of 10 percent, is
$7 million and $1 million after-tax, respectively. The hypothetical loss was
determined by calculating the aggregate impact of a 10 percent increase in the
interest rate of each variable rate financial instrument held by the Company at
December 31, 1999 and 1998, which is subject to interest rate risk. Fixed rate
financial instruments were not evaluated, as the risk exposure is not material.
The Company's outstanding foreign currency forward contracts include
contracts to buy and/or sell British Pounds, Canadian Dollars, European Euros,
German Marks, Netherlands Guilders, Norwegian Kroner, and Swiss Francs. All
foreign exchange contracts were related to specific transactions for which a
firm commitment existed, therefore, the associated market risk of these
financial instruments and the underlying firm commitments in the aggregate is
not material.
Year 2000 Date Conversion
The Year 2000 problem concerns the inability of information systems to recognize
properly and process date-sensitive information beyond January 1, 2000. In
January 1998, the Company initiated a formal comprehensive enterprise-wide
program to identify and resolve Year 2000-related issues. The scope of the
program included the investigation of all Company functions and products and all
internally used hardware and software systems, including embedded systems in
what are not traditionally considered information technology systems. The
Company followed an eight-step risk management process grouped into two major
phases: detection (planning and awareness, inventory, triage, and detailed
assessment) and correction (resolution, test planning, test execution, and
deployment).
To date, the Company has completed the transition from calendar 1999 to 2000
with no reported significant impact to operations. The Company will continue to
evaluate Year 2000-related exposures at suppliers and customers over the next
several months. The Company will also continue to monitor its systems,
facilities, and products to ensure that latent defects do not manifest
themselves over the next few months. Although the Company's Year 2000 conversion
efforts were successful, remaining Year 2000 risks include potential product
supply and other non-operational issues.
Since January 1998, the Company has spent approximately $116 million on the
Year 2000 program, $20 million on the detection phase, and $96 million on the
corrective action phase. Prior to 1998, expenditures on the program were
insignificant. Total cost at completion of the program is currently estimated to
be $119 million. All costs, except those for long-lived assets, are expensed as
incurred. These costs include employees, inside and outside consultants and
services, system replacements, and other equipment requirements. The Company has
employed consultants in an advisory capacity, primarily in the detection phase.
Total estimated costs of the Year 2000 program are predominantly internal.
Although a number of minor information technology projects have been deferred as
a result of the priority given to the Year 2000 program, no significant projects
which would materially affect the Company's financial position or results of
operations have been delayed.
18
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). This accounting standard, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
requires that all derivatives be recognized as either assets or liabilities at
estimated fair value. The adoption of SFAS No. 133 is not expected to have a
material effect on the Company's financial position or results of operations.
In November 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 100, Restructuring and Impairment Charges, which
clarifies the accounting for and disclosure of certain expenses commonly
reported in connection with exit activities and business combinations, and the
recognition of impairment charges for intangible assets and other long-lived
assets. In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which
among other guidance, clarifies certain conditions to be met in order to
recognize revenue. These Staff Accounting Bulletins are not expected to have a
material effect on the Company's financial position or results of operations.
Forward-Looking Statements
Certain statements made in this Annual Report contain forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, regarding the Company's future plans, objectives, and expected
performance. Specifically, statements that are not historical facts, including
statements accompanied by words such as "believe," "expect," "anticipate,"
"estimate," "intend," or "plan" are intended to identify forward-looking
statements and convey the uncertainty of future events or outcomes. The Company
cautions readers that any such forward-looking statements are based on
assumptions that the Company believes are reasonable, but are subject to a
wide-range of risks, and there can be no assurance that actual results may not
differ materially. Important factors that could cause actual results to differ
include, but are not limited to: differences in anticipated and actual program
results, the ultimate resolution of the contingencies and legal matters
discussed in the notes to the financial statements, the ability to realize
anticipated cost efficiencies, the ability to contain cost growth, particularly
at Raytheon Aircraft (RAC) and RE&C, the ability to finance ongoing operations
at attractive rates, the effect of market conditions, particularly as it affects
the general aviation market, the impact of competitive products and pricing, the
impact on recourse obligations of RAC due to changes in the collateral values of
financed aircraft, risks inherent with large long-term fixed price contracts,
particularly at RE&C and the Company's Electronics businesses, government
customers' budgetary constraints, government import and export policies,
termination of government contracts, financial and governmental risks related to
international transactions, and the integration of acquisitions, among other
things. Further information regarding the factors that could cause actual
results to differ materially from projected results can be found in the
Company's reports filed with the Securities and Exchange Commission, including
"Item 1-Business" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
19
Raytheon Company Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
(In millions except share amounts) (Restated)
- ---------------------------------------------------------------------------------------------------------------------------
Assets
- ---------------------------------------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents $ 230 $ 421
Accounts receivable, less allowance for doubtful accounts
of $27 in 1999 and $21 in 1998 851 618
Contracts in process (note E) 5,215 4,859
Inventories (note F) 1,950 1,991
Deferred federal and foreign income taxes (note J) 490 840
Prepaid expenses and other current assets 195 236
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 8,931 8,965
Property, plant, and equipment, net (note G) 2,417 2,275
Goodwill, net of accumulated amortization of $986 in 1999 and $669 in 1998 14,034 14,396
Other assets, net (notes H and M) 2,728 2,596
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 28,110 $ 28,232
===========================================================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------
Current liabilities
Notes payable and current portion of long-term debt (note I) $ 2,472 $ 827
Advance payments, less contracts in process of $1,792 in 1999 and $1,159 in 1998 1,599 1,251
Accounts payable 1,561 2,071
Accrued salaries and wages 549 703
Other accrued expenses (note D) 1,705 2,180
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,886 7,032
Accrued retiree benefits and other long-term liabilities (notes D and M) 1,414 1,679
Deferred federal and foreign income taxes (note J) 553 561
Long-term debt (note I) 7,298 8,163
Commitments and contingencies (note K)
Stockholders' equity (note Q)
Preferred stock, par value $0.01 per share,
200,000,000 shares authorized, none outstanding in 1999 and 1998
Class A common stock, par value $0.01 per share,
450,000,000 shares authorized, 100,805,000 and 101,503,000 shares outstanding
in 1999 and 1998, respectively after deducting 1,537,000 and 839,000
treasury shares in 1999 and 1998, respectively 1 1
Class B common stock, par value $0.01 per share,
1,000,000,000 shares authorized, 237,955,000 and 235,295,000 shares
outstanding in 1999 and 1998, respectively after deducting 5,842,000
and 3,889,000 treasury shares in 1999 and 1998, respectively 2 2
Additional paid-in capital 6,475 6,272
Accumulated other comprehensive income (69) (50)
Treasury stock, at cost (413) (257)
Retained earnings 4,963 4,829
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,959 10,797
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 28,110 $ 28,232
===========================================================================================================================
The accompanying notes are an integral part of the financial statements.
20
Raytheon Company Consolidated Statements of Income
- ----------------------------------------------------------------------------------------------------------
Years Ended December 31: 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
(In millions except per share amounts) (Restated) (Restated)
- ----------------------------------------------------------------------------------------------------------
Net sales $ 19,841 $ 19,419 $ 13,593
- ----------------------------------------------------------------------------------------------------------
Cost of sales 16,256 15,167 10,929
Administrative and selling expenses 1,550 1,664 1,189
Research and development expenses 508 582 415
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 18,314 17,413 12,533
- ----------------------------------------------------------------------------------------------------------
Operating income 1,527 2,006 1,060
- ----------------------------------------------------------------------------------------------------------
Interest expense, net 713 711 359
Other income, net (14) (142) (65)
- ----------------------------------------------------------------------------------------------------------
Non-operating expense, net 699 569 294
- ----------------------------------------------------------------------------------------------------------
Income before taxes 828 1,437 766
Federal and foreign income taxes 371 593 255
- ----------------------------------------------------------------------------------------------------------
Income before accounting change 457 844 511
Cumulative effect of change in accounting principle, net of tax 53 -- --
- ----------------------------------------------------------------------------------------------------------
Net income $ 404 $ 844 511
==========================================================================================================
Earnings per share before accounting change
Basic $ 1.35 $ 2.50 $ 2.14
Diluted 1.34 2.47 2.11
- ----------------------------------------------------------------------------------------------------------
Earnings per share
Basic $ 1.20 $ 2.50 $ 2.14
Diluted 1.19 2.47 2.11
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
21
Raytheon Company Consolidated Statements of Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999, Additional Accumulated Compre- Total
1998, and 1997 Common Stock Paid-in Other Compre- Treasury Retained hensive Stockholders'
(In millions except per share amounts) Class A Class B Capital hensive Income Stock Earnings Income Equity
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 (restated) $236 $ 308 $ (12) $4,043 $4,575
Net income (restated) 511 $ 511 511
Other comprehensive income
Foreign exchange translation adjustments (32) (32)
SFAS No. 115 valuation adjustment 26 26
SFAS No. 87 pension adjustment (5) (5)
Other comprehensive income (11) (11)
Comprehensive income--1997 (restated) $ 500
Dividends declared--$0.80 per share (209) (209)
Common stock plan activity 2 172 174
Treasury stock activity (note Q) (2) (23) (90) (115)
Reduction of par value (234) 234 --
Issuance of Class A common stock $ 1 5,460 5,461
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 (restated) 1 2 6,151 (23) 4,255 10,386
Net income (restated) 844 $ 844 844
Other comprehensive income
Foreign exchange translation adjustments (9) (9)
SFAS No. 115 valuation adjustment (6) (6)
SFAS No. 87 pension adjustment (12) (12)
Other comprehensive income (27) (27)
Comprehensive income--1998 (restated) $ 817
Dividends declared--$0.80 per share (270) (270)
Common stock plan activity 121 121
Treasury stock activity $(257) (257)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 (restated) 1 2 6,272 (50) (257) 4,829 10,797
Net income 404 $ 404 404
Other comprehensive income
Foreign exchange translation adjustments (13) (13)
SFAS No. 115 valuation adjustment (6) (6)
Other comprehensive income (19) (19)
Comprehensive income--1999 $ 385
Dividends declared--$0.80 per share (270) (270)
Common stock plan activity 203 203
Treasury stock activity (156) (156)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 1 $ 2 $6,475 $(69) $(413) $4,963 $10,959
===========================================================================================================================
The accompanying notes are an integral part of the financial statements.
22
Raytheon Company Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31: 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(In millions) (Restated) (Restated)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 404 $ 844 $ 511
Adjustments to reconcile net income to net cash provided by
operating activities, net of the effect of acquisitions and divestitures
Depreciation and amortization 724 761 457
Net gain on sales of operating units and investments (23) (141) (72)
(Increase) decrease in accounts receivable (268) 209 233
Increase in contracts in process (369) (746) (585)
Increase in inventories (178) (247) --
Decrease in deferred federal and foreign income taxes 350 816 122
Decrease (increase) in prepaid expenses and other current assets 34 (106) (60)
Increase in advance payments 349 459 32
(Decrease) increase in accounts payable (497) 264 128
(Decrease) increase in accrued salaries and wages (151) 28 363
Decrease in other accrued expenses (515) (776) (283)
Other adjustments, net (177) (371) 198
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (317) 994 1,044
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Sale of financing receivables 1,239 1,105 1,182
Origination of financing receivables (1,438) (1,339) (1,317)
Collection of financing receivables not sold 83 60 54
Expenditures for property, plant, and equipment (532) (509) (459)
Proceeds from sales of property, plant, and equipment 102 700 69
Increase in other assets (121) (52) (84)
Proceeds from sales of operating units and investments (note C) 267 748 705
Payment for purchase of acquired companies, net of cash received (note C) -- (96) (3,087)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (400) 617 (2,937)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends (269) (271) (189)
Increase (decrease) in short-term debt 771 (4,828) (597)
Increase in long-term debt 10 3,757 2,889
Purchase of treasury shares (150) (247) (94)
Proceeds under common stock plans 164 103 44
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 526 (1,486) 2,053
- ---------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange rates on cash -- -- (1)
- ---------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (191) 125 159
Cash and cash equivalents at beginning of year 421 296 137
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 230 $ 421 $ 296
===========================================================================================================================
The accompanying notes are an integral part of the financial statements.
23
Note A: Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Raytheon Company
(Raytheon or the "Company") and all domestic and foreign subsidiaries. All
material intercompany transactions have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year presentation.
Revenue Recognition
Sales under long-term contracts are recorded under the percentage of completion
method. Costs and estimated gross margins are recorded as sales as work is
performed based on the percentage that incurred costs bear to estimated total
costs utilizing the most recent estimates of costs and funding. Some contracts
contain incentive provisions based upon performance in relation to established
targets which are recognized in the contract estimates when deemed realizable.
Since many contracts extend over a long period of time, revisions in cost and
funding estimates during the progress of work have the effect of adjusting
earnings applicable to performance in prior periods in the current period. When
the current contract estimate indicates a loss, provision is made for the total
anticipated loss in the current period.
Sales from the Texas Instruments' defense business fixed price contracts in
process at the time of acquisition were recorded as products were shipped or
services were rendered.
Revenue from aircraft sales are recognized at the time of physical delivery
of the aircraft. Revenue from certain qualifying non-cancelable aircraft lease
contracts are accounted for as sales-type leases. The present value of all
payments, net of executory costs, are recorded as revenue, and the related costs
of the aircraft are charged to cost of sales. Associated interest, using the
interest method, is recorded over the term of the lease agreements. All other
leases for aircraft are accounted for under the operating method wherein revenue
is recorded as earned over the rental aircraft lives. Service revenue is
recognized ratably over contractual periods or as services are performed.
Research and Development Expenses
Expenditures for company-sponsored research and development projects are
expensed as incurred.
Federal and Foreign Income Taxes
The Company and its domestic subsidiaries provide for federal income taxes on
pretax accounting income at rates in effect under existing tax law. Foreign
subsidiaries have recorded provisions for income taxes at applicable foreign tax
rates in a similar manner.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid
investments with original maturities of 90 days or less.
Contracts in Process
Contracts in process are stated at cost plus estimated profit but not in excess
of realizable value.
24
Inventories
Inventories at Raytheon Aircraft are stated at the lower of cost (principally
last-in, first-out) or market. All other inventories are stated at cost
(principally first-in, first-out or average cost) but not in excess of
realizable value.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Major improvements are
capitalized while expenditures for maintenance, repairs, and minor improvements
are charged to expense. When assets are retired or otherwise disposed of, the
assets and related accumulated depreciation and amortization are eliminated from
the accounts and any resulting gain or loss is reflected in income.
Provisions for depreciation are generally computed on a combination of
accelerated and straight line methods. Depreciation provisions are based on
estimated useful lives as follows: buildings--20 to 45 years, machinery and
equipment--3 to 10 years, and equipment leased to others--5 to 10 years.
Leasehold improvements are amortized over the lesser of the remaining life of
the lease or the estimated useful life of the improvement.
Goodwill
Goodwill is amortized on the straight-line method over its estimated useful
life, but not in excess of 40 years. The Company evaluates the possible
impairment of goodwill at each reporting period based on the undiscounted
projected cash flows of the related business unit.
Impairment of Long-lived Assets
The Company evaluates the recoverability of long-lived assets by measuring the
carrying amount of the assets against the related estimated undiscounted future
cash flows. When an evaluation indicates that the future undiscounted cash flows
are not sufficient to recover the carrying value of the asset, the asset is
adjusted to its estimated fair value.
Investments
Investments include equity ownership of 20 percent to 50 percent in affiliated
companies and of less than 20 percent in other companies. Investments in
affiliated companies are accounted for under the equity method, wherein the
Company's share of earnings and income taxes applicable to the assumed
distribution of such earnings are included in net income. Other investments are
stated at the lower of cost or fair value.
25
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS No. 130), during 1998. SFAS No. 130
established standards for reporting comprehensive income and its components, and
is presented in the statement of stockholders' equity. The Statement of
Financial Accounting Standards No. 87, Employers' Accounting for Pensions (SFAS
No. 87) pension adjustment is shown net of tax benefits of $6 million and $3
million in 1998 and 1997, respectively. The Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS No. 115) valuation adjustment is shown net of tax benefits of
$3 million in both 1999 and 1998, and a tax provision of $14 million in 1997.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries are translated at current
exchange rates and the effects of these translation adjustments are reported as
a component of accumulated other comprehensive income in stockholders' equity.
The balance at December 31, 1999 and 1998, was $(50) million and $(37) million,
respectively. Foreign exchange transaction gains and losses in 1999, 1998, and
1997 were not material.
Pension Costs
The Company has several pension and retirement plans covering the majority of
employees, including certain employees in foreign countries. Annual charges to
income are made for the cost of the plans, including current service costs,
interest on projected benefit obligations, and net amortization and deferrals,
increased or reduced by the return on assets. Unfunded accumulated benefit
obligations are accounted for as a long-term liability. The Company funds
annually those pension costs which are calculated in accordance with Internal
Revenue Service regulations and standards issued by the Cost Accounting
Standards Board.
Interest Rate and Foreign Currency Contracts
The Company meets its working capital requirements with a combination of
variable rate short-term and fixed rate long-term financing. The Company enters
into interest rate swap agreements or treasury rate locks with commercial and
investment banks primarily to reduce the impact of changes in interest rates on
financing arrangements. Settlement accounting is used for interest rate swap
agreements and treasury rate locks. The Company also enters into foreign
currency forward contracts to minimize fluctuations in the value of payments due
to international vendors and the value of foreign currency denominated receipts.
The hedges used by the Company are transaction driven and are directly related
to a particular asset, liability, or transaction for which a commitment is in
place. Hedge accounting is used for foreign currency forward contracts.
Unrealized gains and losses are classified in the same manner as the item being
hedged and are recognized in income when the transaction is complete. Interest
rate swap agreements, treasury rate locks, and foreign currency forward
contracts are held to maturity and no exchange-traded or over-the-counter
instruments have been purchased. Cash flows are recognized in the statement of
cash flows in the same category as the related item. The impact on the Company's
financial position and results of operations from likely changes in foreign
exchange rates and interest rates is not material due to the minimizing of risk
through the hedging of transactions related to specific assets, liabilities, or
commitments.
26
Fair Value of Financial Instruments
The carrying value of certain financial instruments, including cash, cash
equivalents, and short-term debt approximates estimated fair value due to their
short maturities and varying interest rates. The carrying value of notes
receivable approximates estimated fair value based principally on the underlying
interest rates and terms, maturities, collateral, and credit status of the
receivables. The carrying value of investments are based on quoted market prices
or the present value of future cash flows and earnings, which approximate
estimated fair value. The value of guarantees and letters of credit approximates
estimated fair value. The estimated fair value of long-term debt was based on
current rates offered to the Company for similar debt with the same remaining
maturities and approximates the carrying value.
Employee Stock Plans
Proceeds from the exercise of stock options under employee stock plans are
credited to common stock at par value and the excess is credited to additional
paid-in capital. There are no charges or credits to income for stock options.
The fair value at the date of award of restricted stock is credited to common
stock at par value and the excess is credited to additional paid-in capital. The
fair value is charged to income as compensation expense over the vesting period.
Income tax benefits arising from restricted stock transactions, employees'
premature disposition of stock option shares, and exercise of nonqualified stock
options are credited to additional paid-in capital.
The Company adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123) in 1996. The standard
defines a fair value based method of accounting for employee stock options. The
pro forma net income and earnings per share effect of the fair value based
accounting are disclosed in Note L, Employee Stock Plans.
Accounting Pronouncements
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (SOP 98-5). This accounting standard requires that
certain start-up and pre-contract costs be expensed as incurred. The Company
reported a first quarter 1999 charge of $53 million after-tax, or $0.16 per
diluted share, reflecting the initial application of SOP 98-5 and the cumulative
effect of the change in accounting principle as of January 1, 1999.
Risks and Uncertainties
Companies, such as Raytheon, which are engaged in supplying defense-related
equipment to the government, are subject to certain business risks peculiar to
that industry. Sales to the government may be affected by changes in procurement
policies, budget considerations, changing concepts of national defense,
political developments abroad, and other factors. The Company has maintained a
solid foundation of defense systems which meet the needs of the United States
and its allies, as well as serving a broad government program base and range of
commercial electronics businesses. These factors lead to the belief that there
is high probability of continuation of the Company's current major defense
programs.
27
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Note B: Restatement of Financial Statements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which
among other guidance, clarifies certain conditions to be met in order to
recognize revenue. After reexamining the terms underlying certain transactions
of Raytheon Aircraft, the Company determined that revenue related to these
transactions should be reversed. In view of the cumulative effect of the
unrecorded adjustment on the results of future periods, the Company restated its
annual and quarterly consolidated financial statements. The restatements were
required to reverse sales that the Company believed were properly recorded as
bill and hold sales when the manufacturing process was substantially complete
and the rights of ownership of the aircraft had passed to the buyer, but before
minor modifications had been completed and the physical delivery of the aircraft
occurred. The restated financial statements reflect sales when final delivery of
the aircraft occurred. As these adjustments relate to the timing of revenue
recognition, all reversals are recognized in later periods. The financial
statements and related notes set forth in this Annual Report reflect all such
restatements.
Results of Operations
Year Ended December 31, 1998
- ----------------------------------------------------------------------
Previously As
(In millions except per share amounts) Reported Restated
- ----------------------------------------------------------------------
Net sales $ 19,530 $19,419
Cost of sales 15,248 15,167
Operating income 2,036 2,006
Federal and foreign income taxes 603 593
Net income 864 844
Diluted earnings per share 2.53 2.47
- ----------------------------------------------------------------------
Year Ended December 31, 1997
- ----------------------------------------------------------------------
Previously As
(In millions except per share amounts) Reported Restated
- ----------------------------------------------------------------------
Net sales $ 13,673 $13,593
Cost of sales 10,985 10,929
Operating income 1,084 1,060
Federal and foreign income taxes 263 255
Net income 527 511
Diluted earnings per share 2.18 2.11
- ----------------------------------------------------------------------
28
Financial Position
December 31, 1998
- ----------------------------------------------------------------------
Previously As
(In millions) Reported Restated
- ----------------------------------------------------------------------
Inventories $ 1,711 $ 1,991
Deferred taxes 809 840
Current assets 8,637 8,965
Total assets 27,939 28,232
Advance payments 865 1,251
Accounts payable 2,091 2,071
Other accrued expenses 2,194 2,180
Current liabilities 6,680 7,032
Stockholders' equity 10,856 10,797
- ----------------------------------------------------------------------
Note C: Acquisitions and Divestitures
The Company acquired the Texas Instruments' defense business (TI Defense) in
July 1997 and merged with the defense business of Hughes Electronics Corporation
(Hughes Defense) in December 1997. The following unaudited pro forma financial
information combines the results of operations of Raytheon, TI Defense, and
Hughes Defense as if the acquisition and merger had taken place on January 1,
1997:
1997
- ----------------------------------------------------------------------------
(In millions except per share amounts) (Restated)
- ----------------------------------------------------------------------------
Net sales $ 21,279
Net income 548
Basic earnings per share 1.62
Diluted earnings per share 1.60
- ----------------------------------------------------------------------------
The pro forma results are not necessarily indicative of what the results of
operations would have been if the transactions had occurred on the date
indicated, do not reflect the cost and revenue synergies expected to be
realized, and are not intended to be indicative of future results of operations.
The Hughes transaction, valued at $9.5 billion subject to post-closing
adjustments, was comprised of approximately $5.5 billion in common stock and
$4.0 billion in debt, which was assumed by the merged company. Pursuant to the
terms of the Master Separation Agreement (the "Separation Agreement"), which
requires an adjustment based on net assets, the final purchase price for Hughes
Defense has not been determined. Based on the terms and conditions of the
29
Separation Agreement, the Company believes that it is entitled to a reduction in
the purchase price, a position that Hughes Electronics disputes. The Company and
Hughes Electronics have begun the process of negotiating a possible resolution
of this matter. If the matter is not successfully resolved through negotiation,
the Separation Agreement provides for binding arbitration. Accordingly, while
the Company expects a reduction in purchase price from the original terms of the
agreement, the amount, timing, and effect on the Company's financial position
are uncertain. As a result of this uncertainty, no amounts have been recorded in
the financial statements related to this expected reduction in purchase price.
Any payment received from Hughes Electronics as a result of a reduction in
purchase price will result in a corresponding reduction in goodwill and not be
reflected in the income statement. Any payment received from Hughes Electronics
for interest accrued on a reduction in purchase price, as provided in the
Separation Agreement, will be reflected in the income statement in the period of
receipt.
Pursuant to the terms of the Separation Agreement, Hughes Electronics
delivered to the Company a balance sheet for Hughes Defense as of December 17,
1997 (the "Closing Balance Sheet"), the effective time of the merger with Hughes
Defense. During the course of the Company's review of the Closing Balance Sheet,
the Company identified numerous items requiring adjustment. As a result of this
review, as well as the accrual of additional exit costs, the Company recorded a
total of approximately $1 billion of adjustments, exit cost accruals, and
additional goodwill during 1998. As a result of the different measurements of
the purchase price allocation, additional annual goodwill amortization of
approximately $26 million will be recorded. The Closing Balance Sheet included:
o Contracts in process of $2,226 million, which the Company reduced by $1,170
million to record additional contract loss provisions of $693 million,
other contract adjustments of $272 million, billed and unbilled contract
write-offs of $139 million, and contract claim write-offs of $66 million.
o Inventories of $343 million, which the Company reduced by $84 million
primarily to record write-offs of excess and obsolete inventory.
o Other current assets of $208 million, which the Company increased by $612
million primarily to record additional deferred tax assets related to the
Company's adjustments to the Closing Balance Sheet.
o Property, plant, and equipment of $1,103 million, which the Company reduced
by $78 million to record an estimated fair value adjustment.
o Other long-term assets of $1,023 million, which the Company increased by
$119 million primarily to record an increase in the value of certain
prepaid pension assets.
o Current liabilities of $1,701 million, which the Company increased by $931
million to record $584 million of exit costs, $245 million of adjustments
for unfavorable leases, $29 million related to liabilities for employee
compensation and related taxes and benefits, and $14 million for additional
environmental liabilities.
o Long-term liabilities of $1,069 million, which the Company reduced by $83
million primarily to reduce certain liabilities to estimated fair value.
30
Assets acquired in conjunction with the merger with Hughes Defense,
including the adjustments noted above, include contracts in process of $1,056
million, inventories of $259 million, other current assets of $820 million,
property, plant, and equipment of $1,025 million, and other assets of $1,142
million (primarily pension related). Liabilities assumed include debt of $4,033
million, current liabilities of $2,632 million, and long-term liabilities of
$986 million. Goodwill resulting from the fair value of this transaction was
$8,930 million.
As noted above, the adjustments recorded during 1998 were made as a result of
the Company's review of the Closing Balance Sheet. The Company believes many of
the same types of adjustments may also have been required in the September 28,
1997 Hughes Defense balance sheet which is included in the Company's
Solicitation Statement/Prospectus dated November 10, 1997 (the "Prospectus").
As a result, the Company believes that the September 28, 1997 Hughes Defense
balance sheet may contain items that are material departures from generally
accepted accounting principles. Investors are cautioned that the pro forma
combined condensed financial statements contained in the Prospectus may not be
representative of the combined company's actual financial position. Hughes
Electronics and their independent accountants do not agree with the Company's
assessment.
In September 1999, the Company sent Hughes Electronics a demand for mediation
pursuant to the alternative dispute resolution process set forth in the
Separation Agreement in connection with a separate claim against Hughes
Electronics concerning the accuracy and completeness of disclosures made by
Hughes Electronics to the Company prior to the merger.
In November 1999, the Company filed a complaint against Towers, Perrin,
Forster & Crosby (TPF&C). The complaint arises out of a series of events
concerning certain Hughes Electronics pension plans (the "Hughes Plans"),
portions of which were acquired by the Company in connection with the merger
with Hughes Defense. Specifically, the complaint alleges that the Company was
damaged by false representations made to the Company by TPF&C regarding the
amount of surplus in the Hughes Plans and errors committed by TPF&C in providing
administrative services to the Hughes Plans. The complaint seeks damages in an
amount to be determined at trial.
TI Defense was acquired for $2.9 billion in cash. Assets acquired in
conjunction with the acquisition of TI Defense include accounts receivable of
$229 million, inventories of $223 million, other current assets of $126 million,
and property, plant, and equipment of $306 million. Liabilities assumed include
current liabilities of $646 million and long-term liabilities of $147 million.
Goodwill resulting from the fair value of this transaction was $2,929 million.
In 1999, the Company sold its Cedarapids, Inc. subsidiary for $170 million,
other non-core business operations for $65 million in cash and $3 million in
securities, and securities received as partial payment for previously divested
businesses for $32 million. The net gain resulting from these dispositions was
$23 million.
31
In 1998, the Company acquired AlliedSignal's Communications Systems business
for $63 million. Also in 1998, the Company sold its commercial laundry business
unit for $315 million in cash and $19 million in securities, its Raytheon
Aircraft Montek subsidiary for $160 million, and other non-core business
operations for $273 million. The net gain resulting from these dispositions was
$141 million.
In 1997, the Company sold its home appliance, heating, air conditioning, and
commercial cooking operations for $522 million. Also in 1997, the Company sold
its Switchcraft and Semiconductor divisions for $183 million. The net gain
resulting from these dispositions was $72 million.
Note D: Restructuring and Special Charges
Restructuring charges and exit costs recognized in connection with business
combinations include the cost of involuntary employee termination benefits and
related employee severance costs, facility closures, and other costs associated
with the Company's approved plans. Employee termination benefits include
severance, wage continuation, medical, and other benefits. Facility closure and
related costs include disposal costs of property, plant, and equipment, lease
payments, lease termination costs, and net gain or loss on sales of closed
facilities.
In 1999, the Company recorded the following restructuring charges, favorable
adjustments to restructuring-related reserves, and special charges which were
included in the statements of income and classified as a reduction in net sales
or included in cost of sales, administrative and selling expenses, or other
expense as indicated below:
Admin.
Net Cost and Selling Other
(In millions) Sales of Sales Expenses Expense Total
- -------------------------------------------------------------------------------
Restructuring charges
Electronics $128 $9 $137
RE&C 10 10
Favorable adjustments to
restructuring-related reserves
Electronics (65) (65)
Special charges
Electronics
Iridium LLC $15 6 $14 35
Korean business venture 33 33
Exit PRT business 6 6
- -------------------------------------------------------------------------------
Total $15 $118 $9 $14 $156
===============================================================================
32
In 1998, the Company recorded the following restructuring and special charges
which were included in the statements of income and classified as either cost of
sales or administrative and selling expenses as indicated below:
Admin.
Cost and Selling
(In millions) of Sales Expenses Total
- -------------------------------------------------------------------------------
Restructuring charges
RE&C $33 $33
Special charges
RE&C asset impairment 52 52
Electronics
Korean business venture $42 42
Exit a line of business 83 83
Writedown assets to be sold 42 42
- -------------------------------------------------------------------------------
Total $85 $167 $252
===============================================================================
In 1997, the Company recorded the following restructuring and special charges
which were included in the statements of income and classified as either cost of
sales or administrative and selling expenses as indicated below:
Admin.
Cost and Selling
(In millions) of Sales Expenses Total
- -------------------------------------------------------------------------------
Restructuring charges
Electronics $220 $220
RE&C 75 75
Special charges
RE&C contract valuations 50 50
Electronics
Asset impairment 9 9
Write down assets to be sold $48 48
One time merger costs 17 46 63
Aircraft asset impairment 30 30
- -------------------------------------------------------------------------------
Total $401 $94 $495
===============================================================================
Exit Costs and Restructuring Charges--Electronics
In the fourth quarter of 1997, the Company recorded a $220 million restructuring
charge, which is included in cost of sales, to reduce the then newly formed RSC
workforce by 12,800 employees and reduce space by approximately 11 million
square feet at 34 facilities through sales, subleases, and lease terminations.
In connection with these actions, the Company also accrued $584 million as
liabilities assumed in connection with the merger with Hughes Defense and the
acquisition of TI Defense as part of the allocation of purchase price and not as
a charge to operations. The principal actions involve the consolidation of
missile and other electronics systems' manufacturing and engineering, as well as
the consolidation of certain component manufacturing into Centers of Excellence.
33
In the fourth quarter of 1998, the estimated number of employee terminations
increased by approximately 1,200 employees, primarily comprised of manufacturing
employees, however, the actual cost of termination per employee was lower than
the original estimate. As a result of these changes in estimate, the total cost
of employee severance decreased by $37 million. In the fourth quarter of 1998,
the Company determined that facilities exit costs would run lower than the
original estimate by $30 million because many of the facility actions were
progressing ahead of the original schedule, reducing the amount of rent and
occupancy costs, and costs to return facilities to the required condition were
less than originally planned. In the fourth quarter of 1998, the Company
committed to close two additional facilities and further reduce employment by
approximately 1,400 positions. The total program cost of the actions was
estimated at $67 million, comprised of $14 million of severance and other
employee related costs and $53 million of facility closure and related costs.
In the third quarter of 1999, the Company recorded a $35 million
restructuring charge, which is included in cost of sales, for higher than
originally estimated exit costs related to the Hughes Defense and TI Defense
actions. The estimate for employee related exit costs increased by $27 million
for higher than planned severance and other termination benefit costs. The
estimate for facility related exit costs increased by $8 million for additional
lease termination costs expected to be incurred. The Company accrued $12 million
of exit costs as liabilities assumed in connection with a minor acquisition. The
Company recorded a $102 million restructuring charge in the third quarter of
1999, of which $93 million is included in cost of sales and $9 million is
included in administrative and selling expenses, to further reduce the
Electronics workforce by 2,200 employees and vacate and dispose of an additional
2.7 million square feet of facility space. Employee related exit costs of $55
million include severance and other termination benefit costs for manufacturing,
engineering, and administrative employees. Facility related exit costs of $47
million include the costs for lease termination, building closure and disposal,
and equipment disposition.
In the fourth quarter of 1999, the Company determined that the cost of the
RSC restructuring initiatives would be $65 million lower than originally planned
and recorded a favorable adjustment to the original $220 million restructuring
charge. The reduction in the estimated costs related to lower than anticipated
costs for severance and facilities. The primary reasons for the reduction in
severance costs include a shift in the composition of severed employees, higher
attrition resulting in the need for fewer severed employees, and more employees
transferring to other locations within the Company. The estimated costs related
to facilities were lower than anticipated due to the identification of
alternative uses for assets originally identified for disposition, lower
de-installation costs, and more rapid exit from facilities.
The restructuring and exit costs discussed above provide for severance and
related benefits for approximately 17,600 employees and costs to vacate and
dispose of approximately 14 million square feet of facility space. The Company
is exiting facility space and terminating employees made redundant as a result
of the merger with Hughes Defense and the acquisition of TI Defense and the
subsequent reorganization of RSC. There were no major activities that will not
be continued as a result of these actions. Employee related exit costs include
34
severance and other termination benefit costs for employees in various
functional areas including manufacturing, engineering, and administration.
Facility related exit costs include the costs for lease termination, building
closure and disposal, and equipment disposition. Exit costs accrued in
connection with the merger with Hughes Defense and the acquisition of TI Defense
also include employee relocation and program moves. Owned facilities that will
be vacated in connection with the restructuring activities will be sold. The
Company will terminate leases or sublease space for non-owned facilities vacated
in connection with restructuring. While these actions are intended to improve
the Company's competitive position, there can be no assurances as to their
ultimate success or that additional restructuring actions will not be required.
Electronics Exit Costs
- ------------------------------------------------------------------------------
(In millions) 1999 1998
- ------------------------------------------------------------------------------
Accrued liability at beginning of year $399 $300
- ------------------------------------------------------------------------------
Charges and liabilities accrued
Severance and other employee related costs 33 58
Facility closure and related costs 14 226
- ------------------------------------------------------------------------------
47 284
- ------------------------------------------------------------------------------
Costs incurred
Severance and other employee related costs 130 51
Facility closure and related costs 172 134
- ------------------------------------------------------------------------------
302 185
- ------------------------------------------------------------------------------
Accrued liability at end of year $144 $399
==============================================================================
Cash expenditures $302 $178
Number of employee terminations due to
restructuring actions (actual) 3,300 3,600
- ------------------------------------------------------------------------------
35
Electronics Restructuring
- ------------------------------------------------------------------------------
(In millions) 1999 1998
- ------------------------------------------------------------------------------
Accrued liability at beginning of year $164 $220
- ------------------------------------------------------------------------------
Charges and liabilities accrued
Severance and other employee related costs 55 14
Facility closure and related costs 47 53
- ------------------------------------------------------------------------------
102 67
- ------------------------------------------------------------------------------
Changes in estimate
Severance and other employee related costs (20) (37)
Facility closure and related costs (45) (30)
- ------------------------------------------------------------------------------
(65) (67)
- ------------------------------------------------------------------------------
Costs incurred
Severance and other employee related costs 36 53
Facility closure and related costs 35 3
- ------------------------------------------------------------------------------
71 56
- ------------------------------------------------------------------------------
Accrued liability at end of year $130 $164
==============================================================================
Cash expenditures $ 71 $ 56
Number of employee terminations due to
restructuring actions (actual) 1,000 3,000
- ------------------------------------------------------------------------------
In addition to the $373 million and $241 million of restructuring and exit costs
incurred in 1999 and 1998, respectively, the Company also incurred $265 million
and $56 million of capital expenditures and period expenses in 1999 and 1998,
respectively, related to the implementation of the Electronics businesses
consolidation and reorganization. Note N, Business Segment Reporting, contains
additional disclosures related to Electronics restructuring and exit costs and
activities by segment.
Restructuring Charges--Engineering and Construction
In the fourth quarter of 1997, the Company recorded a $75 million restructuring
charge, which is included in cost of sales, to reduce the Raytheon Engineers &
Constructors (RE&C) workforce by 1,000 employees and close or partially close 16
offices, reducing space by approximately 1.1 million square feet. The
restructuring charge included $31 million for employee severance and $44 million
for facilities exit. During the fourth quarter of 1998, the Company modified the
plan for RE&C to close fewer facilities than originally estimated. As a result
of this modification, the number of employee terminations was reduced from
approximately 2,300 people to approximately 1,400 and the total cost of employee
severance decreased by $11 million. Because higher than expected facilities exit
costs were incurred at the locations being closed, the total estimated cost of
facilities exit increased by $11 million. In October 1998, the Company announced
plans for an additional 260 person reduction in the RE&C workforce and recorded
an additional $33 million restructuring charge, which is included in cost of
sales. The Company completed these actions during 1999 for $10 million less than
planned due to lower facility exit costs. In the second quarter of 1999, the
Company implemented additional restructuring plans to further reduce the RE&C
workforce by 200 employees at a cost of $10 million. The Company recorded a
restructuring charge of $10 million in the third quarter of 1999, which is
included in cost of sales, to reduce the RE&C workforce by another 150
employees. The employee reductions, expected to be completed within one year,
primarily affected engineering, business development, and administrative
employees. While these actions are intended to improve the Company's competitive
position, there can be no assurances as to their ultimate success or that
additional restructuring actions will not be required.
36
Engineering and Construction Restructuring Costs
- ------------------------------------------------------------------------------
(In millions) 1999 1998
- ------------------------------------------------------------------------------
Accrued liability at beginning of year $ 66 $ 75
- ------------------------------------------------------------------------------
Charges and liabilities accrued
Severance and other employee related costs 10 33
Facility closure and related costs -- --
- ------------------------------------------------------------------------------
10 33
- ------------------------------------------------------------------------------
Change in estimate
Severance and other employee related costs 10 (11)
Facility closure and related costs (10) 11
- ------------------------------------------------------------------------------
-- --
- ------------------------------------------------------------------------------
Costs incurred
Severance and other employee related costs 12 19
Facility closure and related costs 41 23
- ------------------------------------------------------------------------------
53 42
- ------------------------------------------------------------------------------
Accrued liability at end of year $ 23 $ 66
==============================================================================
Cash expenditures $ 53 $ 42
Number of employee terminations due to
restructuring actions (actual) 300 1,300
- ------------------------------------------------------------------------------
Special Charges
In 1999, the Company recorded a $35 million special charge to write down its
minority investment and receivables related to Iridium LLC, which filed for
Chapter 11 protection from creditors on August 13, 1999. The Company also
recorded an additional $33 million special charge to further write down
inventory and receivables related to a Korean business venture and a $6 million
special charge to exit the personal rapid transit (PRT) business, including the
costs to dispose of a test track. At December 31, 1999, the remaining assets
related to the Korean business venture consisted of a $5 million receivable.
In the second quarter of 1998, the Company's partner in a Commercial
Electronics business venture in Korea began to experience financial
difficulties. As a result, the Company recorded a $42 million special charge to
recognize a permanent impairment of its investment in the business venture,
reducing the book value of the investment to estimated fair value. During the
third quarter of 1998, the financial condition of the business venture
deteriorated further, and the Company recorded an additional $83 million special
charge to exit a line of business, which included writing off its remaining
investment in the Korean business venture.
37
The Company's partner in this business venture has filed for company
reorganization, the Korean equivalent of Chapter 11 protection from creditors.
As such, the Company does not expect to realize any future benefits from its
remaining partnership interest in this business venture. Any remaining exposure
related to the operations of the business venture is not expected to have a
material adverse effect on the Company's financial position or results of
operations.
Also in 1998, the Company recorded a $42 million special charge to write down
the assets of two operations in the Electronics businesses that the Company had
decided to sell to estimated fair value of approximately $125 million. One sale
was completed during 1998 and the other during 1999. The operating results,
which were not material, were included in the Company's results of operations
through the date of sale.
In 1998, the Company also recorded a $52 million special charge for asset
impairment related to the RE&C restructuring actions to exit two operations
which were closed in 1999. The charge consisted of $45 million of goodwill
associated with one of the operations to be exited and $7 million for the
estimated loss on disposition of the other operation.
In 1997, the Company recorded a $63 million special charge primarily for
one-time costs in the Electronics businesses associated with the merger with
Hughes Defense and the acquisition of TI Defense. The Company also recorded a
$57 million special charge primarily to write down to estimated fair value
certain assets in the Electronics businesses that the Company had decided to
sell. The sale of these assets was completed in 1998 and the proceeds and loss
on disposition were not material.
Also in 1997, the Company recorded a $50 million special charge for contract
valuations at RE&C and a $30 million special charge to recognize a permanent
impairment at Raytheon Aircraft.
Note E: Contracts in Process
Contracts in process consisted of the following at December 31, 1999:
(In millions) Cost Type Fixed Price Type Total
- ------------------------------------------------------------------------------
U.S. government end-use contracts
Billed $ 392 $ 339 $ 731
Unbilled 983 4,014 4,997
Less progress payments (3) (1,869) (1,872)
- ------------------------------------------------------------------------------
1,372 2,484 3,856
- ------------------------------------------------------------------------------
Other customers
Billed 84 632 716
Unbilled 59 1,403 1,462
Less progress payments -- (819) (819)
- ------------------------------------------------------------------------------
143 1,216 1,359
- ------------------------------------------------------------------------------
Total $1,515 $3,700 $5,215
==============================================================================
38
Contracts in process consisted of the following at December 31, 1998:
(In millions) Cost Type Fixed Price Type Total
- ------------------------------------------------------------------------------
U.S. government end-use contracts
Billed $ 367 $ 562 $ 929
Unbilled 873 4,205 5,078
Less progress payments -- (2,753) (2,753)
- ------------------------------------------------------------------------------
1,240 2,014 3,254
- ------------------------------------------------------------------------------
Other customers
Billed 128 670 798
Unbilled 94 1,205 1,299
Less progress payments -- (492) (492)
- ------------------------------------------------------------------------------
222 1,383 1,605
- ------------------------------------------------------------------------------
Total $1,462 $3,397 $4,859
==============================================================================
The U.S. government has a security title to unbilled amounts associated with
contracts that provide for progress payments. Unbilled amounts are primarily
recorded on the percentage of completion method and are recoverable from the
customer upon shipment of the product, presentation of billings, or completion
of the contract.
Included in contracts in process at December 31, 1999 and 1998, was
approximately $406 million and $210 million, respectively, related to unapproved
change orders and claims on construction contracts. Unapproved change orders and
claims, primarily due to owner-directed changes, owner-caused delays, unforeseen
conditions, or similar reasons, are included in contracts in process at their
estimated realizable value. The Company believes that it has a contractual or
legal basis for pursuing recovery of these unapproved change orders and claims,
and that collection is probable. The settlement of these amounts depends on
individual circumstances and negotiations with the counterparty, therefore, the
timing of the collection will vary and approximately $247 million of collections
are expected to extend beyond one year.
Billed and unbilled contracts in process include retentions arising from
contractual provisions. At December 31, 1999, retentions amounted to $123
million and are anticipated to be collected as follows: 2000--$88 million,
2001--$18 million, and the balance thereafter.
39
Note F: Inventories
Inventories consisted of the following at December 31: 1999 1998
- ------------------------------------------------------------------------------
(In millions) (Restated)
- ------------------------------------------------------------------------------
Finished goods $ 280 $ 317
Work in process 1,322 1,193
Materials and purchased parts 510 746
Excess of current cost over LIFO values (140) (148)
- ------------------------------------------------------------------------------
1,972 2,108
Less progress payments (22) (117)
- ------------------------------------------------------------------------------
Total $1,950 $1,991
==============================================================================
Included in inventories are amounts related to certain fixed price contracts
under which sales are recorded as products are shipped. The inventory values
from which the excess of current cost over LIFO values are deductible were
$1,009 million and $880 million at December 31, 1999 and 1998, respectively.
Note G: Property, Plant, and Equipment
Property, plant, and equipment consisted of the following at December 31:
(In millions) 1999 1998
- ------------------------------------------------------------------------------
Land $ 74 $ 70
Buildings and leasehold improvements 1,906 1,828
Machinery and equipment 2,429 2,376
Equipment leased to others 312 201
- ------------------------------------------------------------------------------
4,721 4,475
Less accumulated depreciation and amortization (2,304) (2,200)
- ------------------------------------------------------------------------------
Total $ 2,417 $ 2,275
==============================================================================
40
Depreciation expense was $295 million, $380 million, and $318 million in 1999,
1998, and 1997, respectively. In September 1998, the Company entered into a $490
million property sale and five-year operating lease facility.
Accumulated depreciation of equipment leased to others was $19 million and
$10 million at December 31, 1999 and 1998, respectively. Future minimum lease
payments from non-cancelable aircraft operating leases, which extend to 2014,
amounted to $103 million.
At December 31, 1999, these payments were due as follows:
- ------------------------------------------------------------------------------
(In millions) 2000 $ 27
2001 17
2002 14
2003 11
2004 6
Thereafter 28
- ------------------------------------------------------------------------------
Note H: Other Assets
Other assets consisted of the following at December 31:
(In millions) 1999 1998
- ------------------------------------------------------------------------------
Long-term receivables
Due from customers in installments to 2012 $ 283 $ 222
Sales-type leases, due in installments to 2015 17 20
Other, principally due through 2007 27 42
Investments 210 266
Prepaid pension and other noncurrent assets 2,191 2,046
- ------------------------------------------------------------------------------
Total $2,728 $2,596
==============================================================================
The Company provides long-term financing principally to its aircraft customers.
Long-term receivables include commuter airline receivables of $68 million and
$113 million at December 31, 1999 and 1998, respectively. Since it is the
Company's policy to have the aircraft serve as collateral for the commuter
airline receivables, the Company does not expect to incur any material losses
against the net book value of the long-term receivables.
The Company sells receivables, including government short-term receivables,
general and commuter aviation long-term receivables, and engineering and
construction short-term receivables to a bank syndicate and other financial
institutions. The banks have a first priority claim on all proceeds, including
the underlying equipment and any insurance proceeds, and have recourse against
the Company, at varying percentages, depending upon the character of the
receivables sold. For the general and commuter aviation long-term receivables,
the underlying aircraft serve as collateral for the aircraft receivables, and
the future resale value of the aircraft is an important consideration in the
transaction. Based on experience to date with resale activities and pricing and
the Company's plan to continue production into the forseeable future, the
Company believes that any liability arising from these transactions will not
have a material effect on the Company's financial position, liquidity, or
results of operations.
41
In connection with the sale of receivables, the following special purpose
entities continued in existence at December 31, 1999: Raytheon Receivables,
Inc., Raytheon Aircraft Receivables Corporation, and Raytheon Engineers &
Constructors Receivables Corporation. The Company sells receivables through
these special purpose entities, retains the servicing rights, and receives a
servicing fee which is recognized as collected over the remaining term of the
related receivables sold. Estimated gains or losses from the sale of receivables
are recognized in the period in which the sale occurs. In determining the gain
or loss on each qualifying sale of receivables, the investment in the sold
receivable pool is allocated between the portion sold and the portion retained
based on their relative estimated fair values at the date of sale. The retained
interest includes servicing rights, interest only strips, and subordinated
certificates. These financial instruments are recorded at estimated fair value.
No material gain or loss resulted from the sales of receivables. The balance of
receivables sold to banks or financial institutions was $3,040 million and
$3,002 million at December 31, 1999 and 1998, respectively.
Note I: Notes Payable and Long-term Debt
Debt consisted of the following at December 31:
(In millions) 1999 1998
- ------------------------------------------------------------------------------
Notes payable at a weighted average interest
rate of 6.03% for 1999 and 6.71% for 1998 $1,422 $ 34
Commercial paper at a weighted average interest
rate of 6.53% for 1999 and 5.91% for 1998 174 785
Current portion of long-term debt 876 8
- ------------------------------------------------------------------------------
Notes payable and current portion of long-term debt 2,472 827
- ------------------------------------------------------------------------------
Notes due 2000, 6.30%, not redeemable prior to maturity 500 499
Notes due 2001, 5.95%, not redeemable prior to maturity 499 498
Notes due 2002, 6.45%, not redeemable prior to maturity 986 981
Notes due 2003, 5.70%, not redeemable prior to maturity 398 397
Notes due 2005, 6.30%, not redeemable prior to maturity 447 447
Notes due 2005, 6.50%, not redeemable prior to maturity 737 735
Notes due 2007, 6.75%, redeemable at any time 966 961
Notes due 2008, 6.15%, redeemable at any time 744 743
Notes due 2010, 6.00%, redeemable at any time 249 248
Notes due 2010, 6.55%, redeemable at any time 298 298
Debentures due 2018, 6.40%, redeemable at any time 543 543
Debentures due 2018, 6.75%, redeemable at any time 346 346
Debentures due 2025, 7.375%, redeemable after 2005 363 363
Debentures due 2027, 7.20%, redeemable at any time 466 465
Debentures due 2028, 7.00%, redeemable at any time 248 247
Commercial paper backed by five year fixed for
variable interest rate swap at 6.40% 375 375
Other notes with varying interest rates 9 25
Less installments due within one year (876) (8)
- ------------------------------------------------------------------------------
Long-term debt 7,298 8,163
- ------------------------------------------------------------------------------
Total debt issued and outstanding $9,770 $8,990
==============================================================================
42
The Company issued $3.8 billion of long-term notes and debentures in 1998 and
$3.0 billion in 1997. These financings were used to refinance the debt
associated with the merger with Hughes Defense and the acquisition of TI Defense
and to take advantage of favorable long-term interest rates in order to reduce
short-term borrowings.
Commercial paper in the amount of $375 million was classified as current
portion of long-term debt at December 31, 1999, and long-term debt at December
31, 1998, due to Company borrowings of that amount which are supported by a
five-year Syndicated Bank Credit Agreement combined with a five-year fixed for
variable interest rate swap which matures in 2000.
The aggregate amounts of installments due on long-term debt for the next five
years are:
- ------------------------------------------------------------------------------
(In millions) 2000 $ 876
2001 502
2002 1,003
2003 403
2004 --
- ------------------------------------------------------------------------------
Lines of credit with certain commercial banks totaling $4.1 billion at December
31, 1999 exist as standby facilities to support the issuance of commercial paper
by the Company. These lines of credit bear interest based upon LIBOR and mature
at various dates through 2002. At December 31, 1999, borrowings under these
lines of credit totaled $1.4 billion. Credit lines or commitments with banks
were maintained by subsidiary companies amounting to $130 million and $202
million at December 31, 1999 and 1998, respectively. Compensating balance
arrangements are not material.
The principal amounts of long-term debt were reduced by debt issue discounts and
interest rate hedging costs of $76 million and $105 million, respectively, on
the date of issuance, and are reflected as follows at December 31:
(In millions) 1999 1998
- ------------------------------------------------------------------------------
Principal $ 8,309 $ 8,325
Unamortized issue discounts (57) (66)
Unamortized interest rate hedging costs (78) (88)
Installments due within one year (876) (8)
- ------------------------------------------------------------------------------
Long-term debt $ 7,298 $ 8,163
==============================================================================
The Company has bank agreement covenants. In 1999, the Company's most
restrictive covenant was amended. The new covenant requires that the earnings
before interest and taxes (EBIT) be at least 2.4 times net interest expense for
the prior four quarters. Prior to the amendment, the requirement was that EBIT
was at least three times net interest expense for the prior four quarters. The
Company was in compliance with this covenant during 1999, 1998, and 1997.
Total interest payments were $725 million, $778 million, and $295 million in
1999, 1998, and 1997, respectively.
43
Note J: Federal and Foreign Income Taxes
Income reported for federal and foreign tax purposes differs from pretax
accounting income due to variations between Internal Revenue Code requirements
and the Company's accounting practices.
The provisions for federal and foreign income taxes consisted of the following:
1999 1998 1997
- ------------------------------------------------------------------------------
(In millions) (Restated) (Restated)
- ------------------------------------------------------------------------------
Current income tax expense
Federal $ 23 $ 46 $ 191
Foreign 6 7 9
Deferred income tax expense (benefit)
Federal 319 549 53
Foreign 23 (9) 2
- ------------------------------------------------------------------------------
Total $ 371 $ 593 $ 255
==============================================================================
The provision for income taxes differs from the U.S. statutory rate
due to the following:
1999 1998 1997
- ------------------------------------------------------------------------------
(Restated) (Restated)
- ------------------------------------------------------------------------------
Tax at statutory rate 35.0% 35.0% 35.0%
Goodwill amortization 12.2 7.9 3.3
Foreign sales corporation tax benefit (2.8) (1.3) (2.2)
Research and development tax credit (0.6) (0.3) (2.2)
Other, net 1.0 -- (0.6)
- ------------------------------------------------------------------------------
Total 44.8% 41.3% 33.3%
==============================================================================
In 1999, 1998, and 1997, domestic income before taxes amounted to $746 million,
$1,401 million, and $719 million, respectively, and foreign income before taxes
amounted to $82 million, $36 million, and $47 million, respectively. Cash
payments (refunds) were $102 million, $(16) million, and $169 million in 1999,
1998, and 1997, respectively. In 1998, net deferred tax assets were increased by
$371 million in connection with acquisitions and subsequent adjustments to
acquisitions.
44
Deferred federal and foreign income taxes consisted of
the following at December 31: 1999 1998
- ------------------------------------------------------------------------------
(In millions) (Restated)
- ------------------------------------------------------------------------------
Current deferred tax assets (liabilities)
Long-term contracts $ 294 $ 459
Inventory and other 135 115
Restructuring reserves 103 262
Inventory capitalization (34) (27)
Other (8) 31
- ------------------------------------------------------------------------------
Deferred federal and foreign income taxes
--current $ 490 $ 840
==============================================================================
Noncurrent deferred tax (liabilities) assets
Pension $ (553) $ (521)
Depreciation and amortization (259) (159)
Revenue on leases (101) (104)
Postretirement benefits 332 249
Other 28 (26)
- ------------------------------------------------------------------------------
Deferred federal and foreign income taxes
--noncurrent $ (553) $ (561)
==============================================================================
At December 31, 1999, there were $20 million of taxes refundable included in
prepaid expenses and other current assets. At December 31, 1998, there were $105
million of taxes payable included in accounts payable.
Note K: Commitments and Contingencies
At December 31, 1999, the Company had commitments under long-term leases
requiring approximate annual rentals on a net lease basis as follows:
- ------------------------------------------------------------------------------
(In millions) 2000 $ 392
2001 358
2002 288
2003 378
2004 144
Thereafter 747
- ------------------------------------------------------------------------------
Remaining lease payments under the Company's $490 million property sale and
five-year operating lease facility, which are included in the table above,
approximate $83 million in 2000, $77 million in 2001, $64 million in 2002, and
$215 million in 2003. The lease facility contains covenants that are
substantially similar to those in the Company's senior credit facilities.
Certain lease commitments will be terminated or reduced in connection with
facility and office closures and the optimization of facility utilization. Rent
expense in 1999, 1998, and 1997 was $416 million, $283 million, and $136
million, respectively.
45
Defense contractors are subject to many levels of audit and investigation.
Among agencies that oversee contract performance are the Defense Contract Audit
Agency, the Inspector General, the Defense Criminal Investigative Service, the
General Accounting Office, the Department of Justice, and Congressional
Committees. Over recent years, the Department of Justice has convened Grand
Juries from time to time to investigate possible irregularities by the Company
in government contracting. Such investigations, individually and in the
aggregate, are not expected to have a material adverse effect on the Company's
financial position or results of operations.
The Company self-insures for losses and expenses for aircraft product
liability up to a maximum of $50 million annually. Insurance is purchased from
third parties to cover excess aggregate liability exposure from $50 million to
$1.2 billion. This coverage also includes the excess of liability over $10
million per occurrence. The aircraft product liability reserve was $24 million
at December 31, 1999.
The Company is involved in various stages of environmental investigation and
cleanup related to remediation of various sites. All appropriate costs expected
to be incurred in connection therewith have been accrued at December 31, 1999.
Due to the complexity of environmental laws and regulations, the varying costs
and effectiveness of alternative cleanup methods and technologies, the
uncertainty of insurance coverage, and the unresolved extent of the Company's
responsibility, it is difficult to determine the ultimate outcome of these
matters, however, any additional liability is not expected to have a material
effect on the Company's financial position, liquidity, or results of operations
after giving effect to provisions previously recorded.
The Company issues guarantees and has banks issue, on its behalf, letters of
credit to meet various bid, performance, warranty, retention, and advance
payment obligations. Approximately $1,346 million and $1,527 million of these
contingent obligations, net of related outstanding advance payments, were
outstanding at December 31, 1999 and 1998, respectively. These instruments
expire on various dates through 2005.
During October and November 1999, the Company and two of its officers were
named as defendants in class action lawsuits. The complaints principally allege
that the defendants violated federal securities laws by making false and
misleading statements and by failing to disclose material information concerning
the Company's financial performance, thereby causing the value of the Company's
stock to be artificially inflated. The Company was also named as a nominal
defendant and all of its directors (except one) were named as defendants in a
derivative lawsuit. The derivative complaint contains allegations similar to
those included in the above complaints and further alleges that the defendants
breached fiduciary duties to the Company and allegedly failed to exercise due
care and diligence in the management and administration of the affairs of the
Company. Although the Company believes that it and the other defendants have
meritorious defenses to the claims made in both the derivative complaint and the
other complaints and intends to contest the lawsuits vigorously, an adverse
resolution of the lawsuits could have a material adverse affect on the Company's
financial position, liquidity, and results of operations in the period in which
the lawsuits are resolved. The Company is not presently able to reasonably
estimate potential losses, if any, related to the lawsuits.
46
The Company merged with Hughes Defense in December 1997. Pursuant to the
terms of the Separation Agreement, which requires an adjustment based on net
assets, the final purchase price for Hughes Defense has not been determined.
Based on the terms and conditions of the Separation Agreement, the Company
believes that it is entitled to a reduction in the purchase price, a position
that Hughes Electronics disputes. The Company and Hughes Electronics have begun
the process of negotiating a possible resolution of this matter. If the matter
is not successfully resolved through negotiation, the Separation Agreement
provides for binding arbitration. Concurrent with the negotiations, the parties
have held initial discussions regarding the selection of a neutral arbitrator.
Accordingly, while the Company expects a reduction in purchase price from the
original terms of the agreement, the amount, timing, and effect on the Company's
financial position are uncertain. As a result of this uncertainty, no amounts
have been recorded in the financial statements related to this expected
reduction in purchase price. Any payment received from Hughes Electronics as a
result of a reduction in purchase price will result in a corresponding reduction
in goodwill and not be reflected in the income statement. Any payment received
from Hughes Electronics for interest accrued on a reduction in purchase price,
as provided in the Separation Agreement, will be reflected in the income
statement in the period of receipt.
In September 1999, the Company sent Hughes Electronics a demand for mediation
pursuant to the alternative dispute resolution process set forth in the
Separation Agreement in connection with a separate claim against Hughes
Electronics concerning the accuracy and completeness of disclosures made by
Hughes Electronics to the Company prior to the merger.
In November 1999, the Company filed a complaint against TPF&C. The complaint
arises out of a series of events concerning certain Hughes Plans, portions of
which were acquired by the Company in connection with the merger with Hughes
Defense. Specifically, the complaint alleges that the Company was damaged by
false representations made to the Company by TPF&C regarding the amount of
surplus in the Hughes Plans and errors committed by TPF&C in providing
administrative services to the Hughes Plans. The complaint seeks damages in an
amount to be determined at trial.
In addition, various claims and legal proceedings generally incidental to the
normal course of business are pending or threatened against the Company. While
the ultimate liability from these proceedings is presently indeterminable, any
additional liability is not expected to have a material effect on the Company's
financial position, liquidity, or results of operations after giving effect to
provisions already recorded.
Note L: Employee Stock Plans
The 1976 Stock Option Plan provides for the grant of both incentive and
nonqualified stock options at an exercise price which is 100 percent of the fair
value on the date of grant. No further grants are allowed under this plan. The
1991 Stock Plan provides for the grant of incentive stock options at an exercise
price which is 100 percent of the fair value on the date of grant and
nonqualified stock options at an exercise price which may be less than the fair
value on the date of grant. The 1995 Stock Option Plan provides for the grant of
both incentive and nonqualified stock options at an exercise price which is not
less than 100 percent of the fair value on the date of grant.
47
The plans also provide that all stock options may be exercised in their
entirety 12 to 24 months after the date of grant. Incentive stock options
terminate 10 years from the date of grant, and those stock options granted after
December 31, 1986 become exercisable to a maximum of $100,000 per year.
Nonqualified stock options terminate 11 years from the date of grant or 10 years
and a day if issued in connection with the 1995 Stock Option Plan. In 1997, the
Company issued conversion stock options covering 4.8 million shares in
substitution of nonqualified stock options held by employees of TI Defense and
Hughes Defense. In accordance with the terms of the original grants, these
replacement stock options have remaining exercise periods of up to eight years
and become exercisable at various times through January 2001.
The 1991 Stock Plan also provides for the award of restricted stock and
restricted units. The 1997 Nonemployee Directors Restricted Stock Plan provides
for the award of restricted stock to nonemployee directors. Restricted awards
are made at prices determined by the Compensation Committee of the Board of
Directors and are compensatory in nature. Restricted stock and restricted unit
awards vest over a specified period of time of not less than one year and not
more than 10 years.
No further grants are allowed under the 1991 Stock Plan, 1995 Stock Option
Plan, and 1997 Nonemployee Directors Restricted Stock Plan after March 26, 2001,
March 21, 2005, and November 25, 2006, respectively.
Restricted stock awards entitle the participant to full dividend and voting
rights. Unvested shares are restricted as to disposition and subject to
forfeiture under certain circumstances. Compensation expense is recognized over
the vesting period. Awards of 849,900, 541,100, and 315,900 shares of restricted
stock and restricted units were made to employees and directors at a weighted
average value at the grant date of $45.68, $57.21, and $47.92 in 1999, 1998, and
1997, respectively. The required conditions for 72,600, 85,500, and 579,900
shares of restricted stock and restricted units were satisfied during 1999,
1998, and 1997, respectively. There were 1,336,600, 834,900, and 1,678,700
shares of restricted stock and restricted units outstanding at December 31,
1999, 1998, and 1997, respectively. The amount of compensation expense recorded
was $16 million, $15 million, and $22 million in 1999, 1998, and 1997,
respectively. In 1997, $12 million of compensation expense was related to
accelerated vesting of restricted stock as a result of the merger with Hughes
Defense.
There were 51.0 million, 53.7 million, and 52.8 million shares of common
stock (including shares held in treasury) reserved for stock options and
restricted stock awards at December 31, 1999, 1998, and 1997, respectively.
The 1976 Stock Option Plan, 1991 Stock Plan, 1995 Stock Option Plan, and 1997
Nonemployee Directors Restricted Stock Plan utilize Class B common stock.
48
Stock option information for 1999, 1998, and 1997 follows:
Weighted Average
(Share amounts in thousands) Shares Option Price
- ------------------------------------------------------------------------------
Outstanding at
December 31, 1996 12,570 $ 37.65
Granted 8,950 43.84
Exercised (1,698) 31.18
Expired (312) 49.13
- ------------------------------------------------------------------------------
Outstanding at
December 31, 1997 19,510 $ 40.87
Granted 6,945 55.54
Exercised (2,917) 35.44
Expired (816) 51.13
- ------------------------------------------------------------------------------
Outstanding at
December 31, 1998 22,722 $ 45.68
Granted 6,986 67.52
Exercised (4,176) 40.82
Expired (475) 55.13
- ------------------------------------------------------------------------------
Outstanding at
December 31, 1999 25,057 $ 52.40
==============================================================================
The following tables summarize information about stock options outstanding and
exercisable at December 31, 1999:
(Share amounts in thousands) Options Outstanding
- ------------------------------------------------------------------------------
Weighted Average Weighted
Shares Contractual Average
Exercise Outstanding at Remaining Exercise
Price Range December 31, 1999 Life Price
- ------------------------------------------------------------------------------
$14.51 to $29.63 1,884 3.1 years $23.07
$31.24 to $49.19 5,112 5.6 years $38.70
$51.06 to $59.31 11,412 7.2 years $54.15
$59.44 to $73.97 6,649 9.5 years $68.23
- ------------------------------------------------------------------------------
Total 25,057
==============================================================================
(Share amounts in thousands) Options Exercisable
- ------------------------------------------------------------------------------
Weighted
Shares Average
Exercise Exercisable at Exercise
Price Range December 31, 1999 Price
- ------------------------------------------------------------------------------
$14.51 to $29.63 1,806 $22.93
$31.24 to $49.19 4,457 $37.68
$51.06 to $59.31 8,631 $53.64
$59.44 to $73.97 -- --
- ------------------------------------------------------------------------------
Total 14,894
==============================================================================
49
Shares exercisable at the corresponding weighted average exercise price at
December 31, 1999, 1998, and 1997, respectively, were 14.9 million at $45.14,
14.9 million at $41.58, and 13.0 million at $37.35.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, in accounting for
its stock-based compensation plans. Accordingly, no compensation expense has
been recognized for its stock-based compensation plans other than for restricted
stock. The Company has adopted the disclosure-only provisions of SFAS No. 123,
therefore, no compensation expense was recognized for the stock option plans.
Had compensation expense for the Company's stock option plans been determined
based on the fair value at the grant date for awards under these plans,
consistent with the methodology prescribed under SFAS No. 123, the Company's net
income and earnings per share would have approximated the pro forma amounts
indicated below:
1999 1998 1997
- ------------------------------------------------------------------------------
(In millions except per share amounts) (Restated) (Restated)
- ------------------------------------------------------------------------------
Net income--as reported $ 404 $ 844 $ 511
Net income--pro forma 332 800 468
Basic earnings per share--
as reported 1.20 2.50 2.14
pro forma 0.98 2.37 1.96
Diluted earnings per share--
as reported 1.19 2.47 2.11
pro forma 0.97 2.34 1.93
- ------------------------------------------------------------------------------
The weighted average fair value of each stock option granted in 1999, 1998, and
1997 is estimated as $22.25, $10.40, and $17.41, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
1999 1998 1997
- ------------------------------------------------------------------------------
Expected life 4 years 4 years 4 years
Assumed annual dividend growth rate 5% 6% 6%
Expected volatility 35% 15% 15%
Assumed annual forfeiture rate 5% 5% 5%
- ------------------------------------------------------------------------------
The risk free interest rate (month-end yields on 4-year treasury strips
equivalent zero coupon) ranged from 4.6% to 6.2% in 1999, 4.4% to 5.7% in 1998,
and 5.0% to 7.5% in 1997.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995.
50
Note M: Pension and Other Employee Benefits
The Company has several pension and retirement plans covering the majority of
its employees, including certain employees in foreign countries. Total pension
expense includes foreign pension expense of $10 million in 1999 and 1998, and
$11 million in 1997. In addition to providing pension benefits, the Company
provides certain health care and life insurance benefits for retired employees.
Substantially all of the Company's U.S. employees may become eligible for these
benefits.
Plan assets consist primarily of equity securities (including 6,163,000
shares of the Company's Class A and Class B common stock combined, with a fair
value of $174 million at December 31, 1999, and fixed income securities
(including $14 million of the Company's 6.75% notes due in 2007).
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. This accounting standard revised the disclosure
requirements for pension and other postretirement benefit plans. The measurement
date is October 31. The information presented below includes the effect of
acquisitions, subsequent adjustments to acquisitions, and divestitures.
Change in Benefit Obligation
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
- ------------------------------------------------------------------------------
(In millions) December 31: 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Benefit obligation at
beginning .0of year $ 10,794 $ 9,927 $ 1,426 $ 1,303
Service cost 365 338 29 30
Interest cost 720 703 97 98
Plan participants' contributions 28 27 -- --
Amendments -- 3 1 (2)
Actuarial (gain) loss (381) 384 (157) 30
Acquisitions 12 182 -- 75
Divestitures (53) (28) (3) (1)
Curtailments -- 2 -- --
Benefits paid (856) (744) (117) (107)
- ------------------------------------------------------------------------------
Benefit obligation at end of year $ 10,629 $10,794 $ 1,276 $1,426
==============================================================================
Change in Plan Assets
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
- ------------------------------------------------------------------------------
(In millions) December 31: 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Fair value of plan assets at
beginning of year $ 12,791 $ 12,188 $ 318 $ 289
Actual return on plan assets 1,477 1,388 35 22
Acquisitions 23 (203) -- --
Divestitures (74) (40) -- --
Company contribution 133 175 136 107
Plan participants' contributions 28 27 15 --
Benefits paid (856) (744) (117) (100)
- ------------------------------------------------------------------------------
Fair value of plan assets at
end of year $ 13,522 $ 12,791 $ 387 $ 318
==============================================================================
51
Funded Status--unrecognized components
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
- ------------------------------------------------------------------------------
(In millions) December 31: 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Funded status $ 2,893 $ 1,997 $(889) $(1,108)
Unrecognized actuarial (gain) loss (1,630) (894) (160) 21
Unrecognized transition (asset)
obligation (12) (18) 261 288
Unrecognized prior service cost 164 182 (8) (14)
- ------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 1,415 $ 1,267 $(796) $ (813)
==============================================================================
Funded Status--recognized in balance sheets
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
- ------------------------------------------------------------------------------
(In millions) December 31: 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Prepaid benefit cost $ 1,815 $ 1,674 $ 17 $ 11
Accrued benefit liability (441) (453) (813) (824)
Intangible asset 9 15 -- --
Accumulated other
comprehensive income 32 31 -- --
- ------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 1,415 $ 1,267 $(796) (813)
==============================================================================
Components of Net Periodic Benefit (Income) Cost
- ------------------------------------------------------------------------------
Pension Benefits
- ------------------------------------------------------------------------------
(In millions) 1999 1998 1997
- ------------------------------------------------------------------------------
Service cost $ 365 $ 338 $ 143
Interest cost 720 703 332
Expected return on plan assets (1,090) (1,016) (401)
Amortization of transition asset (6) (7) (8)
Amortization of prior service cost 18 19 20
Recognized net actuarial gain (28) (30) (21)
Loss (gain) due to curtailment/settlements 6 -- (6)
- ------------------------------------------------------------------------------
Net periodic benefit (income) cost $ (15) $ 7 $ 59
==============================================================================
Components of Net Periodic Benefit Cost
- ------------------------------------------------------------------------------
Other Benefits
- ------------------------------------------------------------------------------
(In millions) 1999 1998 1997
- ------------------------------------------------------------------------------
Service cost $ 29 $ 30 $ 10
Interest cost 97 98 57
Expected return on plan assets (27) (25) (19)
Amortization of transition obligation 25 25 27
Amortization of prior service cost (1) (2) (1)
Recognized net actuarial gain (1) (1) (7)
(Gain) loss due to curtailment/settlements (1) 1 11
- ------------------------------------------------------------------------------
Net periodic benefit cost $ 121 $ 126 $ 78
==============================================================================
52
Weighted Average Assumptions
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
- ------------------------------------------------------------------------------
December 31: 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Discount rate 7.50% 7.00% 7.50% 7.00%
Expected return on plan assets 9.375% 9.375% 9.375% 8.50%
Rate of compensation increase 4.50% 4.50% 4.50% 4.50%
Health care trend rate in the next year 9.00% 6.00%
Gradually declining to a trend rate of 5% in the years beyond 2006 2000
- ------------------------------------------------------------------------------
The effect of a one percent increase and decrease in the assumed health care
trend rate for each future year for the aggregate of service and interest cost
is $7 million and $(6) million, respectively, and for the accumulated
postretirement benefit obligation is $81 million and $(66) million,
respectively.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $405 million, $384 million, and $49 million,
respectively, at December 31, 1999, and $515 million, $483 million, and $151
million, respectively, at December 31, 1998.
Under the terms of various savings and investment plans (defined contribution
plans), covered employees are allowed to contribute up to a specific percentage
of their pay, generally limited to $30,000 per year. The Company matches the
employee's contribution, up to a maximum of generally between three and four
percent of the employee's pay. Total expense for defined contribution plans was
$193 million, $121 million, and $78 million in 1999, 1998, and 1997,
respectively. The increase in 1999 was due to a plan change that increased the
Company match. The increase in 1998 was due to the merger with Hughes Defense.
The Company's annual contribution to the Raytheon Employee Stock Ownership
Plans is approximately one-half of one percent of salaries and wages, limited to
$170,000 in 1999 and $160,000 in 1998 and 1997, of most U.S. salaried and hourly
employees. The expense was $25 million, $18 million, and $15 million and the
number of shares allocated to participant accounts was 295,000, 271,000, and
290,000 in 1999, 1998, and 1997, respectively.
Note N: Business Segment Reporting
The Company operates in three major business areas: Electronics, both defense
and commercial, Engineering and Construction, and Aircraft. The Company is a
leader in defense electronics, including missiles; radar; sensors and
electro-optics; reconnaissance, surveillance, and intelligence; command,
control, communication, and information; training; simulation and services;
naval systems; air traffic control systems; and aircraft integration systems.
The Engineering and Construction segment offers full-service engineering and
construction capabilities to clients worldwide. The Aircraft segment is one of
the leading providers of business and special mission aircraft and delivers a
broad line of jet, turboprop, and piston-powered airplanes to corporate and
military customers worldwide.
53
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (SFAS No.
131) during 1998. SFAS No. 131 established standards for reporting information
about operating segments in annual financial statements and requires selected
information about operating segments. It also established standards for
disclosures about products, services, and geographic areas.
Reportable segments within Electronics have been determined based upon
product lines and include the following: Defense Systems; Sensors and Electronic
Systems; Command, Control, Communication and Information Systems; Aircraft
Integration Systems, Training and Services, Commercial Electronics, and Other.
Certain operating segments within Electronics have been aggregated as they
exhibit similar long-term financial performance characteristics and do not meet
the quantitative threshold. Of the identifiable segments within Total
Electronics, all except Aircraft Integration Systems have combined operations of
Hughes Defense, TI Defense, and Raytheon. All material intercompany transactions
have been eliminated.
During the first quarter of 1999, the Company completed a reorganization of
certain business segments to better align the operations with customer needs and
to eliminate management redundancy. The Intelligence, Information, and Aircraft
Integration Systems segment, with the exception of its Aircraft Integration
Systems division, merged with Command, Control, and Communication Systems to
create Command, Control, Communication and Information Systems. The Aircraft
Integration Systems division was established as a separate segment called
Aircraft Integration Systems.
In keeping with the Company's on-going consolidation efforts and to further
simplify its organizational structure, in the first quarter of 2000, RSC was
eliminated and the Defense Systems and Sensors and Electronic Systems segments
were combined into the new Electronic Systems segment. These organizational
changes will be reflected in the Company's 2000 financial statements.
Identifiable assets attributed to Unallocated Electronics Items consist
primarily of goodwill and prepaid pension. While these assets have not been
allocated back to the segments, the associated income statement impact,
including goodwill amortization, has been included in the determination of
segment operating income.
Change in net debt represents the Company's internal criteria for evaluating
cash flow performance by the segments. This amount includes intercompany
balances that are eliminated in consolidation and are not necessarily
representative of actual cash flows determined in accordance with generally
accepted accounting principles.
Information for the segments that comprise Total Electronics and all
information related to the change in net debt has not been presented for 1997
because the Company determined that it was impracticable to obtain the
comparative information due to the significant acquisitions, divestitures, and
reorganizations that took place during 1997.
54
Operations by Business Segments
- --------------------------------------------------------------------------------------------------------------------------------
Sales Operating income
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(In millions) (Restated) (Restated) (Restated) (Restated)
- --------------------------------------------------------------------------------------------------------------------------------
Defense Systems $ 5,215 $ 4,941 $ 785(2) $ 880
Sensors and Electronic Systems 2,695 2,934 332(3) 556
Command, Control, Communication
and Information Systems 3,576(1) 3,529 301(4) 371
Aircraft Integration Systems, Training
and Services, Commercial Electronics,
and Other 3,003 3,418 8(5) 225(7)
- --------------------------------------------------------------------------------------------------------------------------------
Total Electronics 14,489 14,822 $ 8,972 1,426 2,032 $ 856(9)
Engineering and Construction 2,656 2,065 2,255 (61)(6) (253)(8) 19(10)
Aircraft 2,696 2,532 2,366 162 227 185(11)
- --------------------------------------------------------------------------------------------------------------------------------
Total $19,841 $19,419 $13,593 $ 1,527 $ 2,006 $ 1,060
================================================================================================================================
Capital expenditures Depreciation and amortization
- --------------------------------------------------------------------------------------------------------------------------------
(In millions) 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Defense Systems $ 203 $ 79 $ 161 $ 195
Sensors and Electronic Systems 81 117 173 177
Command, Control, Communication
and Information Systems 76 72 173 165
Aircraft Integration Systems, Training
and Services, Commercial Electronics,
and Other 48 52 118 119
- --------------------------------------------------------------------------------------------------------------------------------
Total Electronics 408 320 $ 257 625 656 $ 360
Engineering and Construction 8 41 18 20 28 33
Aircraft 116 148 184 79 77 64
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 532 $ 509 $ 459 $ 724 $ 761 $ 457
================================================================================================================================
Identifiable assets at December 31: Change in net debt
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
(In millions) (Restated) (Restated)
- --------------------------------------------------------------------------------------------------------------------------------
Defense Systems $ 2,487 $ 2,286 $ (292) $ (396)
Sensors and Electronic Systems 1,956 1,823 (57) (101)
Command, Control, Communication
and Information Systems 1,591 1,641 (316) (161)
Aircraft Integration Systems, Training
and Services, Commercial Electronics,
and Other 1,844 1,993 70 (322)
Unallocated Electronics Items 13,004 13,032 829 387
- --------------------------------------------------------------------------------------------------------------------------------
Total Electronics 20,882 20,775 $22,599 234 (593)
Engineering and Construction 1,521 1,478 1,758 163 (239)
Aircraft 3,161 2,667 2,270 199 (130)
Corporate 2,546 3,312 1,893 375 (235)
- ---------------------------------------------------------------------------------------------------------------------------------
Total $28,110 $28,232 $28,520 $ 971 $ (1,197) $ 6,178
================================================================================================================================
55
(1) Includes a special charge of $15 million.
(2) Includes restructuring and special charges offset by favorable adjustments
to restructuring-related reserves of $(11) million, net.
(3) Includes restructuring and special charges offset by favorable adjustments
to restructuring-related reserves of $52 million, net.
(4) Includes restructuring and special charges offset by favorable adjustments
to restructuring-related reserves of $28 million, net.
(5) Includes restructuring and special charges offset by favorable adjustments
to restructuring-related reserves of $63 million, net.
(6) Includes a restructuring charge of $10 million.
(7) Includes special charges of $167 million.
(8) Includes restructuring and special charges of $85 million.
(9) Includes restructuring and special charges of $340 million.
(10) Includes restructuring and special charges of $125 million.
(11) Includes a special charge of $30 million.
The following tables summarize information related to Electronics
restructuring and exit costs and activities by segment:
Electronics Restructuring and Exit Costs
- ------------------------------------------------------------------------------
Charges Costs Ending
(In millions) Accrued Incurred Balance
- ------------------------------------------------------------------------------
Defense Systems $ 394 $ 305 $ 89
Sensors and Electronic Systems 252 163 89
Command,Control, Communication
and Information Systems 145 95 50
Aircraft Integration Systems, Training
and Services, Commercial Electronics,
and Other 97 51 46
- ------------------------------------------------------------------------------
Total $ 888 $ 614 $ 274
==============================================================================
56
Electronics Restructuring and Exit Activities
- ------------------------------------------------------------------------------
Number of Square Feet
Employee Exited
Terminations (thousands)
- ------------------------------------------------------------------------------
Defense Systems 3,200 4,000
Sensors and Electronic Systems 3,200 3,400
Command, Control, Communication
and Information Systems 2,300 900
Aircraft Integration Systems, Training
and Services, Commercial Electronics,
and Other 2,200 1,200
- ------------------------------------------------------------------------------
Total 10,900 9,500
==============================================================================
Operations by Geographic Areas
- ------------------------------------------------------------------------------
Outside United States
(In millions) United States (Principally Europe) Consolidated
- ------------------------------------------------------------------------------
Sales to unaffiliated customers
- ------------------------------------------------------------------------------
1999 $18,549 $1,292 $19,841
1998 (restated) 18,417 1,002 19,419
1997 (restated) 12,827 766 13,593
Long-lived assets at
- ------------------------------------------------------------------------------
December 31, 1999 $18,984 $ 195 $19,179
Identifiable assets at
- ------------------------------------------------------------------------------
December 31, 1998 (restated) $27,227 $1,005 $28,232
December 31, 1997 (restated) 27,898 622 28,520
- ------------------------------------------------------------------------------
The country of origin was used to attribute sales to either United States or
Outside United States. U.S. sales of $18,549 million, $18,417 million, and
$12,827 million include export sales, principally to Europe, the Middle East,
and Far East, of $1,668 million, $2,380 million, and $2,756 million in 1999,
1998, and 1997, respectively.
Sales to major customers, principally in Electronics, in 1999, 1998, and
1997, were: U.S. government (end user), $11,051 million, $11,167 million, and
$5,787 million, respectively, U.S. Department of Defense, $10,511 million,
$10,816 million, and $4,591 million, respectively, and U.S. government (foreign
military sales), $1,015 million, $1,660 million, and $483 million, respectively.
57
Note O: Quarterly Operating Results (unaudited)
(In millions except per share amounts and stock prices)
- ------------------------------------------------------------------------------
1999 First Second Third Fourth
- ------------------------------------------------------------------------------
(Restated) (Restated) (Restated)
- ------------------------------------------------------------------------------
Net sales $ 5,025 $ 5,210 $ 4,776 $4,830
Gross margin 1,059 1,181 453 892
Net income (loss) 205 290(1) (163)(2) 72(3)
Earnings (loss) per share
Basic 0.61 0.86(1) (0.48)(2) 0.21(3)
Diluted 0.60 0.84(1) (0.48)(2) 0.21(3)
Cash dividends per share
Declared 0.20 0.20 0.20 0.20
Paid 0.20 0.20 0.20 0.20
Common stock prices per the Composite Tape
Class A--High 58.13 72.88 75.38 48.38
Class A--Low 50.75 57.38 43.75 21.25
Class B--High 58.88 74.63 76.56 49.88
Class B--Low 51.25 57.75 44.50 22.25
- ------------------------------------------------------------------------------
1998 (Restated) First Second Third Fourth
- ------------------------------------------------------------------------------
Net sales $ 4,693 $ 5,037 $ 4,431 $5,258
Gross margin 1,037 1,127 760 1,328
Net income 228 263(4) 12(5) 341(6)
Earnings per share
Basic 0.67 0.78(4) 0.04(5) 1.01(6)
Diluted 0.66 0.77(4) 0.04(5) 1.00(6)
Cash dividends per share
Declared 0.20 0.20 0.20 0.20
Paid 0.20 0.20 0.20 0.20
Common stock prices per the Composite Tape
Class A--High 59.50 59.19 59.63 58.56
Class A--Low 44.88 50.38 39.88 48.69
Class B--High 60.69 60.19 60.75 59.81
Class B--Low 45.75 51.44 40.69 49.31
- ------------------------------------------------------------------------------
1999 (Previously reported) First Second Third
- ------------------------------------------------------------------------------
Net sales $ 4,903 $ 5,202 $ 4,728
Gross margin 1,033 1,187 443
Net income (loss) 188 294(1) (169)(2)
Earnings (loss) per share
Basic 0.56 0.87(1) (0.50)(2)
Diluted 0.55 0.86(1) (0.50)(2)
- ------------------------------------------------------------------------------
58
1998 (Previously reported) First Second Third Fourth
- ------------------------------------------------------------------------------
Net sales $ 4,574 $ 5,078 $ 4,436 $5,442
Gross margin 1,016 1,139 758 1,369
Net income 215 270(4) 11(5) 368(6)
Earnings per share
Basic 0.63 0.80(4) 0.03(5) 1.09(6)
Diluted 0.63 0.79(4) 0.03(5) 1.08(6)
- ------------------------------------------------------------------------------
(1) Includes net gain on sales of operating units and securities received as
partial payment for previously divested businesses of $5 million after-tax,
or $0.01 per share.
(2) Includes charges of $190 million after-tax, restructuring and special
charges of $144 million after-tax, and net gain on sales of operating units
and securities received as partial payment for previously divested
businesses of $8 million after-tax. The impact of these items combined was
a net charge of $326 million after-tax, or $0.96 per share.
(3) Includes favorable adjustments to restructuring-related reserves of $42
million after-tax and net gain on sales of operating units and securities
received as partial payment for previously divested businesses of $1
million after-tax. The impact of these items combined was a net gain of $43
million after-tax, or $0.13 per share.
(4) Includes special charges of $54 million after-tax and net gain on sales of
operating units of $61 million after-tax. The impact of these items
combined was a net gain of $7 million after-tax, or $0.02 per share.
(5) Includes a charge of $180 million after-tax, restructuring and special
charges of $104 million after-tax, and net gain on sales of operating units
of $3 million after-tax. The impact of these items combined was a net
charge of $281 million after-tax, or $0.82 per share.
(6) Includes a net gain on sales of operating units of $3 million after-tax, or
$0.01 per share.
Note: Earnings per share are computed independently for each of the quarters
presented, therefore, the sum of the quarterly earnings per share may not equal
the total computed for the year.
In the first quarter of 1999, the Company reported restated income before
accounting change, basic earnings per share before accounting change, and
diluted earnings per share before accounting change of $258 million, $0.77, and
$0.76, respectively. As previously reported, these amounts were $241 million,
$0.72, and $0.71, respectively.
59
Note P: Financial Instruments
At December 31, 1999 and 1998, the Company had outstanding interest rate swap
agreements, treasury rate locks, and foreign currency forward contracts which
minimized or eliminated risk associated with interest rate changes or foreign
currency exchange rate fluctuations. All of these financial instruments were
related to specific transactions and particular assets or liabilities for which
a firm commitment existed. These instruments were executed with credit-worthy
institutions and the majority of the foreign currencies were denominated in
currencies of major industrial countries.
The following table summarizes major currencies and the approximate contract
amounts associated with foreign exchange contracts at December 31:
1999 1998
- ------------------------------------------------------------------------------
(In millions) Buy Sell Buy Sell
- ------------------------------------------------------------------------------
British Pounds $ 228 $ 63 $ 138 $ 100
Canadian Dollars -- 1 20 50
European Euros 24 2 -- --
German Marks 11 -- 40 27
Netherlands Guilders 7 21 41 89
Norwegian Kroner 21 -- 100 --
Swiss Francs 2 43 12 85
All other 53 10 49 25
- ------------------------------------------------------------------------------
Total $ 346 $ 140 $ 400 $ 376
==============================================================================
Buy amounts represent the U.S. dollar equivalent of commitments to purchase
foreign currencies and sell amounts represent the U.S. dollar equivalent of
commitments to sell foreign currencies. Foreign exchange contracts that do not
involve U.S. dollars have been converted to U.S. dollars for disclosure
purposes.
Interest rate swap agreements were $381 million and $383 million at December
31, 1999 and 1998, respectively. The agreements outstanding at December 31, 1999
mature during 2000 and essentially fix the interest rates on a portion of
variable rate debt. Under these agreements, the Company will pay the
counterparties interest at a weighted average fixed rate of 6.5%, and the
counterparties will pay the Company at a variable rate primarily equal to
three-month LIBOR. The weighted average variable rate applicable to these
agreements was 6.1% at December 31, 1999. Treasury rate locks were $250 million
at December 31, 1999, mature during 2000, and essentially fixed the interest
rates on a portion of long-term debt the Company was planning to issue. Note R,
Subsequent Events, contains additional information about the planned debt
issuance.
Foreign currency forward contracts, used primarily to minimize fluctuations
in the values of foreign currency payments and receipts, have maturities at
various dates through August 2003 as follows: $413 million in 2000, $44 million
in 2001, $14 million in 2002, and $15 million in 2003. Estimated fair values for
the interest rate swap agreements, treasury rate locks, and foreign currency
forward contracts total $5 million at December 31, 1999.
60
Note Q: Stockholders' Equity
The Company has two classes of common stock--Class A and Class B. For all
matters other than the election and removal of directors, Class A and Class B
stockholders have equal voting rights. For the election or removal of directors
only, the Class A stockholders have 80.1 percent of the total voting power and
the Class B stockholders have the remaining 19.9 percent. Class A and Class B
stockholders are entitled to receive the same amount per share of any dividends
declared. Immediately following any dividend, split, subdivision, or other
distribution of shares of Class A or Class B common stock, the number of shares
must bear the same relationship to each other as immediately prior to such
distribution. Except as indicated above, the rights of Class A and Class B
stockholders are identical.
In December 1997, the Company issued 102.6 million shares of Class A common
stock and converted each share of Raytheon common stock into one share of Class
B common stock in connection with the merger with Hughes Defense. The Company
has agreed with the former parent of Hughes Defense that it will not propose a
plan of recapitalization or certain other equity transactions that would
adversely affect the tax free status of the merger. Also, in December 1997, the
Company retired 71.1 million shares of Class B common stock previously held in
treasury. Prior to this retirement, the excess of cost over par value of
treasury stock was charged proportionally to additional paid-in capital and
retained earnings.
In February 1995, the Board of Directors authorized the repurchase of up to
12 million shares of the Company's common stock to allow the Company to
repurchase shares from time to time when warranted by market conditions. In
January 1998, the Board of Directors ratified and reauthorized the repurchase of
the remaining 2.5 million shares originally authorized. There have been 11.8
million shares purchased under these authorizations through December 31, 1999.
There were 1.7 million shares repurchased under this program during 1998 and 0.7
million shares repurchased under this program during 1999. In March 1999, the
Board of Directors authorized the repurchase of up to an additional 6 million
shares of the Company's common stock over the next three years. There were no
shares repurchased under this program during 1999.
In November 1992, the Board of Directors authorized the purchase of up to 4
million shares of the Company's common stock per year over the next five years
to counter the dilution due to the exercise of stock options. During 1997, there
were 1.7 million shares repurchased under this program to offset 1.7 million
shares issued due to the exercise of stock options.
In January 1998, the Board of Directors authorized the purchase of up to 5
million shares of the Company's common stock per year to counter the dilution
due to the exercise of stock options. There were 1.9 million and 2.9 million
shares repurchased under this program during 1999 and 1998, respectively, to
offset 4.2 million and 2.9 million shares issued due to the exercise of stock
options during 1999 and 1998, respectively.
The changes in shares of Class A and Class B common stock outstanding during
1999 are as follows:
(In thousands) Class A Class B
- ------------------------------------------------------------------------------
Balance at December 31, 1998 101,503 235,295
Common stock plan activity -- 4,613
Treasury stock activity (698) (1,953)
- ------------------------------------------------------------------------------
Balance at December 31, 1999 100,805 237,955
==============================================================================
61
Basic earnings per share (EPS) excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Class A and Class B
common stock have been aggregated in the basic and diluted EPS calculation which
follows:
1999 1998 1997
- ------------------------------------------------------------------------------
(In millions except per share amounts) (Restated) (Restated)
- ------------------------------------------------------------------------------
Net income for basic and diluted EPS $ 404 $ 844 $ 511
Share information (in thousands)
Average common shares
outstanding for basic EPS 337,351 337,882 238,915
Dilutive effect of stock options
and restricted stock 3,433 3,979 2,971
- ------------------------------------------------------------------------------
Shares for diluted EPS 340,784 341,861 241,886
Basic EPS $ 1.20 $ 2.50 $ 2.14
Diluted EPS 1.19 2.47 2.11
- ------------------------------------------------------------------------------
Stock options to purchase 12.5 million, 6.7 million, and 8.2 million shares of
common stock outstanding at December 31, 1999, 1998, and 1997, respectively,
were not included in the computation of diluted EPS because the stock options'
exercise price was greater than the average market price of the Company's common
stock during the year.
Note R: Subsequent Events
In February 2000, the Company sold its flight simulation and associated training
business for $160 million.
In March 2000, the Company issued $2.25 billion of long-term debt in a
private placement consisting of $200 million of floating rate notes due in 2002,
$800 million of 7.9% notes due in 2003, $850 million of 8.2% notes due in 2006,
and $400 million of 8.3% notes due in 2010. Proceeds from the offering were used
to repay outstanding short-term debt, extending the maturity of the Company's
debt obligations.
62
Company Responsibility for Financial Statements
The financial statements and related information contained in this Annual Report
have been prepared by and are the responsibility of the Company's management.
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles and reflect judgments and estimates as
to the expected effects of transactions and events currently being reported. The
Company's management is responsible for the integrity and objectivity of the
financial statements and other financial information included in this Annual
Report. To meet this responsibility, the Company maintains a system of internal
accounting controls to provide reasonable assurance that assets are safeguarded
and that transactions are properly executed and recorded. The system includes
policies and procedures, internal audits, and Company officers' reviews.
/s/ Franklyn A. Caine
Franklyn A. Caine
Senior Vice President and
Chief Financial Officer
/s/ Daniel P. Burnham
Daniel P. Burnham
Chairman and
Chief Executive Officer
The Audit Committee of the Board of Directors is composed solely of outside
directors. The Committee meets periodically and, when appropriate, separately
with representatives of the independent accountants, Company officers, and the
internal auditors to monitor the activities of each.
Upon recommendation of the Audit Committee, PricewaterhouseCoopers LLP,
independent accountants, were selected by the Board of Directors to audit the
Company's financial statements and their report follows.
/s/ Daniel P. Burnham
Daniel P. Burnham
Chairman of the Board of Directors
Report of Independent Accountants
To the Board of Directors and Stockholders of Raytheon Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Raytheon Company at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The consolidated financial statements for each of the two years in the period
ended December 31, 1998 have been restated as described in Note B.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 25, 2000, except for the information in Note R
as to which the date is March 7, 2000